UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________________ 

FORM 10-Q

_______________________________________________ 

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

.

Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

Indicate the number of outstanding shares of each of the issuer’s classes of common stock, as of the latest practicable date: At April 30, 2014 there were 29,370,087 shares of Common Stock, $0.01 par value, outstanding.

TAYLOR CAPITAL GROUP, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - March 31, 2014 (unaudited) and December 31, 2013	1
	Consolidated Statements of Income (unaudited) - For the three months ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income (unaudited) – For the three months ended March 31, 2014 and 2013	3
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Cash Flows (unaudited) - For the three months ended March 31, 2014 and 2013	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	67
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
	Signatures	72

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

	March 31, 2014			December 31, 2013
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	138,496		$	90,743
Short-term investments	73			74
Total cash and cash equivalents	138,569			90,817
Investment securities:
Available for sale, at fair value	708,153			722,307
Held to maturity, at amortized cost (fair value of $375,676 at March 31, 2014 and $376,767 at December 31, 2013)	391,903			398,424
Loans held for sale	436,086			473,890
Loans, net of allowance for loan losses of $82,891 at March 31, 2014 and $81,864 at December 31, 2013	3,568,122			3,566,511
Premises, leasehold improvements and equipment, net	26,350			26,919
Investments in Federal Home Loan Bank and Federal Reserve Bank stock, at cost	49,617			64,612
Mortgage servicing rights, at fair value	227,695			216,111
Other real estate and repossessed assets, net	9,950			10,049
Other assets	96,573			116,178
Total assets	$	5,653,018		$	5,685,818
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	1,068,207		$	1,048,946
Interest-bearing	2,885,178			2,602,037
Total deposits	3,953,385			3,650,983
Accrued interest, taxes and other liabilities	87,369			105,350
Short-term borrowings	1,043,097			1,378,327
Junior subordinated debentures	86,607			86,607
Total liabilities	5,170,458			5,221,267
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A, 8% perpetual non-cumulative; 4,000,000 shares authorized, 4,000,000 shares issued and outstanding at March 31, 2014 and December 31, 2013, $25 liquidation value	100,000			100,000
Nonvoting convertible; 1,350,000 shares authorized, 1,282,674 shares issued and outstanding at March 31, 2014 and at December 31, 2013	13			13
Common stock, $0.01 par value; 45,000,000 shares authorized; 30,728,996 shares issued at March 31, 2014 and 30,687,528 shares issued at December 31, 2013; 29,370,998 shares outstanding at March 31, 2014 and 29,329,530 shares outstanding at December 31, 2013	308			307
Surplus	417,984			417,429
Accumulated deficit	(7,486		)	(17,430		)
Accumulated other comprehensive income, net	1,326			(6,183		)
Treasury stock, at cost, 1,357,998 shares at March 31, 2014 and December 31, 2013	(29,585		)	(29,585		)
Total stockholders’ equity	482,560			464,551
Total liabilities and stockholders’ equity	$	5,653,018		$	5,685,818

See accompanying notes to consolidated financial statements (unaudited)

1

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(dollars in thousands, except per share data)

	For the Three Months
	Ended March 31,
	2014			2013
Interest income:
Interest and fees on loans	$	39,811		$	37,629
Interest and dividends on investment securities:
Taxable	6,486			8,617
Tax-exempt	2,545			1,427
Interest on cash equivalents	—			1
Total interest income	48,842			47,674
Interest expense:
Deposits	3,169			4,264
Short-term borrowings	382			420
Junior subordinated debentures	1,437			1,443
Subordinated notes	—			864
Total interest expense	4,988			6,991
Net interest income	43,854			40,683
Provision for loan losses	2,600			300
Net interest income after provision for loan losses	41,254			40,383
Noninterest income:
Service charges	3,620			3,491
Mortgage banking revenue	23,057			32,030
Gains on sales of investment securities, net	35			1
Other derivative income (loss)	(31		)	1,560
Letter of credit and other loan fees	1,254			1,091
Other noninterest income	1,163			1,546
Total noninterest income	29,098			39,719
Noninterest expense:
Salaries and employee benefits	34,655			34,028
Occupancy of premises	2,989			2,568
Furniture and equipment	968			737
Nonperforming asset expense, net	166			559
FDIC assessment	1,862			2,024
Legal fees, net	1,010			858
Loan expense, net	2,189			2,371
Outside services	3,559			2,496
Computer processing	1,768			966
Other noninterest expense	5,397			5,148
Total noninterest expense	54,563			51,755
Income before income taxes	15,789			28,347
Income tax expense	5,845			11,090
Net income	9,944			17,257
Preferred dividends and discounts	—			(3,661		)
Net income applicable to common stockholders	$	9,944		$	13,596
Basic income per common share	$	0.32		$	0.45
Diluted income per common share	0.32			0.44

See accompanying notes to consolidated financial statements (unaudited)

2

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(dollars in thousands)

	For the Three Months
	Ended March 31,
	2014			2013
Net income	$	9,944		$	17,257
Other comprehensive income (loss), net of income tax:
Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment	8,059			(3,844		)
Change in deferred gains and losses on investments transferred to held to maturity from available for sale	(109		)	(312		)
Change in unrealized loss from cash flow hedging instruments	(441		)	241
Total other comprehensive income (loss), net of income tax	7,509			(3,915		)
Total comprehensive income, net of income tax	$	17,453		$	13,342

See accompanying notes to consolidated financial statements (unaudited)

3

TAYLOR CAPITAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited) (dollars in thousands, except per share data)
	Preferred Stock, Series A		Preferred Stock, Series B		Nonvoting Convertible Preferred Stock		Common Stock		Surplus			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at December 31, 2013	$	100,000	$	—	$	13	$	307	$	417,429		$	(17,430	)	$	(6,183	)	$	(29,585	)	$	464,551
Exercise of stock options	—		—		—		1		546			—			—			—			547
Amortization of stock-based compensation awards	—		—		—				158			—			—			—			158
Tax expense on options, dividends and vesting	—		—		—		—		(149		)	—			—			—			(149		)
Net income	—		—		—		—		—			9,944			—			—			9,944
Other comprehensive income	—		—		—		—		—			—			7,509			—			7,509
Balance at March 31, 2014	$	100,000	$	—	$	13	$	308	$	417,984		$	(7,486	)	$	1,326		$	(29,585	)	$	482,560
Balance at December 31, 2012	$	100,000	$	103,813	$	13	$	302	$	412,391		$	(63,537	)	$	36,206		$	(29,585	)	$	559,603
Issuance of restricted stock grants, net of forfeitures	—		—		—		2		—						—			—			2
Exercise of stock options	—		—		—		—		35			—			—			—			35
Amortization of stock-based compensation awards	—		—		—		—		3,596			—			—			—			3,596
Net income	—		—		—		—		—			17,257			—			—			17,257
Other comprehensive loss	—		—		—		—		—			—			(3,915		)	—			(3,915		)
Preferred issuance costs, Series A	—		—		—		—		(47		)	—			—			—			(47		)
Preferred stock dividends, Series A	—		—		—		—		—			(1,889		)	—			—			(1,889		)
Preferred stock dividends and discounts accumulated, Series B	—		462		—		—		—			(1,772		)	—			—			(1,310		)
Balance at March 31, 2013	$	100,000	$	104,275	$	13	$	304	$	415,975		$	(49,941	)	$	32,291		$	(29,585	)	$	573,332

See accompanying notes to consolidated financial statements (unaudited).

4

TAYLOR CAPITAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands)
	For the Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	9,944		$	17,257
Adjustments to reconcile net income to net cash provided by operating activities:
Other derivative income	31			(1,560		)
Gains on sales of investment securities, net	(35		)	(1		)
Amortization of premiums and discounts, net	1,622			2,983
Deferred loan fee amortization	(514		)	(897		)
Provision for loan losses	2,600			300
Payments on loans held for sale	3,005			288
Loans originated for sale	(1,058,980		)	(1,844,028		)
Proceeds from loan sales	1,090,506			2,124,303
Gains from sales of originated mortgage loans	(12,005		)	(33,184		)
Depreciation and amortization	1,235			733
Deferred income tax expense	5,961			11,252
(Gain) loss on sales of other real estate	41			(264		)
Excess tax shortfall on stock options exercised and stock awards	—			(25		)
Change in fair value of mortgage derivative instruments	(1,486		)	9,642
Change in fair value of mortgage servicing rights	9,085			(1,363		)
Other, net	(191		)	3,232
Changes in other assets and liabilities:
Accrued interest receivable	703			(434		)
Other assets	2,107			(40,489		)
Accrued interest payable, taxes and other liabilities	(9,649		)	(32,550		)
Net cash provided by operating activities	43,980			215,195
Cash flows from investing activities:
Purchases of available for sale securities	—			(117,743		)
Purchases of held to maturity securities	—			(82,500		)
Proceeds from principal payments and maturities of available for sale securities	24,939			44,605
Proceeds from principal payments and maturities of held to maturity securities	6,148			20,736
Proceeds from sales of available for sale securities	1,131			30,327
Settlement of prior year investment security purchases	—			(23,625		)
Net (increase) decrease in loans	600			(58,975		)
Net additions to premises, leasehold improvements and equipment	(666		)	(3,864		)
Purchases of FHLB and FRB stock	(13,005		)	(14,026		)
Proceeds from redemptions of FHLB and FRB stock	28,000			24,000
Purchases of mortgage servicing rights	(10,324		)	(4,233		)
Net proceeds from sales of other real estate and repossessed assets	694			2,345
Net cash provided by (used in) investing activities	37,517			(182,953		)
Consolidated Statements of Cash Flows continued on the next page.

5

TAYLOR CAPITAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued) (dollars in thousands)
	For the Three Months Ended
	March 31,
	2014			2013
Cash flows from financing activities:
Net increase in deposits	302,938			266,870
Net decrease in short-term borrowings	(335,230		)	(326,433		)
Exercise of stock options	547			—
Preferred stock dividends paid and discounts accumulated	(2,000		)	(3,199		)
Other financing activities	—			15
Net cash used in financing activities	(33,745		)	(62,747		)
Net increase (decrease) in cash and cash equivalents	47,752			(30,505		)
Cash and cash equivalents, beginning of period	90,817			166,385
Cash and cash equivalents, end of period	$	138,569		$	135,880

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	5,217	$	7,924
Income taxes	40		5,083
Supplemental disclosures of noncash investing and financing activities:
Available for sale investment securities acquired, not yet settled	—		67,672
Change in fair value of available for sale investment securities, net of tax	8,059		(3,844		)
Transfer of held for sale loans to portfolio loans	4,933		—
Loans transferred to other real estate and repossessed assets	636		5,040
Additions to mortgage servicing rights resulting from originations	10,345		22,063

See accompanying notes to consolidated financial statements (unaudited)

6

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation:

These consolidated financial statements contain unaudited information as of March 31, 2014 and for the three month periods endedMarch 31, 2014 and March 31, 2013. 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 United States of America generally accepted accounting principles (“U.S. GAAP”) are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with Taylor Capital Group, Inc.'s (the "Company") audited consolidated financial statements and the related notes. The Consolidated Statement of Income for the three months ended March 31, 2014 is not necessarily indicative of the results that the Company may achieve for the full year or any other period.

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

2. Investment Securities:

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities at March 31, 2014 and December 31, 2013 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available For Sale:
March 31, 2014:
U.S. government sponsored agency securities	$	14,830	$	266	$	—		$	15,096
Residential mortgage-backed securities	278,507		2,818		(10,303		)	271,022
Commercial mortgage-backed securities	110,090		6,233		(200		)	116,123
Collateralized mortgage obligations	12,488		—		(406		)	12,082
State and municipal obligations	306,028		1,469		(13,667		)	293,830
Total at March 31, 2014	$	721,943	$	10,786	$	(24,576	)	$	708,153
December 31, 2013:
U.S. government sponsored agency securities	14,879		83		—			14,962
Residential mortgage-backed securities	286,116		2,092		(13,558		)	274,650
Commercial mortgage-backed securities	121,006		6,953		—			127,959
Collateralized mortgage obligations	12,840		—		(142		)	12,698
State and municipal obligations	314,386		725		(23,073		)	292,038
Total at December 31, 2013	$	749,227	$	9,853	$	(36,773	)	$	722,307

7

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Held To Maturity:
March 31, 2014:
U.S. government sponsored agency securities	$	9,993	$	—	$	(703	)	$	9,290
Residential mortgage-backed securities	229,865		2,764		(8,282		)	224,347
Collateralized mortgage obligations	66,813		—		(4,705		)	62,108
State and municipal obligations	85,232		—		(5,301		)	79,931
Total at March 31, 2014	$	391,903	$	2,764	$	(18,991	)	$	375,676
December 31, 2013:
U.S. government sponsored agency securities	$	9,993	$	—	$	(995	)	$	8,998
Residential mortgage-backed securities	235,300		2,281		(11,069		)	226,512
Collateralized mortgage obligations	66,775		—		(5,315		)	61,460
State and municipal obligations	86,356		—		(6,559		)	79,797
Total at December 31, 2013	$	398,424	$	2,281	$	(23,938	)	$	376,767

As of March 31, 2014, the Company held $685.7 million (estimated fair value) of mortgage related investment securities that consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities and collateralized mortgage obligations include securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties.

Of the total mortgage related investment securities, $681.6 million (estimated fair value), or 99.4%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae and Freddie Mac, and the remaining $4.1 million were private-label residential mortgage related securities.

Investment securities with an approximate book value of $936.6 million at March 31, 2014 and $1.0 billion at December 31, 2013, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances and for other purposes as required or permitted by law. The amount of pledged investment securities has decreased due to a decrease in deposits and short-term borrowings that require collateral.

The following table summarizes the Company’s gross realized gains and losses for the three month periods indicated:

	For the Three Months Ended
	March 31, 2014		March 31, 2013
	(in thousands)
Gross realized gains	$	35	$	1
Gross realized losses	—		—
Net realized gains	$	35	$	1

8

The following table summarizes, for investment securities with unrealized losses as of March 31, 2014 and December 31, 2013, the amount of the unrealized loss and the related fair value. The securities have been further segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months.

	Length of Continuous Unrealized Loss Position
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Available For Sale:
March 31, 2014:
Residential mortgage-backed securities	$	145,455	$	(8,785	)	$	20,235	$	(1,518	)	$	165,690	$	(10,303	)
Commercial mortgage-backed securities	9,638		(200		)	—		—			9,638		(200		)
Collateralized mortgage obligations	12,082		(406		)	—		—			12,082		(406		)
State and municipal obligations	146,560		(7,672		)	94,241		(5,995		)	240,801		(13,667		)
Total	$	313,735	$	(17,063	)	$	114,476	$	(7,513	)	$	428,211	$	(24,576	)
December 31, 2013:
Residential mortgage-backed securities	162,431		(11,665		)	20,512		(1,893		)	182,943		(13,558		)
Collateralized mortgage obligations	12,698		(142		)	—		—			12,698		(142		)
State and municipal obligations	194,923		(17,368		)	54,976		(5,705		)	249,899		(23,073		)
Total	$	370,052	$	(29,175	)	$	75,488	$	(7,598	)	$	445,540	$	(36,773	)

	Length of Continuous Unrealized Loss Position
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Held To Maturity:
March 31, 2014:
U.S. government agency securities	$	9,290	$	(703	)	$	—	$	—		$	9,290	$	(703	)
Residential mortgage-backed securities	111,917		(4,086		)	55,584		(4,196		)	167,501		(8,282		)
Collateralized mortgage obligations	62,108		(4,705		)	—		—			62,108		(4,705		)
State and municipal obligations	79,931		(5,301		)	—		—			79,931		(5,301		)
Total	$	263,246	$	(14,795	)	$	55,584	$	(4,196	)	$	318,830	$	(18,991	)
December 31, 2013:
U.S. government agency securities	$	8,998	$	(995	)	$	—	$	—		$	8,998	$	(995	)
Residential mortgage-backed securities	113,051		(5,747		)	55,483		(5,322		)	168,534		(11,069		)
Collateralized mortgage obligations	61,460		(5,315		)	—		—			61,460		(5,315		)
State and municipal obligations	79,797		(6,559		)	—		—			79,797		(6,559		)
Total	$	263,306	$	(18,616	)	$	55,483	$	(5,322	)	$	318,789	$	(23,938	)

At March 31, 2014, the Company had 69 investment securities in an unrealized loss position for 12 or more months with a total unrealized loss of $11.7 million. The number of securities in an unrealized loss position for 12 months or longer has grown since December 31, 2013 due to an increase in market interest rates. The 69 securities in an unrealized loss position for more than 12 months consisted of state and municipal obligations, residential mortgage-backed securities and private-label securities.

9

At March 31, 2014, the Company had 58 state and municipal obligation securities that were in an unrealized loss position for 12 months or longer. However, none of these securities had an net unrealized loss in excess of 10% of carrying value. As part of its normal process, the Company reviewed these securities and concluded that the decline in fair value was not credit related but related to market changes and upward movements of interest rates.

At March 31, 2014, the Company had 11 residential mortgage-backed securities, excluding private-label mortgage-backed securities, that were in an unrealized loss position for 12 months or longer. Of these 11 securities, none had a net unrealized loss in excess of 10% of carrying value. As part of its normal process, the Company reviewed the residential mortgage-backed securities in an unrealized loss position and concluded that the decline in fair value was not credit related but related to changes in interest rates.

At March 31, 2014, the Company had three private-label mortgage-backed securities that previously had been subject to detailed testing for other-than-temporary impairment. Of these securities, two had an unrealized loss of less than 10% of carrying value and one was in an unrealized gain position. Although these unrealized losses are below the internal threshold for additional impairment testing, the Company further analyzed two of these securities because of the length of the unrealized loss and because other-than-temporary impairment had previously been recorded on one of these securities. As part of this analysis, the Company obtained fair value estimates from an independent source and performed a cash flow analysis considering default rates, loss severities based upon the location of the collateral and estimated prepayments. The results of this analysis showed that no additional other-than-temporary impairment was considered to have occurred. The Bank did not have the intent to sell these securities as of March 31, 2014, it expected to recover the amortized cost of these securities, except for any credit loss already taken, and it was more likely than not that the Bank would not be required to sell the securities prior to the recovery of fair value.

One additional investment security in the Company’s state and municipal obligation portfolio was evaluated for other-than-temporary impairment at March 31, 2014. This security was acquired in 2008 in a loan work out arrangement. Scheduled payments were received as agreed until November 2010. Since that time, two principal and interest payments have been received. The Company had recognized other-than-temporary impairment loss on this security of $381,000 in 2011. The expected future annual cash flows were analyzed as of March 31, 2014 and no additional other-than-temporary impairment was recorded in the first quarter of 2014. The cost and fair value of this investment security was $507,000 at March 31, 2014.

The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at March 31, 2014:

	Amortized Cost		Estimated Fair Value
	(in thousands)
Available For Sale:
Due in one year or less	$	—	$	—
Due after one year through five years	2,610		2,723
Due after five years through ten years	26,878		27,076
Due after ten years	291,370		279,127
Residential mortgage-backed securities	278,507		271,022
Commercial mortgage-backed securities	110,090		116,123
Collateralized mortgage obligations	12,488		12,082
Total available for sale	$	721,943	$	708,153

	Amortized Cost		Estimated Fair Value
	(in thousands)
Held To Maturity:
Due after five years through ten years	$	9,993	$	9,290
Due after ten years	85,232		79,931
Residential mortgage-backed securities	229,865		224,347
Collateralized mortgage obligations	66,813		62,108
Total held to maturity	$	391,903	$	375,676

10

Investment securities do not include Cole Taylor Bank's (the "Bank") aggregate investment in Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank (“FRB”) stock of $49.6 million at March 31, 2014 and $64.6 million at December 31, 2013. These investments are required for membership and are carried at cost.

The Bank must maintain a specified level of investment in FHLBC stock based on the amount of its outstanding FHLB borrowings. At March 31, 2014, the Company had a $37.8 million investment in FHLBC stock, compared to $52.8 million at December 31, 2013. As of March 31, 2014, the Company believed that it would ultimately recover the par value of the FHLBC stock.

3. Loans and Loans Held for Sale:

Loans by type at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014			December 31, 2013
	(in thousands)
Loans:
Commercial and industrial	$	1,940,095		$	1,935,377
Commercial real estate secured	1,109,042			1,124,227
Residential construction and land	45,417			46,079
Commercial construction and land	132,729			121,682
Lease receivables	143,091			132,013
Consumer	294,546			301,377
Gross loans	3,664,920			3,660,755
Less: Unearned discount	(13,907		)	(12,380		)
Loans	3,651,013			3,648,375
Less: Allowance for loan losses	(82,891		)	(81,864		)
Loans, net	$	3,568,122		$	3,566,511
Loans Held for Sale:
Total Loans Held for Sale	$	436,086		$	473,890

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

11

The following table presents the aging of loans by class at March 31, 2014 and December 31, 2013:

	30-59 Days Past Due		60-89 Days  Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
	(in thousands)
March 31, 2014
Commercial and industrial	$	14	$	—	$	17,841	$	17,855	$	1,922,240	$	1,940,095
Commercial real estate secured	762		287		26,589		27,638		1,081,404		1,109,042
Residential construction and land	—		—		—		—		45,417		45,417
Commercial construction and land	—		—		22,550		22,550		110,179		132,729
Lease receivables, net	2,319		—		—		2,319		126,865		129,184
Consumer	4,544		109		5,956		10,609		283,937		294,546
Loans	$	7,639	$	396	$	72,936	$	80,971	$	3,570,042	$	3,651,013
December 31, 2013
Commercial and industrial	$	—	$	—	$	15,879	$	15,879	$	1,919,498	$	1,935,377
Commercial real estate secured	443		301		37,474		38,218		1,086,009		1,124,227
Residential construction and land	—		—		—		—		46,079		46,079
Commercial construction and land	—		—		22,550		22,550		99,132		121,682
Lease receivables, net	—		—		—		—		119,633		119,633
Consumer	3,617		828		5,922		10,367		291,010		301,377
Loans	$	4,060	$	1,129	$	81,825	$	87,014	$	3,561,361	$	3,648,375

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company uses the following definitions for risk ratings:

Pass. Loans in this category range from loans that are virtually risk free to those where the borrower has an operating history that contains losses or adverse trends that weakened its financial condition that have not currently impacted repayment ability, but may in the future, if not corrected.

Special Mention. Loans in this category have potential weaknesses which may, if not corrected, weaken the asset, inadequately protect the Bank’s credit position and/or diminish repayment prospects.

Substandard. Loans in this category relate to borrowers with deteriorating financial conditions and exhibit a number of well-defined weaknesses which currently inhibit normal repayment through normal operations. These loans require constant monitoring and supervision by Bank management.

Nonaccrual. Loans in this category exhibit the same weaknesses as substandard, however, the weaknesses are more pronounced and the loans are no longer accruing interest.

12

The following table presents the risk categories of loans by class at March 31, 2014 and December 31, 2013:

	Pass		Special Mention		Substandard		Nonaccrual		Total Loans
	(in thousands)
March 31, 2014
Commercial and industrial	$	1,859,595	$	43,285	$	19,374	$	17,841	$	1,940,095
Commercial real estate secured	1,034,693		21,813		25,947		26,589		1,109,042
Residential construction and land	43,370		—		2,047		—		45,417
Commercial construction and land	105,050		5,129		—		22,550		132,729
Lease receivables, net	129,184		—		—		—		129,184
Consumer	288,590		—		—		5,956		294,546
Loans	$	3,460,482	$	70,227	$	47,368	$	72,936	$	3,651,013
December 31, 2013
Commercial and industrial	$	1,862,405	$	48,403	$	8,690	$	15,879	$	1,935,377
Commercial real estate secured	1,040,468		19,523		26,762		37,474		1,124,227
Residential construction and land	42,519		—		3,560		—		46,079
Commercial construction and land	93,965		5,167		—		22,550		121,682
Lease receivables, net	119,633		—		—		—		119,633
Consumer	295,455		—		—		5,922		301,377
Loans	$	3,454,445	$	73,093	$	39,012	$	81,825	$	3,648,375

Impaired loans include all nonaccrual loans, as well as accruing loans estimated to have higher risk of noncompliance with the present repayment schedule for both interest and principal. Unless modified in a troubled debt restructuring, certain homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans.

The Company’s policy is to charge-off a loan when a loss is highly probable and clearly identified. For consumer loans, the Company follows the guidelines issued by its primary regulator which specify the number of days of delinquency at which to charge-off a consumer loan by type of credit. Except for unsecured loans that are generally charged-off when a loan is 90 days past due, the Company does not have a policy to automatically charge-off a commercial loan when it reaches a certain status of delinquency. If a commercial loan is determined to have an impairment, the Company will either establish a specific valuation allowance or, if management deems a loss to be highly probable and clearly identified, reduce the recorded investment in that loan by taking a full or partial charge-off. In making the determination that a loss is highly probable and clearly identified, management evaluates the type, marketability and availability of the collateral along with any credit enhancements supporting the loan. In determining when to fully or partially charge-off a loan, management considers prospects for collection of assets, likely time frame for repayment, solvency status of the borrower, the existence of practical or reasonable collection programs, the existence of shortfalls after attempts to improve collateral position, prospects for near-term improvements in collateral valuations and other considerations identified in its internal loan review and workout processes.

13

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 and December 31, 2013:

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Balance		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Balance		Allowance for Loan Losses Allocated
	(in thousands)
With no related allowance recorded:
Commercial and industrial	$	550	$	519	$	—	$	3,546	$	2,135	$	—
Commercial real estate secured	47,083		37,612		—		54,453		41,965		—
Consumer	7,417		6,909		—		6,400		5,951		—
Subtotal	55,050		45,040		—		64,399		50,051		—
With an allowance recorded:
Commercial and industrial	35,044		28,723		13,129		33,453		15,200		8,555
Commercial real estate secured	9,753		9,753		3,030		8,790		8,650		3,265
Commercial construction and land	25,430		22,550		1,890		25,430		22,550		1,867
Subtotal	70,227		61,026		18,049		67,673		46,400		13,687
Total impaired loans	$	125,277	$	106,066	$	18,049	$	132,072	$	96,451	$	13,687

The following table presents average balances of loans individually evaluated for impairment and associated interest income recognized by class of loans for the three months ended March 31, 2014 and March 31, 2013:

	March 31, 2014				March 31, 2013
	YTD Average Recorded Balance		YTD Interest Income Recognized		YTD Average Recorded Balance		YTD Interest Income Recognized
	(in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,327	$	3	$	2,741	$	—
Commercial real estate secured	39,788		167		25,325		157
Residential construction and land	—		—		2,619		—
Commercial construction and land	—		—		2,601		—
Consumer	6,430		48		6,478		32
Subtotal	47,545		218		39,764		189
With an allowance recorded:
Commercial and industrial	21,961		79		16,480		36
Commercial real estate secured	9,202		80		5,790		37
Commercial construction and land	22,550		—		18,197		—
Subtotal	53,713		159		40,467		73
Total impaired loans	$	101,258	$	377	$	80,231	$	262

The majority of the Company's commercial credit customers, as measured by outstanding balances, are located within the Chicago area, although they may do business outside of that area. As of March 31, 2014, approximately 29% of the Company’s loans were to some degree secured by real estate properties located primarily within the Chicago area, compared to 30% as of December 31, 2013.

14

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of March 31, 2014 and March 31, 2013:

	Commercial & Industrial			Commercial Real Estate Secured			Residential Construction & Land			Commercial Construction & Land		Lease Receivables		Consumer			Total
	(in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning balance as of December 31, 2013	$	37,733		$	22,384		$	5,654		$	7,562	$	718	$	7,813		$	81,864
Provision	3,481			415			(1,648		)	699		57		(404		)	2,600
Charge-offs	—			(2,483		)	1			—		—		(345		)	(2,827		)
Recoveries	643			23			425			—		—		163			1,254
Ending balance as of March 31, 2014	$	41,857		$	20,339		$	4,432		$	8,261	$	775	$	7,227		$	82,891
Ending balance individually evaluated for impairment	$	13,129		$	3,030		$	—		$	1,890	$	—	$	—		$	18,049
Ending balance collectively evaluated for impairment	28,728			17,309			4,432			6,371		775		7,227			64,842
LOANS:
Ending balance individually evaluated for impairment	$	29,242		$	47,365		$	—		$	22,550	$	—	$	6,909		$	106,066
Ending balance collectively evaluated for impairment	1,910,853			1,061,677			45,417			110,179		129,184		287,637			3,544,947
Ending balance	$	1,940,095		$	1,109,042		$	45,417		$	132,729	$	129,184	$	294,546		$	3,651,013
ALLOWANCE FOR LOAN LOSSES:
Beginning balance as of December 31, 2012	$	35,946		$	20,542		$	6,642		$	8,928	$	273	$	9,860		$	82,191
Provision	396			506			(1,038		)	2,257		78		(1,899		)	300
Charge-offs	(3		)	(24		)	—			—		—		(788		)	(815		)
Recoveries	120			21			174			—		—		159			474
Ending balance as of March 31, 2013	$	36,459		$	21,045		$	5,778		$	11,185	$	351	$	7,332		$	82,150
Ending balance individually evaluated for impairment	$	8,540		$	1,584		$	—		$	3,546	$	—	$	—		$	13,670
Ending balance collectively evaluated for impairment	27,919			19,461			5,778			7,639		351		7,332			68,480
LOANS:
Ending balance individually evaluated for impairment	$	20,197		$	36,305		$	742		$	26,375	$	—	$	6,494		$	90,113
Ending balance collectively evaluated for impairment	1,557,044			976,947			39,878			94,837		58,564		405,411			3,132,681
Ending balance	$	1,577,241		$	1,013,252		$	40,620		$	121,212	$	58,564	$	411,905		$	3,222,794

15

Troubled Debt Restructurings

A modified loan is considered a troubled debt restructuring (“TDR”) when the borrower is experiencing documented financial difficulty and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics at the outset of a new loan. The most common types of modifications include interest rate modifications, forbearance on principal and/or interest, partial charge-offs and changes in note structure. All loans modified in a TDR are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

For the commercial portfolio, loans modified in a TDR are separately evaluated for impairment at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is generally measured by comparing the recorded investment in the loan to the fair value of the collateral net of estimated costs to sell, if the loan is collateral dependent. The Company recognizes a specific valuation allowance equal to the amount of the measured impairment, if applicable.

Commercial and consumer loans modified in a TDR are classified as impaired loans for a minimum of one year. After one year, a loan is no longer included in the balance of impaired loans if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is performing based on the terms of the restructuring agreement. Nonperforming restructured loans totaled $8.5 million at March 31, 2014 and $8.8 million at December 31, 2013. Performing restructured loans totaled $35.6 million at March 31, 2014 and $20.7 million at December 31, 2013.

The following tables provide information on loans modified in a TDR during the quarters ended March 31, 2014 and March 31, 2013. The pre-modification outstanding recorded balance is equal to the outstanding balance immediately prior to modification. The post-modification outstanding balance is equal to the outstanding balance immediately after modification.

	For the quarter ended					For the quarter ended
	March 31, 2014					March 31, 2013
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded  Balance		Post-Modification Outstanding Recorded Balance
	(dollars in thousands)
Commercial and industrial	2	$	9,952	$	9,952	1	$	2,659	$	2,659
Commercial real estate secured	2	3,874		3,874		2	1,306		1,306
Consumer	9	1,243		1,243		11	692		692
Total	13	$	15,069	$	15,069	14	$	4,657	$	4,657

The following tables provide information on TDRs that defaulted for the first time during the period indicated and had been modified within the last twelve months:

	For the quarter ended			For the quarter ended
	March 31, 2014			March 31, 2013
	Number of Loans	Recorded Investment at Period End		Number of Loans	Recorded Investment at Period End
	(dollars in thousands)
Consumer	1	$	44	—	$	—
Total	1	$	44	—	$	—

Loans Held for Sale

At March 31, 2014, loans held for sale of $436.1 million consisted predominately of residential mortgage loans originated by Cole Taylor Mortgage. The unpaid principal balance associated with all loans held for sale was $424.0 million at March 31, 2014. An unrealized gain on these loans of $12.0 million for the three months ended March 31, 2014 and $20.6 million for the three months ended March 31, 2013 was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Income. None of these loans were 90 days or more past due or on nonaccrual status. Interest income on these loans is included in net interest income and is not considered part of the change in fair value.

16

Loan Participations

The total amount of loans transferred to third parties as loan participations at March 31, 2014 was $210.2 million, all of which has been recognized as a sale under the applicable accounting guidance in effect at the time of the transfer. The Company continues to have involvement with these loans through relationship management and its servicing responsibilities.

4. Interest-Bearing Deposits:

Interest-bearing deposits at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014		December 31, 2013
	(in thousands)
Commercial interest checking	$	373,467	$	377,631
NOW accounts	572,259		566,269
Savings accounts	41,229		40,357
Money market deposits	684,358		698,302
Brokered money market deposits	6,081		51,124
Time deposits:
Certificates of deposit	507,239		472,222
Brokered certificates of deposit	428,502		203,715
CDARS time deposits	214,479		142,835
Public time deposits	57,564		49,582
Total time deposits	1,207,784		868,354
Total	$	2,885,178	$	2,602,037

At March 31, 2014, time deposits in the amount of $100,000 or more totaled $562.1 million compared to $439.9 million at December 31, 2013 due to an increase in CDARS time deposits and brokered certificates of deposit.

Brokered certificates of deposit (“CDs”) are carried net of mark-to-market adjustments when they are the hedged item in a fair value hedging relationship and net of the related broker placement fees. Brokered CD placement fees of $450,000 at March 31, 2014 and $366,000 at December 31, 2013 are amortized to the maturity date of the related brokered CDs and are included in deposit interest expense. As of March 31, 2014, the Company had no brokered CDs that could be called after a lock-out period but before their stated maturity.  As of March 31, 2013, the Company had one brokered CD with an aggregate balance of $15.0 million that could be called after a lock-out period but before its stated maturity. During the three months ended March 31, 2014, the Company incurred no expense associated with brokered CDs that were called before their stated maturity.  The Company incurred $184,000 in expense associated with a brokered CD that was called before its stated maturity during the three months ended March 31, 2013.

5. Borrowings:

Short-term:

Short-term borrowings at March 31, 2014 and December 31, 2013 consisted of the following:

	March 31, 2014				December 31, 2013
	Amount Borrowed		Weighted- Average Rate		Amount Borrowed		Weighted- Average Rate
	(dollars in thousands)
Customer repurchase agreements	$	6,301	0.04	%	$	7,238	0.05	%
Federal funds purchased	71,796		0.46		106,089		0.42
FHLB advances	965,000		0.12		1,265,000		0.11
Total	$	1,043,097	0.15	%	$	1,378,327	0.14	%

Customer repurchase agreements are collateralized financing transactions primarily executed with local Bank clients and with overnight maturities.

17

FHLB short-term advances at March 31, 2014 and December 31, 2013, consisted of the following:

	Interest Rate		Due Date	Earliest Call Date (if applicable)	March 31, 2014		December 31, 2013
	(dollars in thousands)
FHLB overnight advance	0.130	%	January 2, 2014	n/a	$	—	$	365,000
FHLB advance	0.120		January 2, 2014	n/a	—		150,000
FHLB advance	0.120		January 2, 2014	n/a	—		400,000
FHLB advance	0.110		December 12, 2014	n/a	350,000		350,000
FHLB overnight advance	0.130		April 1, 2014	n/a	615,000		—
Total short-term FHLB advances					$	965,000	$	1,265,000

Collateral:

At March 31, 2014, the FHLB advances were collateralized by $802.3 million of investment securities and blanket liens on $709.6 million of qualified first-mortgage residential loans, multi-family loans, home equity loans and commercial real estate loans. Based on the value of collateral pledged at March 31, 2014, the Bank had additional borrowing capacity at the FHLB of $248.6 million. In comparison, at December 31, 2013, the FHLB advances were collateralized by $887.1 million of investment securities and a blanket lien on $702.0 million of qualified first-mortgage residential, home equity and commercial real estate loans with additional borrowing capacity of $34.1 million.

The Bank participates in the FRB’s Borrower In Custody (“BIC”) program. At March 31, 2014, the Bank had pledged $527.2 million of commercial loans as collateral for an available $441.0 million borrowing capacity at the FRB. At March 31, 2014, the Bank had no advances from the FRB. At December 31, 2013, the Bank had pledged $520.4 million of commercial loans as collateral for available borrowing capacity of $440.9 million under the BIC program, with no advances outstanding at December 31, 2013.

18

6. Other Comprehensive Income (“OCI”):

The following table presents OCI for the periods indicated:

	For the Three Months Ended									For the Three Months Ended
	March 31, 2014									March 31, 2013
	Before Tax Amount			Tax Effect			Net of Tax			Before Tax Amount			Tax Effect			Net of Tax
	(in thousands)
Unrealized gains (losses) from securities:
Change in unrealized gains and losses on available for sale securities	$	13,165		$	(5,085	)	$	8,080		$	(7,049	)	$	3,206		$	(3,843	)
Less: reclassification adjustment for gains included in net income	(35		)	14			(21		)	(1		)	—			(1		)
Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment	13,130			(5,071		)	8,059			(7,050		)	3,206			(3,844		)
Change in deferred gains and losses on investments transferred to held to maturity from available for sale	(183		)	74			(109		)	(522		)	210			(312		)
Cash flow hedging:
Change in net unrealized loss from cash flow hedging	(718		)	277			(441		)	403			(162		)	241
Less: reclassification adjustment for gains included in net income	—			—			—			—			—			—
Change in unrealized loss from cash flow hedging, net of reclassification adjustment	(718		)	277			(441		)	403			(162		)	241
Other comprehensive income (loss)	$	12,229		$	(4,720	)	$	7,509		$	(7,169	)	$	3,254		$	(3,915	)

The following table presents the changes in each component of OCI, net of tax, for the three months ended March 31, 2014:

	Net unrealized gains and losses on available for sale securities			Net deferred gains and losses on investment transfer to held to maturity from available for sale			Net unrealized loss from cash flow hedging instruments			Total
	(in thousands)
Balance at December 31, 2013	$	(10,588	)	$	3,124		$	1,281		$	(6,183	)
OCI before reclassification	8,080			—			(441		)	7,639
Amounts reclassified from OCI	(21		)	(109		)	—			(130		)
Net current period other comprehensive income	8,059			(109		)	(441		)	7,509
Balance at March 31, 2014	$	(2,529	)	$	3,015		$	840		$	1,326

19

The following table presents the amount reclassified out of each component of OCI for the periods indicated:

		Amount reclassified from OCI
Detail of OCI components	Affected line item in the Consolidated Statements of Income	Three months ended March 31, 2014			Three months ended March 31, 2013
		(in thousands)
Net unrealized gains and losses on available for sale securities:
	Gains on sales of investment securities	$	35		$	1
	Income tax expense	(14		)	—
	Net of tax	21			1
Amortization of deferred gains and losses on investment transfer to held to maturity from available for sale:
	Interest Income	183			522
	Income tax expense	(74		)	(210		)
	Net of tax	109			312
Total reclassifications for the period	Net of tax	$	130		$	313

7. Earnings Per Share:

Earnings per share is calculated using the two-class method. The calculation of basic earnings per share requires an allocation of earnings to all securities that participate in dividends with common shares, such as unvested restricted stock and preferred participating stock, to the extent that each security may share in the entity’s earnings. Basic earnings per share is calculated by dividing undistributed earnings allocated to common stock by the weighted average number of common shares outstanding. Dilutive earnings per share considers the dilutive effect of all securities that participate in dividends with common shares, as well as common stock equivalents that do not participate in dividends with common stock, such as stock options and warrants to purchase shares of common stock. Dilutive earnings per share is calculated by dividing undistributed earnings allocated to common stockholders by the sum of the weighted average number of common shares outstanding and the weighted average number of common stock equivalents outstanding, provided those common stock equivalents are dilutive. Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share in periods in which the effect of including such shares would reduce the loss per share or increase the income per share (i.e., when the common stock equivalents are antidilutive). To the extent there is an undistributed loss for the period, that loss is allocated entirely to the weighted average number of common shares, as participating security holders have no contractual obligation to share in losses.

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The following table sets forth the computation of basic and diluted income per common share for the periods indicated:

	For the Three Months
	Ended March 31,
	2014		2013
	(dollars in thousands, except per share amounts)
Net income	$	9,944	$	17,257
Preferred dividends and discounts	—		(3,661		)
Net income available to common stockholders	$	9,944	$	13,596
Undistributed earnings allocated to common shares	$	9,446	$	12,861
Undistributed earnings allocated to unvested restricted participating shares	82		158
Undistributed earnings allocated to preferred participating shares	416		577
Total undistributed earnings	$	9,944	$	13,596
Basic weighted-average common shares outstanding	29,075,072		28,598,194
Dilutive effect of stock options	165,932		125,004
Dilutive effect of warrants	82,752		239,227
Diluted weighted-average common shares outstanding	29,323,756		28,962,425
Basic income per common share	$	0.32	$	0.45
Diluted income per common share	0.32		0.44

Antidilutive shares not included in diluted earnings per common share calculation:
Stock options	59,425	315,819
Warrants	—	505,479

8. Stock-Based Compensation:

The Company’s Incentive Compensation Plan (the “Plan”) allows for the granting of stock options and stock awards. Under the Plan, the Company has issued nonqualified stock options and restricted stock to only employees and directors.

Generally, stock options are granted with an exercise price equal to the fair market value of the common stock on the date of grant, which is equal to the last reported sales price of the common stock on the Nasdaq Global Select Market on the date of grant. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options issued to employees and directors. Since 2006, stock options granted vest equally over four years and expire eight years following the grant date. Compensation expense associated with stock options is recognized over the vesting period, or until the employee or director becomes retirement eligible if that time period is shorter.

The following is a summary of stock option activity for the three months ended March 31, 2014:

	Shares		Weighted- Average Exercise Price
Outstanding at January 1, 2014	665,165		$	16.15
Granted	—		—
Exercised	(63,161	)	8.66
Forfeited	—		—
Expired	(91,667	)	28.53
Outstanding at March 31, 2014	510,337		14.85
Exercisable at March 31, 2014	495,337		15.11

As of March 31, 2014, the total compensation cost related to nonvested stock options that has not yet been recognized totaled $25,000 and the weighted-average period over which these costs are expected to be recognized is approximately 1.1 years.

The Company grants restricted stock awards, a portion of which vests upon completion of future service requirements. The fair value of restricted stock awards is equal to the last reported sales price of the Company’s common stock on the date of

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grant. The Company recognizes stock-based compensation expense for these awards over the vesting period based upon the number of awards ultimately expected to vest.

The following table provides information regarding nonvested restricted stock activity for the three months ended March 31, 2014:

	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2014	309,229		$	16.13
Granted	—		—
Vested	(113,497	)	16.04
Forfeited or canceled	(780	)	17.11
Nonvested at March 31, 2014	194,952		16.17

As of March 31, 2014, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $1.6 million and the weighted-average period over which these costs are expected to be recognized is approximately 1.1 years.

9. Derivative Financial Instruments:

The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. The Company has used interest rate exchange agreements, or swaps, interest rate exchange swap options, or swaptions, callable swaps, agreements to purchase mortgage-backed securities, or mortgage TBAs for which it does not intend to take delivery, and interest rate floors, collars and corridors to manage the interest rate risk associated with its commercial loan portfolio, held for sale loans, brokered CDs, cash flows related to FHLB advances, junior subordinated borrowings, repurchase agreements and mortgage servicing associated with Cole Taylor Mortgage. The Company also has interest rate lock commitments and forward loan commitments associated with Cole Taylor Mortgage that are considered derivatives. Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the Bank’s investment portfolios (covered call options).

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The following tables describe the derivative instruments outstanding at the dates indicated:

	March 31, 2014
Product	Notional Amount		Average Strike Rates	Average Maturity	Fair Value
	(dollars in thousands)
Fair value hedging derivative instruments:
Brokered CD interest rate swaps—pay variable/receive fixed	$	96,920	Receive 2.38% Pay 0.22%	1.3 yrs	$	2,369
Total fair value hedging derivative instruments	96,920
Cash flow hedging derivative instruments:
Interest rate swap - receive fixed/pay variable	20,000		Receive 2.56% Pay 0.31%	11.2 yrs	1,366
Total cash flow hedging derivative instruments	20,000
Total hedging derivative instruments	116,920
Non-hedging derivative instruments:
Customer interest rate swap —pay fixed/receive variable	436,707		Pay 2.25% Receive 0.15%	3.7 yrs	(12,788		)
Customer interest rate swap —receive fixed/pay variable	436,707		Receive 2.25% Pay 0.15%	3.7 yrs	12,597
Interest rate swaps—mortgage servicing rights	485,000		Receive 2.01% Pay 0.23%	6.8 yrs	(5,771		)
Mortgage TBAs	120,000		n/a	0.1 yrs	(324		)
Interest rate lock commitments	567,794		n/a	0.1 yrs	2,444
Forward loan sale commitments	683,000		n/a	0.1 yrs	273
Total non-hedging derivative instruments	2,729,208
Total derivative instruments	$	2,846,128

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	December 31, 2013
Product	Notional Amount		Average Strike Rates	Average Maturity	Fair Value
	(dollars in thousands)
Fair value hedging derivative instruments:
Brokered CD interest rate swaps—pay variable/receive fixed	$	106,920	Receive 2.27% Pay 0.21%	1.4 yrs	$	2,815
Total fair value hedging derivative instruments	106,920
Cash flow hedging derivative instruments:
Interest rate swap - receive fixed/pay variable	20,000		Receive 2.56% Pay 0.31%	11.5 yrs	2,084
Total cash flow hedging derivative instruments	20,000
Total hedging derivative instruments	126,920
Non-hedging derivative instruments:
Customer interest rate swap—pay fixed/receive variable	459,878		Pay 2.27% Receive 0.17%	3.8 yrs	(13,051		)
Customer interest rate swap—receive fixed/pay variable	459,878		Receive 2.27% Pay 0.17%	3.8 yrs	12,969
Interest rate swaps—mortgage servicing rights	470,000		Receive 1.55% Pay 0.23%	6.4 yrs	(11,703		)
Mortgage TBAs	85,000		n/a	0.1 yrs	(1,419		)
Interest rate lock commitments	449,333		n/a	0.1 yrs	498
Forward loan sale commitments	680,000		n/a	0.1 yrs	7,760
Total non-hedging derivative instruments	2,604,089
Total derivative instruments	$	2,731,009

Interest rate swaps designated as fair value hedges against certain brokered CDs are used to convert the fixed rate paid on the brokered CDs to a variable rate based on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. The ineffectiveness on these interest rate swaps was recorded on the Consolidated Statements of Income in other derivative income in noninterest income.

Interest rate swaps designated as fair value hedges against certain callable brokered CDs were used to convert the fixed rate paid on the callable brokered CDs to a variable rate based on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments was reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged callable brokered CD was reported as an adjustment to the carrying value of the callable brokered CDs. The ineffectiveness on these interest rate swaps was recorded on the Consolidated Statements of Income in other derivative income in noninterest income.

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The following table shows the net gains (losses) recognized in the Consolidated Statements of Income related to fair value hedging derivatives:

	Consolidated Statement of Income Location	For the Three Months Ended
		March 31, 2014			March 31, 2013
		(in thousands)
Change in fair value of brokered CD interest rate swaps	Other derivative income	$	(446	)	$	(505	)
Change in fair value of hedged brokered CDs	Other derivative income	452			531
Ineffectiveness		6			$	26
Change in fair value of callable brokered CD interest rate swaps	Other derivative income	—			$	(167	)
Change in fair value of hedged callable brokered CDs	Other derivative income	—			385
Ineffectiveness		$	—		$	218

The interest rate swaps designated as cash flow hedges are used to reduce the variability in the interest paid on a portion of the junior subordinated borrowings. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value is recorded in OCI.

The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. These derivative financial instruments are interest rate swaps and are not designated as hedges. The Company had offsetting interest rate swaps with other counterparties in which the Company agreed to receive a variable interest rate and pay a fixed interest rate. The non-hedging derivatives are recorded at their fair value on the Consolidated Balances Sheets in other assets (related to customer transactions) or other liabilities (offsetting swaps) with changes in fair value recorded on the Consolidated Statements of Income in noninterest income.

In the normal course of business, Cole Taylor Mortgage uses interest rate swaps, interest rate swaptions, mortgage TBAs, interest rate lock commitments and forward loan sale commitments as derivative instruments to hedge the risk associated with interest rate volatility. The instruments qualify as non-hedging derivatives.

Interest rate swaps are used in order to lessen the price volatility of the mortgage servicing rights ("MSR") asset. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue in noninterest income.

Another derivative the Company uses to lessen the price volatility of the MSR asset is the mortgage TBA, which is a forward commitment to buy to-be-announced securities for which the Company does not intend to take delivery of the security and will enter into an offsetting position before physical delivery. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statement of Income in mortgage banking revenue in noninterest income.

The Company enters into interest rate lock commitments for originated residential mortgage loans. The Company then uses forward loan sale commitments to sell originated residential mortgage loans to offset the interest rate risk of the rate lock commitments, as well as mortgage loans held for sale. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets or other liabilities with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue in noninterest income.

The Company enters into covered call option transactions from time to time that are designed primarily to increase the total return associated with the investment securities portfolio. Any premiums related to covered call options are recognized on the Consolidated Statements of Income in noninterest income. There were no covered call options outstanding as of March 31, 2014.

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Amounts included in the Consolidated Statements of Income related to non-hedging derivative instruments were as follows:

		For the Three Months Ended
	Consolidated Statements of Income Location	March 31, 2014			March 31, 2013
		(in thousands)
Customer interest rate swaps - pay fixed/receive variable	Other derivative income	$	263		$	1,098
Customer interest rate swaps - pay variable/receive fixed	Other derivative income	(372		)	(1,041		)
Interest rate swaps - MSRs	Mortgage banking revenue	5,443			(1,827		)
Mortgage TBA	Mortgage banking revenue	1,095			—
Interest rate lock commitments	Mortgage banking revenue	1,946			(5,718		)
Forward loan sale commitments	Mortgage banking revenue	(7,487		)	(2,096		)

10. Offsetting Assets and Liabilities:

Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting agreements exist. The Company's brokered CD interest rate swaps, callable brokered CD interest rate swaps, cash flow interest rate swaps and interest rate swaps on MSR assets are generally executed under International Swaps and Derivatives Association (“ISDA”) master agreements which provide for this right of offset. The Company's mortgage forward loan sale agreements are generally subject to master securities forward transaction agreements which include netting provisions.

The Company generally does not offset interest rate swaps for financial reporting purposes. The Company does offset forward loan commitments for financial reporting purposes.

Information about financial instruments that are eligible for offset in the Consolidated Balance Sheets as of the dates included is presented in the following table:

								Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts Recognized		Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Collateral			Net Amount
	(in thousands)
As of March 31, 2014
Derivative assets	$	7,132	$	(725	)	$	6,407	$	(5,665	)	$	—		$	742
Derivative liabilities	21,670		(725		)	20,945		(5,665		)	(15,174		)	106
As of December 31, 2013
Derivative assets	13,762		(41		)	13,721		(5,707		)	—			8,014
Derivative liabilities	25,773		(41		)	25,732		(5,707		)	(19,934		)	91

11. Fair Value Measurement:

The Company has elected to account for residential mortgage loans originated by Cole Taylor Mortgage and designated as held for sale at fair value under the fair value option in accordance with ASC 825 – Financial Instruments. Any mortgages originated, held in the loan portfolio and then transferred to held for sale are accounted for at the lower of cost or market. When the Company began to retain MSRs in 2011, an election was made to account for these rights under the fair value option. In addition, any purchased MSRs are accounted for under the fair value option. The Company has not elected the fair value option for any other financial asset or liability.

In accordance with ASU 820, the Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are defined as follows:

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Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair values:

Available for sale investment securities:

For these securities, the Company obtains fair value measurements from an independent pricing service, when available. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current ratings from credit rating agencies and the bond’s terms and conditions, among other things. The fair value measurements are compared to another independent source on a quarterly basis to review for reasonableness. In addition, the Company reviews the third-party valuation methodology on a periodic basis. Any significant differences in valuation are reviewed with members of management who have the relevant technical expertise to assess the results. The Company has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not have fair value measurements available for a security, the Company has estimated the fair value based on specific information about each security. The Company has determined that these valuations are classified in Level 3 of the fair value hierarchy.

Loans held for sale:

Loans held for sale includes residential mortgage loans that have been originated by Cole Taylor Mortgage and were originally designated as held for sale, along with residential mortgage loans that have been originated by Cole Taylor Mortgage, were originally held in the loan portfolio and then subsequently transferred to held for sale. The Company has elected to account for the loans that were originally designated as held for sale on a recurring basis under the fair value option. The loans that were transferred from the loan portfolio into held for sale are accounted for at the lower of cost or market.

For all residential mortgage loans held for sale, the fair value is based upon quoted market prices for similar assets in active markets and is classified in Level 2 of the fair value hierarchy.

Loans:

The Company does not record loans at their fair value on a recurring basis except for mortgage loans originated for sale by Cole Taylor Mortgage and subsequently transferred to the Company’s portfolio. However, the Company evaluates certain loans for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is established.

Generally, the majority of the Company’s impaired loans are collateral-dependent real estate loans where the fair value is determined by a current appraisal. For impaired loans that are collateral dependent, the Company’s practice is to obtain an updated appraisal every nine to 18 months, depending on the nature and type of the collateral and the stability of collateral valuations, as determined by senior members of credit management. Management has established policies and procedures related to appraisals and maintains a list of approved appraisers who have met specific criteria. In addition, the Company’s policy for appraisals on real estate dependent commercial loans generally requires each appraisal to have an independent compliance and technical review performed by a qualified third party to ensure quality of the appraisal and valuation. The Company discounts appraisals for estimated selling costs and, when appropriate, considers the date of the appraisal and stability of the local real estate market when analyzing the estimated fair value of individual impaired loans that are collateral dependent.

The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets, such as equipment, inventory, and accounts receivable. The fair value of these loans is based upon estimates of realizability and collectability of the underlying

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collateral. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the impairment analysis may not result in a related allowance for loan losses for each individual loan.

In accordance with fair value measurements, only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, a portion, but not all, of the Company’s impaired loans are classified in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the impaired loan as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon management’s assessment of the liquidation value of collateral, the Company classifies the impaired loan as nonrecurring Level 3 in the fair value hierarchy.

Assets held in employee deferred compensation plans:

Assets held in employee deferred compensation plans are recorded at fair value and included in other assets on the Company’s Consolidated Balance Sheets. The assets associated with these plans are invested in mutual funds and classified as Level 1, as the fair value measurement is based upon available quoted prices. The Company also records a liability included in accrued interest, taxes and other liabilities on its Consolidated Balance Sheets for the amount due employees related to these plans.

Derivatives:

The Company has determined that its derivative instrument valuations, except for certain mortgage derivatives, are classified in Level 2 of the fair value hierarchy. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. In accordance with accounting guidance of fair value measurements, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, the Company has elected to account for the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Mortgage derivatives:

Mortgage derivatives include interest rate swaps, mortgage TBAs hedging MSRs, interest rate lock commitments to originate held for sale residential mortgage loans for individual customers and forward commitments to sell residential mortgage loans to various investors. The fair value of the interest rate swaps and swaptions used to hedge MSRs is classified in Level 2 of the hierarchy. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. In accordance with accounting guidance of fair value measurements, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral posting thresholds, mutual puts and guarantees. The fair value of mortgage TBAs and forward loan sale commitments is based on quoted prices for similar assets in active markets that the Company has the ability to access and is classified in Level 2 of the hierarchy. The Company uses an external valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.

Mortgage servicing rights:

The Company records its MSRs at fair value. MSRs do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of MSRs by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of MSRs include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the model are validated on a regular basis. The fair value is validated on a quarterly basis with an independent third party. Any discrepancies between the internal model and the third party validation are investigated and resolved by an internal committee. Due to the nature of the valuation inputs, MSRs are classified in Level 3 of the fair value hierarchy.

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Other real estate owned and repossessed assets:

The Company does not record other real estate owned (“OREO”) and repossessed assets at their fair value on a recurring basis. At foreclosure or on obtaining possession of the assets, OREO and repossessed assets are recorded at the lower of the amount of the loan balance or the fair value of the collateral, less estimated cost to sell. Generally, the fair value of real estate is determined through the use of a current appraisal and the fair value of other repossessed assets is based upon the estimated net proceeds from the sale or disposition of the underlying collateral. OREO and repossessed assets require an updated appraisal at least annually. Only such assets that are recorded at fair value, less estimated cost to sell, are measured on a nonrecurring basis under the fair value hierarchy. Because the fair value is based upon management’s assessment of liquidation of collateral, the Company classifies the OREO and repossessed assets as nonrecurring Level 3 in the fair value hierarchy.

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Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below. There were no transfers of assets or liabilities measured at fair value on a recurring basis between Level 1 and Level 2 during the three months ended March 31, 2014.

	As of March 31, 2014
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Available for sale investment securities
U.S. government sponsored agency securities	$	15,096	$	—	$	15,096	$	—
Residential mortgage-backed securities	271,022		—		271,022		—
Commercial mortgage-backed securities	116,123		—		116,123		—
Collateralized mortgage obligations	12,082		—		12,082		—
State and municipal obligations	293,830		—		293,323		507
Total available for sale investment securities	708,153		—		707,646		507
Loans	8,492		—		8,492		—
Loans held for sale	432,075		—		432,075		—
Assets held in employee deferred compensation plans	4,468		4,468		—		—
Derivative instruments	16,332		—		16,332		—
MSRs	227,695		—		—		227,695
Mortgage derivative instruments	4,879		—		2,435		2,444
Liabilities:
Derivative instruments	12,788		—		12,788		—
Mortgage derivative instruments	8,257		—		8,257		—
	As of December 31, 2013
	(in thousands)
Assets:
Available for sale investment securities
U.S. government sponsored agency securities	14,962		—		14,962		—
Residential mortgage-backed securities	274,650		—		274,650		—
Commercial mortgage-backed securities	127,959		—		127,959		—
Collateralized mortgage obligations	12,698		—		12,698		—
State and municipal obligations	292,038		—		291,531		507
Total available for sale investment securities	722,307		—		721,800		507
Loans	7,447		—		7,447		—
Loans held for sale	416,881		—		416,881		—
Assets held in employee deferred compensation plans	4,267		4,267		—		—
Derivative instruments	17,868		—		17,868		—
MSRs	216,111		—		—		216,111
Mortgage derivative instruments	9,723		—		8,770		953
Liabilities:
Derivative instruments	13,051		—		13,051		—
Mortgage derivative instruments	14,587		—		14,132		455

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The table below includes a rollforward of the amounts reported on the Consolidated Balance Sheets for the periods indicated (including the effect of the measurement of fair value on earnings or OCI) for assets measured at fair value on a recurring basis and classified by the Company within Level 3 of the valuation hierarchy:

	For the Three Months Ended March 31,
	2014		2013		2014			2013		2014		2013
	Investment Securities				Mortgage Servicing Rights					Mortgage Derivatives
	(in thousands)
Beginning balance	$	507	$	551	$	216,111		$	78,917	$	498	$	15,318
Total net gains (losses) recorded in:
Net income	—		—		(9,085		)	1,363		1,946		(5,718		)
Purchases	—		—		10,324			4,233		—		—
Originations	—		—		10,345			22,063		—		—
Maturities	—		—		—			—		—		—
Transfers	—		—		—			—		—		—
Fair value at period end	$	507	$	551	$	227,695		$	106,576	$	2,444	$	9,600

Assets Measured on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis are summarized below. The Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These assets consist of loans considered impaired that may require periodic adjustment to the lower of cost or fair value and OREO and repossessed assets.

	As of March 31, 2014
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Loans	$	41,328	$	—	$	4,475	$	36,853
OREO and repossessed assets	5,188		—		—		5,188

	As of December 31, 2013
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Loans	$	29,930	$	—	$	1,145	$	28,785
OREO and repossessed assets	5,373		—		—		5,373

At March 31, 2014, the Company had $36.9 million of impaired loans and $5.2 million of OREO and repossessed assets measured at fair value on a nonrecurring basis and classified in Level 3 of the fair value hierarchy. The change in Level 3 value of impaired loans during the three months ended March 31, 2014, represents sales, payments or net charge-offs of $1.2 million and four additional impaired loans with fair value of $9.3 million which reflects the charge to earnings of $4.6 million to reduce these loans to fair value. The change in Level 3 OREO and repossessed assets for the three months ended March 31, 2014, included no additions and $185,000 of sales/settlements and write-downs which reduced OREO assets classified as Level 3.

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The following table presents quantitative information about Level 3 fair value measurements as of March 31, 2014:

	Fair Value (in thousands)		Valuation Techniques	Unobservable Inputs	Range of Qualitative Information (Weighted Average)
MEASURED ON A RECURRING BASIS:
Available for sale securities	$	507	See (1) below	See (1) below	See (1) below
Mortgage interest rate lock commitments (Mortgage derivative instruments)	2,444		Sales cash flow	Expected closing ratio	38.76% - 94.00% (77.75%)
				Expected delivery price	98.39 bps – 109.14 bps (102.68 bps)
Mortgage servicing rights	227,695		Discounted cash flow	Weighted average prepayment speed (CPR) (2)	4.3% – 26.5% (8.7%)
				Weighted average discount rate	10.00% - 16.25% (10.10%)
				Weighted average maturity, in months	45 – 455 (310)
				Delinquencies	0% - 50.0% (1.03%)
				Costs to service	$64 - $258 ($72)
MEASURED ON ANON-RECURRING BASIS:
Loans	36,853		Management’s assessment of liquidation value of collateral	Discount to reflect realizable value See (3) below	0% - 100%
OREO and repossessed assets	5,188		Management’s assessment of liquidation value of collateral	Discount to reflect realizable value See (4) below	5% - 20%

(1) Fair value can be based on discounted cash flow, offer prices or par. Each available for sale security is evaluated on an individual basis.

(2) CPR or conditional prepayment rate is the proportion of the principal of a pool of loans that is assumed to be paid off prematurely each period.

(3) Management’s assessment of the liquidation value of collateral is based on third party information including current appraisals, current financial statements and bank statements, inventory reports, and accounts receivable aging and may be further reduced by a management determined rate. Each loan is evaluated on an individual basis.

(4) Management’s assessment of the liquidation value of collateral is based on a third party appraised value. The value is further reduced by a management determined rate and estimated costs to sell. Each loan is evaluated on an individual basis.

The significant unobservable inputs used in the fair value measurement of the Company’s available for sale securities classified as Level 3 include interest rates and expected life. Generally, an increase in interest rates would result in a lower fair value measurement and a decrease in interest rates would result in a higher fair value measurement. An increase in expected life would result in a higher fair value measurement and a decrease in expected life would result in a lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s interest rate lock commitments are the expected closing ratio and the expected delivery price. Significant increases in the expected closing ratio and the expected delivery price would result in a higher fair value measurement while significant decreases in those inputs would result in a lower measurement. The unobservable inputs move independently of each other.

The significant unobservable inputs used in the fair value measurement of the Company’s MSRs include prepayment speeds, discount rates, delinquencies and cost to service. Significant increases in prepayment speeds, discount rates, delinquencies or cost to service would result in a significantly lower fair value measurement. Conversely, significant decreases in prepayment speeds, discount rates, delinquencies or costs to service would result in a significantly higher fair value measurement. With the exception of changes in delinquencies, which can change the cost to service, the unobservable inputs move independently of each other.

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Key economic assumptions used in the measuring of the fair value of the MSRs and the sensitivity of the fair value to immediate adverse changes in those assumptions at March 31, 2014 are presented in the following table. This table does not take into account the derivatives used to economically hedge the MSRs.

	March 31, 2014
(dollars in thousands except weighted average costs to service)
Weighted average prepayment speed (CPR)	8.70		%
Impact on fair value of 10% adverse change	$	(7,624	)
Impact on fair value of 20% adverse change	(14,777		)
Weighted average discount rate	10.10		%
Impact on fair value of 10% adverse change	$	(9,386	)
Impact on fair value of 20% adverse change	(18,046		)
Weighted average delinquency rate	1.03		%
Impact on fair value of 10% adverse change	$	(1,309	)
Impact on fair value of 20% adverse change	(2,617		)
Weighted average costs to service	$	72
Impact on fair value of 10% adverse change	$	(3,359	)
Impact on fair value of 20% adverse change	(6,717		)

Fair Value of Financial Instruments

The Company is required to provide certain disclosures of the estimated fair value of its financial instruments. A portion of the Company’s assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available, or readily determinable, trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. The Company may use significant estimates and present value calculations for the purposes of estimating fair values. Accordingly, fair values are based on various factors relative to current economic conditions, risk characteristics and other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect these estimated values.

In addition to the valuation methodologies explained above for financial instruments recorded at fair value on a recurring and non-recurring basis, the following methods and assumptions were used to determine fair values for other significant classes of financial instruments:

Cash and cash equivalents:

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

Loans:

With the exception of certain impaired loans and certain mortgage loans originated by Cole Taylor Mortgage and transferred to the Company’s portfolio, the fair value of loans has been estimated by the present value of future cash flows, using current rates at which similar loans would be made to borrowers with the same remaining maturities, less a valuation adjustment for general portfolio risks. This method of estimating fair value does not incorporate the exit price concept of fair value prescribed by ASC 820—Fair Value Measurements and Disclosures. Certain impaired loans are accounted for at fair value when it is probable the payment of interest and principal will not be made in accordance with the contractual terms and impairment exists. In these cases, the fair value is determined at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. The fair value of collateral dependent real estate loans is determined by a current appraisal. The individual impairment analysis also

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takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets and the fair value of these loans is based on estimates of realizability and collectability of the underlying collateral.

Investment in FHLB and FRB Stock:

The fair value of the investments in FHLB and FRB stock equals book value as these stocks can only be sold to the FHLB, FRB or other member banks at their par value per share.

Accrued interest receivable:

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

Other assets:

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

Deposit liabilities:

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

Short-term borrowings:

The carrying amount of overnight securities sold under agreements to repurchase and federal funds purchased approximates fair value, as the maturities of these borrowings are short-term.

Long-term borrowings:

Securities sold under agreements to repurchase with original maturities over one year and other advances have been valued at the present values of future cash flows using rates which approximate current market rates for instruments of like maturities.

Accrued interest payable:

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

Junior subordinated debentures:

The fair value of the fixed rate junior subordinated debentures issued to TAYC Capital Trust I is computed based on the publicly quoted market prices of the underlying trust preferred securities issued by this trust. The fair value of the floating rate junior subordinated debentures issued to TAYC Capital Trust II has been valued at the present value of estimated future cash flows using current market rates and credit spreads for an instrument with a like maturity.

Subordinated notes:

The subordinated notes issued by the Company in 2010, which have been redeemed, have been historically valued at the present value of estimated future cash flows using current market rates and credit spreads for an instrument with a like maturity.

Off-balance sheet financial instruments:

The fair value of commercial loan commitments to extend credit is not material as these commitments are predominantly floating rate, subject to material adverse change clauses, cancelable and not readily marketable. The carrying value and the fair value of standby letters of credit represent the unamortized portion of the fee paid by the customer. A reserve for unfunded commitments is established if it is probable that a liability has been incurred by the Company under a standby letter of credit or a loan commitment that has not yet been funded.

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The estimated fair values of the Company’s financial instruments as of March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	138,569	$	138,569	$	138,569	$	—	$	—
Available for sale investments	708,153		708,153		—		707,646		507
Held to maturity investments	391,903		375,676		—		375,676		—
Loans held for sale	436,086		436,217		—		436,217		—
Loans, net of allowance	3,568,122		3,612,903		—		12,967		3,599,936
Investment in FHLB and FRB stock	49,617		49,617		—		49,617		—
Accrued interest receivable	15,762		15,762		15,762		—		—
Derivative financial instruments	21,211		21,211		—		18,767		2,444
Other assets	4,468		4,468		4,468		—		—
Total financial assets	$	5,333,891	$	5,362,576	$	158,799	$	1,600,890	$	3,602,887
Financial Liabilities:
Deposits without stated maturities	$	2,745,601	$	2,745,601	$	2,745,601	$	—	$	—
Deposits with stated maturities	1,207,784		1,207,784		—		1,207,784		—
Short-term borrowings	1,043,097		1,043,278		—		1,043,278		—
Accrued interest payable	1,218		1,218		1,218		—		—
Derivative financial instruments	21,045		21,045		—		21,045		—
Junior subordinated debentures	86,607		76,957		46,875		30,082		—
Total financial liabilities	$	5,105,352	$	5,095,883	$	2,793,694	$	2,302,189	$	—
Off-Balance-Sheet Financial Instruments:
Unfunded commitments to extend credit	$	1,382	$	1,382	$	—	$	1,382	$	—
Standby letters of credit	269		269		—		269		—
Total off-balance-sheet financial instruments	$	1,651	$	1,651	$	—	$	1,651	$	—

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	December 31, 2013
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	90,817	$	90,817	$	90,817	$	—	$	—
Available for sale investments	722,307		722,307		—		721,800		507
Held to maturity investments	398,424		376,767		—		376,767		—
Loans held for sale	473,890		474,767		—		474,767		—
Loans, net of allowance	3,566,511		3,686,970		—		8,592		3,678,378
Investment in FHLB and FRB stock	64,612		64,612		—		64,612		—
Accrued interest receivable	16,465		16,465		16,465		—		—
Derivative financial instruments	27,591		27,591		—		26,638		953
Other assets	4,267		4,267		4,267		—		—
Total financial assets	$	5,364,884	$	5,464,563	$	111,549	$	1,673,176	$	3,679,838
Financial Liabilities:
Deposits without stated maturities	$	2,782,629	$	2,782,629	$	2,782,629	$	—	$	—
Deposits with stated maturities	868,354		868,354		—		868,354		—
Short-term borrowings	1,378,327		1,378,656		—		1,378,656		—
Accrued interest payable	1,476		1,476		1,476		—		—
Derivative financial instruments	27,638		27,638		—		27,183		455
Junior subordinated debentures	86,607		83,127		47,547		35,580		—
Total financial liabilities	$	5,145,031	$	5,141,880	$	2,831,652	$	2,309,773	$	455
Off-Balance-Sheet Financial Instruments:
Unfunded commitments to extend credit	$	1,474	$	1,474	$	—	$	1,474	$	—
Standby letters of credit	308		308		—		308		—
Total off-balance-sheet financial instruments	$	1,782	$	1,782	$	—	$	1,782	$	—

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

12. Legal and Regulatory Matters:

The Company is from time to time a party to litigation arising in the normal course of business. As of the date of this report, management knows of no pending or threatened legal actions against the Company, or to which any of its property is subject, that is likely to have a material adverse effect on its business, financial position or results of operations.

On July 26, 2013, a class action complaint, captioned James Sullivan v. Taylor Capital Group, Inc., et al., was filed under Case No. 2013-CH-17751 in the Circuit Court of Cook County, Illinois (the “Court”), against the Company, its directors and MB Financial, Inc. ("MB Financial" and such parties collectively, the “Defendants”) challenging the pending MB Financial/Taylor Capital merger. On August 8, 2013, a second class action complaint, captioned Dennis Panozzo v Taylor Capital Group, Inc., et. al., was filed under Case No. 2013-CH-18546 in the Court against the Defendants. Subsequently, the two cases were consolidated pursuant to court order under the first-filed Sullivan case number (as so consolidated, the “Action”). On October 24, 2013, the plaintiffs in the Action (the “Plaintiffs”) filed a consolidated amended complaint. The complaint alleged, among other things, that the Company’s directors breached their fiduciary duties to the Company and its stockholders by agreeing to the proposed merger at an unfair price pursuant to a flawed sales process, by agreeing to terms with MB Financial that discouraged other bidders and by issuing a preliminary joint proxy statement/prospectus, included in the Form S-4 registration statement filed with the SEC by MB Financial, that purportedly omitted material information. Plaintiffs further alleged that certain of the Company’s directors and officers were not independent or disinterested with respect to the proposed merger.

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Plaintiffs also alleged that MB Financial aided and abetted the Company’s directors' breaches of fiduciary duties. The complaint sought, among other things, an order enjoining the defendants from consummating the merger, as well as attorneys' and experts' fees and certain other damages.

On February 17, 2014, solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted in the Action to rest, the Defendants entered into a memorandum of understanding (the “MOU”) with the Plaintiffs regarding the settlement of the Action pursuant to which the Company and MB Financial agreed to make certain supplemental disclosures concerning the proposed merger, which each of the Company and MB Financial did in a Current Report on Form 8-K filed by each of them on February 18, 2014 (the “Form 8-Ks”). Nothing in the MOU, any settlement agreement or any public filing, including the Form 8-Ks, shall be deemed an admission of the legal necessity of filing or the materiality under applicable laws of any of the additional information contained therein or in any public filing associated with the proposed settlement of the Action.

The MOU also provides that, solely for purposes of settlement, the Court will certify a class consisting of all persons who were record or beneficial stockholders of the Company when the proposed merger was approved by the Company’s Board or any time thereafter (the “Class”). In addition, the MOU provides that, subject to approval by the Court after notice to the members of the Class (the “Class Members”), the Action will be dismissed with prejudice and all claims that the Class Members may possess with regard to the proposed merger, with the exception of claims for statutory appraisal, will be released. In connection with the settlement, the Plaintiffs’ counsel have expressed their intention to seek an award by the Court of attorneys’ fees and expenses. The amount of the award to the Plaintiffs’ counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration to be paid by MB Financial or that any stockholder of the Company will receive in the proposed merger. There can be no assurance that the parties will ultimately enter into a definitive settlement agreement or that the Court will approve the settlement even if the parties enter into such an agreement. In the absence of either event, the proposed settlement as contemplated by the MOU may be terminated.

The Defendants continue to believe that the Action is without merit, have vigorously denied, and continue to vigorously deny, all of the allegations of wrongful or actionable conduct asserted in the Action, and the Company’s board of directors vigorously maintains that it diligently and scrupulously complied with its fiduciary duties, that the joint proxy statement/prospectus, dated January 14, 2014, mailed to the stockholders of the Company and MB Financial is complete and accurate in all material respects and that no further disclosure is required under applicable law.

Based on information currently available, consultations with counsel and established reserves, we believe that the eventual outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.

The Company has been notified by its primary banking regulators that the Bank may be cited with a violation of Section 5 of the Federal Trade Commission Act.  The potential violation relates to the checking account opening process associated with the Bank’s former deposit program relationship with an organization that provides electronic financial disbursements and payment services to the higher education industry (the “Former Counterparty”).  The Bank exited this relationship in the third quarter of 2013. A violation of Section 5 of the Federal Trade Commission Act could result in the imposition of civil money penalties against the Bank, and may possibly impose a secondary obligation to make restitution to account holders affected by the violation.  To the extent the Bank ultimately would be required to make any financial restitution as a result of the potential violation, the Former Counterparty is obligated to reimburse the Bank pursuant to a contractual indemnification agreement.  If any civil money penalties are imposed upon the Bank they would not be reimbursed to the Bank through indemnification or otherwise.  Given the preliminary status of the notification, the Company is unable to reasonably estimate a range of potential financial impact from this matter, if any.  However, the Company does not currently expect that the impact of this potential regulatory violation will have a material impact on its financial position or results of operations.  As the regulatory approval process for the pending merger with MB Financial continues, an evaluation of this situation is being conducted by the Bank’s regulators.  That evaluation is ongoing and the closing of the pending merger could be delayed beyond June 30, 2014.

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13. Segment Reporting:

The Company has identified two operating segments for purposes of financial reporting: Banking and Mortgage Banking. These segments were determined based on the products and services provided or the type of customers served and are consistent with the information that is used by the Company’s key decision makers to make operating decisions and to assess the Company’s performance. In addition, the Company utilizes an Other category.

The Banking operating segment includes commercial banking, asset-based lending, equipment finance, retail banking and all other functions that support those units. The Mortgage Banking operating segment originates mortgage loans for sale to investors and for the Company's portfolio through its retail and broker channels. This segment also services residential mortgage loans for various investors and for loans owned by the Company. The Other segment includes subordinated debt expense, certain parent company activities, expenses related to the pending merger with MB Financial and residual income tax expense or benefit, representing the difference between the actual amount incurred and the amount allocated to operating segments.

The accounting policies of the individual operating segments are generally the same as those of the Company. Segment results are presented based on our management accounting practices. The information presented in our segment reporting is based on internal allocations, which involve management judgment. The application and development of management reporting methodologies is a dynamic process and is subject to periodic adjustments and enhancements.

The following table presents financial information from the Company’s operating segments and the Other category as of the dates indicated:

	Banking				Mortgage Banking					Other*						Consolidated Total
	For the Three Months Ended				For the Three Months Ended					For the Three Months Ended						For the Three Months Ended
	March 31, 2014		March 31, 2013		March 31, 2014			March 31, 2013		March 31, 2014			March 31, 2013			March 31, 2014		March 31, 2013
	(in thousands)
Net interest income (loss)	$	40,528	$	36,181	$	4,735		$	6,414	$	(1,409	)	$	(1,912	)	$	43,854	$	40,683
Provision for loan losses	2,603		292		(3		)	8		—			—			2,600		300
Total noninterest income	6,001		7,647		23,055			32,030		42			42			29,098		39,719
Total noninterest expense	25,947		25,468		27,943			26,287		673			—			54,563		51,755
Income (loss) before income taxes	17,979		18,068		(150		)	12,149		(2,040		)	(1,870		)	15,789		28,347
Income tax expense (benefit)	7,102		7,136		(278		)	3,375		(979		)	579			5,845		11,090
Net income (loss)	$	10,877	$	10,932	$	128		$	8,774	$	(1,061	)	$	(2,449	)	$	9,944	$	17,257
Total average assets	$	4,714,336	$	4,487,276	$	881,040		$	1,150,884	$	3,764		$	4,032		$	5,599,140	$	5,642,192
Average loans	3,436,591		2,885,961		187,635			291,653		—			—			3,624,226		3,177,614
Average loans held for sale	—		—		420,815			691,134		—			—			420,815		691,134

* The Other category includes subordinated note expense, certain parent company activities, expenses related to the pending merger with MB Financial and residual income tax expense (benefit).

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14. Business Combinations:

On July 15, 2013, the Company announced that it had entered into a merger agreement with MB Financial. The agreement provides that, subject to the conditions set forth in the merger agreement and briefly described below, the Company will merge with and into MB Financial, with MB Financial as the surviving corporation. Immediately following the merger, the Company's wholly owned subsidiary bank will merge with MB Financial's wholly owned subsidiary bank, MB Financial Bank, N.A.

In the merger, each share of the common stock and each share of nonvoting preferred stock of the Company will be converted into the right to receive (1) 0.64318 of a share of the common stock of MB Financial and (2) $4.08 in cash. All "in-the-money" Company stock options and warrants outstanding will be canceled in exchange for a cash payment as provided in the agreement, as will all then-outstanding unvested restricted stock awards of the Company. However, the cash consideration paid for the restricted stock awards will remain subject to vesting or other lapse restrictions. Each share of the Company's outstanding Perpetual Non-Cumulative Preferred Stock, Series A, will be exchanged for a share of a series of MB Financial preferred stock with substantially identical terms.

The completion of the merger is subject to customary conditions including the receipt of required regulatory approvals. As discussed in Note 12 -“ Legal and Regulatory Matters,” the Bank may be cited with a violation of Section 5 of the Federal Trade Commission Act.  An evaluation of this situation is being conducted by the Bank’s regulators.  That evaluation is ongoing and the closing of the pending merger could be delayed beyond June 30, 2014.

15. Subsequent Events:

Events subsequent to the balance sheet date of March 31, 2014 have been evaluated for potential recognition or disclosure in these financial statements that would provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company has determined that there was no additional evidence about conditions that existed at the date of the balance sheet or any new nonrecognized subsequent event that would need to be disclosed in order to keep the financial statements from being misleading through the date these financial statements were filed.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), reflect the 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,” “might,” “contemplate,” “plan,” “predict,” “potential,” “should,” “will,” “expect,” “anticipate,” “believe,” “intend,” “could,” “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 2014 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 Agreement and Plan of Merger (the "Merger Agreement") with MB Financial may be terminated in accordance with its terms, and the Merger contemplated thereby may not be completed.

• Termination of the Merger Agreement could negatively impact us.

• We may be subject to business uncertainties and contractual restrictions while the Merger is pending.

• We and MB Financial have entered into a memorandum of understanding with the plaintiffs to settle two stockholder actions previously filed against us, our board of directors and MB Financial challenging the Merger.  It is possible that additional suits may be filed in the future.  If the settlement of these existing suits is not approved by the court or is otherwise voided, an adverse ruling in these or any similar future lawsuits may prevent the Merger from being completed or from being completed within the expected timeframe.

• The Merger Agreement limits our ability to pursue an alternative acquisition proposal and requires us to pay a termination fee of $20 million under limited circumstances relating to alternative acquisition proposals.

• We may be materially and adversely affected by the highly regulated environment in which we operate.

• Dependence on our mortgage business may increase volatility in our consolidated revenues and earnings and our residential mortgage lending profitability could be significantly reduced if we are not able to originate and sell mortgage loans at profitable margins.

• Changes in interest rates may change the value of our MSR portfolio which may increase the volatility of our earnings.

• Certain hedging strategies that we use to manage investment in MSRs, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

• Our mortgage loan repurchase reserve for losses could be insufficient.

• A significant increase in certain loan balances associated with our mortgage business may result in liquidity risk related to the funding of these loans.

• We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. Our controls and procedures may fail or be circumvented.

• We are dependent on outside third parties for processing and handling of our records and data.

• System failure or breaches of our network security, including with respect to our internet banking activities, could subject us to increased operating costs as well as litigation and other liabilities.

• We may not be able to access sufficient and cost-effective sources of liquidity.

• We are subject to liquidity risk, including unanticipated deposit volatility.

• Changes in certain credit ratings related to us or our credit could increase our financing costs or make it more difficult for us to obtain funding or capital on commercially acceptable terms.

• As a bank holding company, our sources of funds are limited.

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• We are subject to interest rate risk, including interest rate fluctuations, that could have a material adverse effect on us.

• Competition from financial institutions and other financial services providers may adversely affect our growth and profitability and have a material adverse effect on us.

• Our business is subject to the conditions of the economies in which we operate and continued weakness in those economies and the real estate markets may materially and adversely affect us.

• Our business is subject to domestic and to a lesser extent, international economic conditions and other factors, many of which are beyond our control and could materially and adversely affect us.

• The preparation of our consolidated financial statements requires us to make estimates and judgments, including the use of models, which are subject to an inherent degree of uncertainty and which may differ from actual results.

• We must manage credit risk and if we are unable to do so, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio, which could have a material adverse effect on us.

• We have counterparty risk and therefore we may be materially and adversely affected by the soundness of other financial institutions.

• We are subject to lending concentration risks.

• We are subject to mortgage asset concentration risks.

• Our business strategy is dependent on our continued ability to attract, develop and retain highly qualified and experienced personnel in senior management and customer relationship positions.

• Our reputation could be damaged by negative publicity.

• New and less mature lines of business, new products and services or new customer relationships may subject us to certain additional risks.

• We may experience difficulties in managing our future growth.

• We and our subsidiaries are subject to changes in federal and state tax laws and changes in interpretation of existing laws.

• Regulatory requirements recently adopted by the U.S. federal bank regulatory agencies to implement Basel III, growth plans or operating results may require us to raise additional capital, which may not be available on favorable terms or at all.

• We have not paid a dividend on our common stock since the second quarter of 2008. In addition, regulatory restrictions and liquidity constraints at the holding company level could impair our ability to make distributions on our outstanding securities.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in the section captioned “Risk Factors” in our December 31, 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 7, 2014 and Item 1A of this Quarterly Report on Form 10-Q. You should not place undue reliance on any forward-looking statements. 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 filing.

Introduction

Taylor Capital Group, Inc. is the holding company of Cole Taylor Bank (the “Bank”), a commercial bank headquartered in Chicago. For more than 80 years, the Bank has been successfully meeting the banking needs of closely held companies and the people who own and manage them by focusing on a relationship-based approach to business. Through its national businesses, the Bank provides a full range of financial services, including asset-based lending, commercial equipment finance and residential mortgage lending. At March 31, 2014, we had consolidated assets of $5.65 billion, deposits of $3.95 billion and stockholders' equity of $482.6 million.

On July 15, 2013, we announced that we had entered into a Merger Agreement with MB Financial, Inc. ("MB Financial"). The agreement provides that, subject to the conditions set forth in the Merger Agreement, we will merge with and into MB Financial, with MB Financial as the surviving corporation. Immediately following the merger, our wholly owned subsidiary bank will merge with MB Financial's wholly owned subsidiary bank, MB Financial Bank, N.A. The completion of the merger is subject to customary conditions including the receipt of required regulatory approvals.  As discussed in the “Current Developments” section below,  the Bank may be cited with a violation of Section 5 of the Federal Trade Commission Act.  An evaluation of this situation is being conducted by our regulators.  That evaluation is ongoing and the closing of the pending merger could be delayed beyond June 30, 2014.

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The following discussion and analysis focuses on the significant factors affecting our financial condition and results of operations and should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto for the year ended December 31, 2013, included in our December 31, 2013 Annual Report on Form 10-K filed with the SEC on March 7, 2014. Operating results for the three months endedMarch 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014, or any other future period. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed above under the caption “Cautionary Note Regarding Forward-Looking Statements.”

Current Developments

We have been notified by our primary banking regulators that the Bank may be cited with a violation of Section 5 of the Federal Trade Commission Act.  The potential violation relates to the checking account opening process associated with our former deposit program relationship with an organization that provides electronic financial disbursements and payment services to the higher education industry (the “Former Counterparty”).  We exited this relationship in the third quarter of 2013. A violation of Section 5 of the Federal Trade Commission Act could result in the imposition of civil money penalties against the Bank, and may possibly impose a secondary obligation to make restitution to account holders affected by the violation.  To the extent we ultimately would be required to make any financial restitution as a result of the potential violation, the Former Counterparty is obligated to reimburse us pursuant to a contractual indemnification agreement.  If any civil money penalties are imposed upon us they would not be reimbursed to us through indemnification or otherwise.  Given the preliminary status of the notification, we are unable to reasonably estimate a range of potential financial impact from this matter, if any.  However, we do not currently expect that the impact of this potential regulatory violation will have a material impact on our financial position or results of operations.  As the regulatory approval process for the pending merger with MB Financial continues, an evaluation of this situation is being conducted by the Bank’s regulators.  That evaluation is ongoing and the closing of the pending merger could be delayed beyond June 30, 2014.

Application of Critical Accounting Policies

Our accounting and reporting policies conform, in all material respects, to U.S. generally accepted accounting principles (“U.S. GAAP”) and general reporting practices within the financial services industry. For additional details, see “Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting and Reporting Policies” from our 2013 Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. The estimates, assumptions and judgments made by us are based on historical experience, current information and other factors that we believe to be reasonable under the circumstances. Certain accounting policies inherently have greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than actual outcomes. We consider our policies for the allowance for loan losses, income taxes, the valuation of derivative financial instruments, the valuation of investment securities and the valuation of mortgage servicing rights to be critical accounting policies.

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

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in our loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors to categories of loans outstanding in the portfolio and specific allowances for identified problem loans and portfolio categories. We maintain our allowance for loan losses at a level that we consider sufficient 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; changes in the size of our loan portfolio; changes in the composition of our loan portfolio and the volume of delinquent, criticized and impaired 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 on loans to 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

42

valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of risk of loss and amount of loss on any loan are complicated by the uncertainties surrounding not only our borrowers’ probability of default, but also the fair value of the underlying collateral. Continuing illiquidity in the Chicago area real estate market has maintained the recent relative uncertainty with respect to real estate values. Because of thedegree of uncertainty and the sensitivity of valuations to the underlying assumptions regarding holding periods until sale and the collateral liquidation method, our actual losses may materially vary from our current estimates.

Our non-consumer loan portfolio is comprised primarily of commercial loans to businesses. These loans are inherently larger in amount than loans to individual consumers and, therefore, have the potential for higher losses for each loan. Due to their size, larger loans can cause greater volatility in our reported credit quality performance measures, such as total impaired or nonperforming loans. Our current credit risk rating and loss estimate for any one loan may have a material impact on our reported impaired loans and related loss estimates. Because our loan portfolio contains a significant number of commercial loans with relatively large balances, the deterioration of any one or a few of these loans could cause an increase in uncollectible loans and our allowance for loan losses. We review our estimates on a quarterly basis and, as we identify changes in estimates, our allowance for loan losses is adjusted through the recording of a provision for loan losses.

Income Taxes

We are subject to the income tax laws of the United States and the states and other jurisdictions in which we operate. The determination of income tax expense or benefit and the amounts of current and deferred income tax assets and liabilities involve the use of estimates, assumptions, interpretations, and judgment. Factors considered include interpretations of federal and state income tax laws, current financial accounting standards, the difference between the tax and financial reporting basis of assets and liabilities (temporary differences), assessment of the likelihood that the reversal of deferred deductible temporary difference will yield tax benefits, and estimates of reserves required for tax uncertainties. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to future results.

Deferred tax assets and liabilities are recorded for temporary differences between the pre-tax income reported on our consolidated financial statements and taxable income. Deferred tax assets and liabilities are measured using currently enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized as an income tax benefit or income tax expense in the period that includes the enactment date.

The determination of the realizability of the net deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economic and business conditions. We currently do not maintain a valuation allowance against our net deferred tax assets because management has determined that it is more-likely-than-not that these net deferred tax assets will be realized.

Valuation of Derivative Financial Instruments

We use derivative financial instruments (“derivatives”), including interest rate swaps and corridor agreements, callable interest rate swap agreements, agreements to purchase mortgage-backed securities ("mortgage TBAs") for which we do not intend to take delivery, as well as interest rate lock and forward loan sale commitments, to either accommodate individual customer needs or to assist in our interest rate risk management. All derivatives are measured and reported at fair value on our Consolidated Balance Sheets as either an asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the effective portion of the hedged risk, is recognized in current earnings during the period of the change in the fair value. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of Other Comprehensive Income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change in fair value. Similarly, the changes in the fair value of derivatives that are not designated as an accounting hedge are also reported currently in earnings.

At the inception of a formally designated hedge and quarterly thereafter, an assessment is made to determine whether changes in the fair value or cash flows of the derivatives have been highly effective in offsetting the changes in the fair value or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that derivatives are not highly effective as a hedge, hedge accounting is discontinued for the period. Once hedge accounting is

43

terminated, all changes in fair value of the derivatives are reported currently in the Consolidated Statements of Income in other noninterest income, which could result in greater volatility in our earnings.

The estimates of fair values of certain of our derivative instruments, such as interest rate swaps and corridors, are calculated by an independent pricing service which uses valuation models to estimate market-based valuations. The valuations are determined using widely accepted valuation techniques, including discounted cash flow analysis of the expected cash flow of each derivative. This analysis reflects the contractual terms of the derivative and uses observable market-based inputs, including interest rate curves and implied volatilities. In addition, the fair value estimate also incorporates a credit valuation adjustment to reflect the risk of nonperformance by both us and our counterparties in the fair value measurement. The resulting fair values produced by these proprietary valuation models are in part theoretical and, therefore, can vary between derivative dealers and are not necessarily reflective of the actual price at which the derivative contract could be traded. Small changes in assumptions can result in significant changes in valuation. The risks inherent in the determination of the fair value of a derivative may result in volatility in our earnings.

The fair value of forward loan sale commitments and mortgage TBAs is based on quoted prices for similar assets in active markets that we have the ability to access. We use an external valuation model that relies on internally developed inputs to estimate the fair value of our interest rate lock commitments.

Valuation of Investment Securities

The fair value of our investment securities portfolio is determined in accordance with U.S. GAAP, which requires that we classify financial assets and liabilities measured at fair value into a three-level fair value hierarchy. The determination of fair value is highly subjective and requires management to rely on estimates, assumptions, and judgments that can affect amounts reported in our consolidated financial statements. We obtain the fair value of investment securities from an independent pricing service. We periodically review the pricing methodology for each significant class of assets used by this third party pricing service to assess the compliance with accounting standards for fair value measurement and classification in the fair value measurement hierarchy. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury bond yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current rating from credit rating agencies, and the bond’s terms and conditions, among other things. While we use an independent pricing service to obtain the fair values of our investment portfolio, we employ certain control procedures to determine the reasonableness of the valuations. We validate the overall reasonableness of the fair values by comparing information obtained from our independent pricing service to other third party valuation sources for selected assets and review the valuations and any significant differences in valuations with members of management who have the relevant technical expertise to assess the results. In addition, we review the third party valuation methodology on a periodic basis.

Each quarter we review our investment securities portfolio to determine whether unrealized losses are temporary or other-than-temporary, based on an evaluation of the creditworthiness of the issuers/guarantors, as well as the underlying collateral, if applicable. Our analysis includes an evaluation of the type of security, the length of time and extent to which the fair value has been less than the security’s carrying value, the characteristics of the underlying collateral, the degree of credit support provided by subordinate tranches within the total issuance, independent credit ratings, changes in credit ratings and a cash flow analysis, considering default rates, loss severities based upon the location of the collateral, and estimated prepayments. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are subjected to further analysis to determine if we expect to receive all the contractual cash flows. We use other independent pricing sources to obtain fair value estimates and perform discounted cash flow analysis for selected securities. When the discounted cash flow analysis obtained from those independent pricing sources indicates that we expect all future principal and interest payments will be received in accordance with their original contractual terms, we do not intend to sell the security, and we more likely than not will not be required to sell the security before recovery, the unrealized loss is deemed temporary. If such analysis shows that we do not expect to be able to recover our entire investment, an other-than-temporary impairment charge will be recorded in current earnings for the amount of the credit loss component. The amount of impairment related to factors other than the credit loss is recognized in OCI. Our assessments of creditworthiness and the resultant expected cash flows are complicated by the uncertainties surrounding not only the specific security and its underlying collateral but also the current economic environment. Our cash flow estimates for mortgage related securities are based on estimates of mortgage default rates, severity of loss and prepayments. Changes in assumptions can result in material changes in expected cash flows. Therefore, unrealized losses that we have determined to be temporary may at a later date be determined to be other-than-temporary and may have a material impact on our Consolidated Statements of Income.

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Valuation of Mortgage Servicing Rights

The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities. Purchased mortgage servicing rights are recorded at the purchase price at the date of purchase and at fair value thereafter.

Mortgage servicing rights do not trade in an active market with readily observable prices. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal valuation and the third party valuation are analyzed and an internal committee determines whether or not an adjustment is required.

The Company has elected to account for mortgage servicing rights using the fair value option. Changes in the fair value are recognized in mortgage banking revenue on the Company's Consolidated Statements of Income.

RESULTS OF OPERATIONS

Overview

Net income applicable to common stockholders was $9.9 million, or $0.32 per diluted common share, for the three months ended March 31, 2014, compared to net income applicable to common stockholders of $13.6 million, or $0.44 per diluted common share, for the three months ended March 31, 2013. The decrease in net income applicable to common stockholders for the three months ended March 31, 2014 was primarily the result of a decline in mortgage banking revenue.

Highlights

• Net interest income was $43.9 million for the first quarter of 2014, an increase of $3.2 million, or 7.9%, from the first quarter of 2013.

• Net interest margin on a tax equivalent basis increased by 29 basis points to 3.49% for the first quarter of 2014 from 3.20% for the first quarter of 2013.

• Total commercial loans increased to $3.37 billion at March 31, 2014, up $553.0 million, or 19.6%, from March 31, 2013.

• Mortgage banking revenue was $23.1 million for the first quarter of 2014, a decrease of $8.9 million, or 27.8%, from the first quarter of 2013.

• Pre-tax, pre-provision operating earnings (a non-GAAP financial measure defined below) decreased to $18.5 million for the first quarter of 2014, down $10.7 million, or 36.6%, as compared to the first quarter of 2013.

Our accounting and reporting policies conform to U.S. GAAP and general practice within the banking industry. Management also uses certain non-GAAP financial measures to evaluate the Company’s financial performance such as the non-GAAP measures of pre-tax, pre-provision operating earnings and of revenue. Management believes that these measures are useful because they provide a more comparable basis for evaluating financial performance from operations period to period.

Pre-tax, pre-provision operating earnings is a non-GAAP financial measure in which provision for loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on investment securities are excluded from income before taxes. Revenue is a non-GAAP financial measure calculated as net interest income plus noninterest income less gains and losses on investment securities.

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The following table reconciles the income before income taxes to pre-tax, pre-provision operating earnings for the periods indicated:

	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Income before income taxes	$	15,789		$	28,347
Add back (subtract):
Credit costs:
Provision for loan losses	2,600			300
Nonperforming asset expense, net	166			559
Credit costs subtotal	2,766			859
Other:
Gains on sales of investment securities, net	(35		)	(1		)
Other subtotal	(35		)	(1		)
Pre-tax, pre-provision operating earnings	$	18,520		$	29,205
The following table details the components of revenue for the periods indicated:
	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Net interest income	$	43,854		$	40,683
Noninterest income	29,098			39,719
Add back (subtract):
Gains on sales of investment securities, net	(35		)	(1		)
Revenue	$	72,917		$	80,401

Net Interest Income

Net interest income is an important source of our earnings and is the difference between total interest income and fees generated by interest-earning assets and total interest expense incurred on interest-bearing liabilities. The amount of net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities and the level of rates earned or incurred on those assets and liabilities.

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013

Net interest income was $43.9 million for the first quarter of 2014, an increase of $3.2 million, or 7.9%, from $40.7 million for the first quarter of 2013.

Our net interest margin on a tax-equivalent basis was 3.49% for the first quarter of 2014, an increase of 29 basis points from 3.20% for the first quarter of 2013 due to lower rates paid on deposit balances, the prepayment of our 8% subordinated notes in June 2013 and growth in the commercial loan portfolio. Net interest margin is calculated by dividing taxable equivalent net interest income by average interest-earning assets.

The yield on average earning assets increased from 3.74% in the first quarter of 2013 to 3.87% in the first quarter of 2014 due to increased yields on investment securities and loans held for sale. The yield on the investment securities portfolio increased to 3.51% in the first quarter of 2014 from 3.18% in the first quarter of 2013 due to an increase in higher yielding municipal securities. The yield on loans held for sale increased from 3.34% in first quarter of 2013 to 4.07% in first quarter of 2014 due to an increase in mortgage rates. The yield earned on loans declined to 3.97% in the first quarter of 2014 from 4.06% in the first quarter of 2013. Competitive pricing pressure on new loans resulted in a decline in commercial loan yields.

The rate paid on total interest-bearing liabilities declined from 0.78% in the first quarter of 2013 to 0.50% in the first quarter of 2014. Significant anticipated deposit repricing, largely in customer certificates of deposit and brokered certificates

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of deposits, contributed to this reduction. In addition, in the second quarter of 2013 we prepaid all $37.5 million principal amount of the Company's 8% subordinated notes in a continuation of our efforts to lower overall funding costs.

Average interest-earning assets during the first quarter of 2014 were $5.23 billion, which was flat as compared to the first quarter of 2013. Average loan balances increased $446.6 million, or 14.1%, due to growth across our commercial lending group, asset based lending group and equipment finance group. Average loans held for sale were $420.8 million for the first quarter of 2014 and $691.1 million for the first quarter of 2013, a decrease of $270.3 million, or 39.1%. This decrease was related to the decrease in mortgage loan origination volume. Average investment balances decreased $172.6 million, or 12.7%, from the first quarter of 2013 to the first quarter of 2014 due to the sale of investment securities in the fourth quarter of 2013 as part of a planned reduction of the investment portfolio.

Total average interest-bearing deposits balances increased to $2.83 billion for the first quarter of 2014, compared to $2.42 billion for the first quarter of 2013, an increase of $401.6 million, due to an increase in commercial interest checking and NOW accounts associated with on-going deposit raising efforts. CDARS deposits and brokered deposits also increased as part of a planned increase in time deposits for liquidity management purposes. Noninterest-bearing deposits decreased $322.5 million in the first quarter of 2014. A large portion of the decrease in noninterest-bearing deposits was due to the end of our relationship with an organization that provides electronic financial aid disbursements and payment services to the higher education industry.

See the section of this discussion and analysis captioned “Quantitative and Qualitative Disclosure About Market Risks” for further discussion of the impact of changes in interest rates on our results of operations.

Rate vs. Volume Analysis of Net Interest Income

The following table presents, for the periods indicated, a summary of the changes in interest earned and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis assuming a tax rate of 35.0%.

	Quarter Ended March 31, 2014 Versus Quarter Ended March 31, 2013 Increase/(Decrease)
	VOLUME			RATE			NET
	(in thousands)
INTEREST EARNED ON:
Investment securities	$	(1,453	)	$	1,041		$	(412	)
Cash equivalents	—			(1		)	(1		)
Loans held for sale	(2,578		)	1,085			(1,493		)
Loans	4,379			(720		)	3,659
Total interest-earning assets							1,753
INTEREST PAID ON:
Interest-bearing deposits	631			(1,726		)	(1,095		)
Total borrowings	(76		)	(832		)	(908		)
Total interest-bearing liabilities							(2,003		)
Net interest income, tax-equivalent							$	3,756

Tax-Equivalent Adjustments to Yields and Margins

As part of our evaluation of net interest income, we analyze our consolidated average balances, our yield on average interest-earning assets and the cost of average interest-bearing liabilities. Such yields and costs are calculated by dividing annualized income or expense by the average balance of assets or liabilities. Because management analyzes net interest income on a tax-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 a tax-equivalent basis, assuming a tax rate of 35.0%. This assumed tax rate may differ from our actual effective income tax rate. In addition, the interest-earning asset yield, net interest margin and the net interest rate spread are adjusted to a fully tax-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.

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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 interest-earning asset yield, net interest margin and net interest spread are shown with and without the tax-equivalent adjustment.

	Three months ended March 31,
	2014			2013
	(dollars in thousands)
Net interest income as stated	$	43,854		$	40,683
Tax-equivalent adjustment-investments	1,370			769
Tax-equivalent adjustment-loans	13			29
Tax-equivalent net interest income	$	45,237		$	41,481
Yield on earning assets without tax adjustment	3.77		%	3.68		%
Yield on earning assets – tax-equivalent	3.87		%	3.74		%
Net interest margin without tax adjustment	3.38		%	3.14		%
Net interest margin – tax-equivalent	3.49		%	3.20		%
Net interest spread without tax adjustment	3.27		%	2.90		%
Net interest spread – tax-equivalent	3.37		%	2.96		%

The following table presents, for the periods indicated, certain information relating to our consolidated average balances and reflects our yield on average interest-earning assets and costs of average interest-bearing liabilities. The table contains certain non-GAAP financial measures to adjust tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35.0%.

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	Three months ended March 31,
	2014							2013
	AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)(6)		AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)(6)
	(dollars in thousands)
INTEREST-EARNING ASSETS:
Investment securities: (1)
Taxable	$	796,873		$	6,486	3.26	%	$	1,123,923		$	8,617	3.07	%
Tax-exempt (tax-equivalent) (2)	390,690			3,915		4.01	%	236,290			2,196		3.72	%
Total investment securities	1,187,563			10,401		3.51	%	1,360,213			10,813		3.18	%
Cash equivalents	98			—		—	%	555			1		0.72	%
Loans held for sale	420,815			4,284		4.07	%	691,134			5,777		3.34	%
Loans: (2) (3)
Commercial and commercial real estate	3,203,385			31,701		3.96	%	2,722,748			28,357		4.17	%
Lease receivables	120,413			973		3.23	%	48,870			372		3.04	%
Residential real estate mortgages	261,151			2,087		3.20	%	357,940			2,426		2.71	%
Home equity and consumer	39,277			396		4.09	%	48,057			563		4.75	%
Fees on loans				383							163
Net loans (tax-equivalent) (2)	3,624,226			35,540		3.97	%	3,177,615			31,881		4.06	%
Total interest-earning assets (2)	5,232,702			50,225		3.87	%	5,229,517			48,472		3.74	%
NON-EARNING ASSETS:
Allowance for loan losses	(81,791		)					(83,022		)
Cash and due from banks	87,480							150,548
Accrued interest and other assets	360,749							345,149
TOTAL ASSETS	$	5,599,140						$	5,642,192
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits	1,636,503			1,602		0.40	%	$	1,475,894		1,897		0.52	%
Savings deposits	40,600			5		0.05	%	40,255			7		0.07	%
Time deposits	1,149,302			1,562		0.55	%	908,623			2,360		1.05	%
Total interest-bearing deposits	2,826,405			3,169		0.45	%	2,424,772			4,264		0.71	%
Short-term borrowings	1,098,989			382		0.14	%	1,099,956			420		0.15	%
Junior subordinated debentures	86,607			1,437		6.64	%	86,607			1,443		6.66	%
Subordinated notes	—			—		—	%	33,414			864		10.34	%
Total interest-bearing liabilities	4,012,001			4,988		0.50	%	3,644,749			6,991		0.78	%
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits	1,011,485							1,333,958
Accrued interest, taxes, and other liabilities	94,781							92,833
Total noninterest-bearing liabilities	1,106,266							1,426,791
STOCKHOLDERS’ EQUITY	480,873							570,652
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,599,140						$	5,642,192
Net interest income (tax-equivalent) (2)				$	45,237						$	41,481
Net interest spread (tax-equivalent) (2) (4)						3.37	%						2.96	%
Net interest margin (tax-equivalent) (2) (5)						3.49	%						3.20	%
(1) Investment securities average balances are based on amortized cost.
(2) Calculations are computed on a tax-equivalent basis assuming a tax rate of 35%.
(3) Nonaccrual loans are included in the average balances.
(4) Net interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(5) Net interest margin is determined by dividing tax-equivalent net interest income by average interest-earning assets.
(6) Yield/Rates are annualized.

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Provision for Loan Losses

The provision for loan losses is based on the allowance for loan losses deemed necessary to cover probable losses in our portfolio as of the balance sheet date. Our provision for loan losses was $2.6 million for the quarter ended March 31, 2014, compared to $300,000 for the quarter ended March 31, 2013. The increase in the provision for loan losses was due to the establishment of specific reserves for certain loans in both the commercial and industrial and commercial real estate secured portfolios as well as growth in the loan portfolio during the quarter ended March 31, 2014, partially offset by a decrease in general reserves.

Noninterest Income

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

	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Service charges	$	3,620		$	3,491
Mortgage banking revenue	23,057			32,030
Gains on sales of investment securities, net	35			1
Letter of credit and other loan fees	1,254			1,091
Other derivative income (loss)	(31		)	1,560
Other noninterest income	1,163			1,546
Total noninterest income	$	29,098		$	39,719

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013

Total noninterest income was $29.1 million during the first quarter of 2014, compared to $39.7 million in the first quarter of 2013, a decrease of $10.6 million, or 26.7%. This decrease was primarily due to a decrease in mortgage banking revenue generated by Cole Taylor Mortgage. Mortgage banking revenue totaled $23.1 million in the first quarter of 2014, a decrease of $8.9 million from the first quarter of 2013, primarily driven by a lower volume of mortgage originations and gain on sale margins, partially offset by an increase in mortgage servicing revenue. Mortgage servicing revenue increased due to an increase in the valuation of the MSR asset and an increase in the mortgage servicing portfolio which grew from $10.51 billion at March 31, 2013 to $20.14 billion at March 31, 2014. This increase is a result of both servicing held on originated loans and servicing purchased from third parties.

Other derivative income decreased from $1.6 million in the first quarter of 2013 to a loss of $31,000 in the first quarter of 2014. This decrease was due to a reduction in customer swap activity.

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Noninterest Expense

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

	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(dollars in thousands)
Salaries and employee benefits:
Salaries, employment taxes and medical insurance	$	26,963		$	23,740
Incentives, commissions and retirement benefits	7,692			10,288
Total salaries and employee benefits	34,655			34,028
Occupancy of premises	2,989			2,568
Furniture and equipment	968			737
Nonperforming asset expense	166			559
FDIC assessment	1,862			2,024
Legal fees, net	1,010			858
Loan expense, net	2,189			2,371
Outside services	3,559			2,496
Computer processing	1,768			966
Other noninterest expense	5,397			5,148
Total noninterest expense	$	54,563		$	51,755
Efficiency ratio	74.83		%	64.37		%

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013

Noninterest expense increased $2.8 million, or 5.4%, to $54.6 million for the first quarter of 2014, as compared to $51.8 million during the first quarter of 2013. The higher level of noninterest expense in the first quarter of 2014 was primarily the result of increased outside services and computer processing expense related to activity at Cole Taylor Mortgage.

Total salaries and employee benefits expense during the first quarter of 2014 was $34.7 million, compared to $34.0 million during the first quarter of 2013, an increase of $700,000, or 2.1%. This increase was primarily driven by an increase of $3.2 million in salaries, employment taxes, and medical insurance expense due to an increase in the number of employees. The number of full time equivalent employees was 1,266 at March 31, 2014, as compared to 1,030 at March 31, 2013. This increase in employees took place primarily at Cole Taylor Mortgage, including the addition of employees related to the establishment of an in-house mortgage servicing platform. Incentives, commissions and retirement benefits decreased from the first quarter of 2013 to the first quarter of 2014 as performance-related incentive expense declined due to declines in mortgage banking revenue.

Occupancy of premises expense increased from $2.6 million for the quarter ended March 31, 2013 to $3.0 million for the quarter ended March 31, 2014. This increase was primarily a result of increased rental space and associated lease expense at Cole Taylor Mortgage as it expanded operations.

Nonperforming asset expense reported in noninterest expense includes expenses associated with impaired loans, Other Real Estate Owned ("OREO") and other repossessed assets held for sale, as well as expenses related to impaired and nonperforming loans held for investment. For assets held for sale, nonperforming asset expense related to OREO and other repossessed assets includes costs associated with owning and managing these assets, including real estate taxes, insurance, utilities and property management costs as well as any subsequent write-downs required by changes in the fair value of the assets and any gains or losses on dispositions. Nonperforming asset expense related to loans held for investment includes expenses incurred by the Company’s loan workout function for collection and foreclosure costs, receiver fees and expenses, and any other expenses incurred to protect the Company’s interests in any loan collateral. In addition, nonperforming asset expense includes changes in the liability that the Company established for estimated probable losses from off-balance sheet commitments associated with impaired loans, such as standby letters of credit or unfunded loan commitments.

Nonperforming asset expense was $166,000 for the quarter ended March 31, 2014, compared to $559,000 for the quarter ended March 31, 2013. This decrease primarily was due to a lower level of ongoing OREO expenses.

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A quantification of the amount of nonperforming asset expense in the held for sale and held for investment loan categories for the periods indicated is as follows:

	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Impaired loans, OREO and other repossessed assets held for sale	$	191		$	30
Impaired and nonperforming loans held for investment	(25		)	529
Total	$	166		$	559

Outside services were $2.5 million in the first quarter of 2013 and $3.6 million in the first quarter of 2014, an increase of $1.1 million. This increase was primarily due to one-time costs associated with transferring the bulk of Cole Taylor Mortgage's loan servicing portfolio in-house.

Computer processing expense increased $802,000 from $966,000 in the first quarter of 2013 to $1.8 million in the first quarter of 2014. This increase was related to the expansion of retail mortgage lending offices from 26 offices at the end of the first quarter 2013 to 46 offices at the end of the first quarter 2014.

Efficiency Ratio

The efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, excluding gains or losses on investment securities). Generally, a lower efficiency ratio indicates that an entity is operating more efficiently.

Our efficiency ratio was 74.83% in the first quarter of 2014, compared to 64.37% during the first quarter of 2013. The increase in the efficiency ratio was primarily due to lower mortgage banking revenue and increased outside services and computer processing expense at Cole Taylor Mortgage, partially offset by an increase in net interest income.

Income Taxes

Income tax expense decreased from $11.1 million in the first three months of 2013 to $5.8 million for the first three months of 2014, a decrease of $5.3 million. This decrease was primarily due to the decrease in our income before income taxes, which decreased from $28.3 million in the first three months of 2013 to $15.8 million in the first three months of 2014. In addition, income tax expense decreased as a result of changes in the applicable statutory state income tax rates combined with fluctuations in the levels of income earned in the states where income tax returns are required to be filed.

As of March 31, 2014, our net deferred tax asset totaled $12.1 million, which, in the judgment of management, will more-likely-than-not be fully realized. The largest components of the deferred tax asset are associated with the allowance for loan losses, employee benefits, basis adjustments on our portfolio of OREO and federal and state net operating loss carry forwards. The deferred tax asset is net of deferred tax liabilities, the largest of which relate to mortgage servicing and leasing.

Segment Review

As described in Note 13 – “Segment Reporting” of the Notes to the Consolidated Financial Statements, we have two principal operating segments: Banking and Mortgage Banking.

The Banking segment consists of commercial banking, commercial real estate banking, asset-based lending, retail banking, equipment financing and all other functions that support those units. The Mortgage Banking segment originates residential mortgage loans for sale to investors and for retention in our loan portfolio through retail and broker channels. This segment also services residential mortgage loans for various investors and for our own loans. In addition, we use an Other category, which includes subordinated note expense, certain parent company activities, expenses related to the pending merger with MB Financial and residual income tax expense, representing the difference between the actual amount incurred and the amount allocated to operating segments.

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013

Banking Segment

Net income for the Banking segment for the quarter ended March 31, 2014 was $10.9 million, which was flat compared to net income of $10.9 million for the quarter ended March 31, 2013. Net interest income of $40.5 million for the first quarter

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of 2014 was $4.3 million more than net interest income of $36.2 million for the same period in 2013. The increase was the result of the combination of growth in the commercial loan portfolio and lower rates paid on deposit balances. Noninterest income decreased from $7.6 million in the first quarter of 2013 to $6.0 million in the first quarter of 2014, a decrease of $1.6 million, due to a decrease in customer swap activity.

Noninterest expense was $25.9 million in the first quarter of 2014 as compared to $25.5 million in the first quarter of 2013, an increase of $479,000. Salaries and benefits expense increased $1.8 million from the first quarter of 2013 to the first quarter of 2014 due to merit increases and an increase in corporate bonus expense. Nonperforming asset expense was $440,000 million less in the first quarter of 2014 as compared to the first quarter of 2013 due to a lower level of OREO balances and ongoing OREO expenses. Legal expense decreased $466,000 and consulting decreased $262,000 from the first quarter of 2013 to the first quarter of 2014 due to timing of expense.

Provision for loan losses was $2.6 million in the first quarter of 2014, an increase of $2.3 million from the first quarter of 2013 (see Provision for Loan Losses section above for additional detail).

Mortgage Banking Segment

Net income for the Mortgage Banking segment for the first quarter of 2014 was $128,000, a $8.6 million decrease from net income of $8.8 million for the first quarter of 2013. Net interest income decreased $1.7 million, from $6.4 million for the quarter ended March 31, 2013 to $4.7 million for the quarter ended March 31, 2014, driven by a decrease in both held for sale and mortgage portfolio loans. Noninterest income decreased from $32.0 million in the first quarter of 2013 to $23.1 million in the first quarter of 2014. Mortgage loan origination income decreased $15.1 million due to a reduction in mortgage loan origination volume and lower gain on sale margins. Partially offsetting this decrease was a $6.2 million increase in net mortgage servicing income. Servicing income increased due to the combination of retention of MSRs on loans originated by Cole Taylor Mortgage, purchases of MSRs and an increase in the valuation of the MSR asset.

Noninterest expense increased from $26.3 million in the first quarter of 2013 to $27.9 million in the first quarter of 2014. This increase was primarily due to a $1.1 million increase in outside services expense due to one-time costs associated with transferring the bulk of Cole Taylor Mortgage's loan servicing portfolio in-house and a $776,000 increase in computer processing costs primarily related to the expansion of retail mortgage lending offices. Salaries and benefits decreased $1.2 million primarily due to a decrease in incentive compensation expense related to declines in revenue partially offset by additional headcount.

FINANCIAL CONDITION

Overview

Total assets decreased $32.8 million, or 0.6%, to $5.65 billion at March 31, 2014 from total assets of $5.69 billion at December 31, 2013, primarily as a result of decreases in investment securities, loans held for sale and investment in Federal Home Loan Bank stock, partially offset by increases in cash and cash equivalents and MSRs. Total liabilities decreased $50.8 million to $5.17 billion at March 31, 2014 from $5.22 billion at December 31, 2013, resulting from a decrease in short-term borrowings partially offset by an increase in total deposits. Total stockholders’ equity at March 31, 2014 was $482.6 million as compared to $464.6 million at December 31, 2013, reflecting the impact of net income for the three months endedMarch 31, 2014 and an increase in accumulated other comprehensive income resulting from an increase in the market value of available for sale securities.

Investment Securities

Investment securities totaled $1.10 billion at March 31, 2014, compared to $1.12 billion at December 31, 2013, a decrease of $20.7 million, or 1.8%. This decrease was primarily the result of principal paydowns of $31.1 million of investment securities partially offset by an increase in accumulated other comprehensive income of $13.1 million resulting from an increase in the market value of available for sale securities.

As of March 31, 2014, mortgage related securities (at estimated fair value) comprised approximately 63% of our investment portfolio. Almost all of the securities were issued by government and government-sponsored enterprises.

At March 31, 2014, we had a net unrealized loss of $13.8 million in our available for sale investment portfolio, which was comprised of $10.8 million of gross unrealized gains and $24.6 million of gross unrealized losses. At December 31, 2013, the net unrealized loss was $26.9 million, which was comprised of $36.8 million of gross unrealized losses and $9.9 million of gross unrealized gains. The gross unrealized losses of twelve months or longer at March 31, 2014 related to 69 investment securities with a carrying value of $107.0 million. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the

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security’s carrying value, the length of time the security has been in an unrealized loss position and the current independent bond rating for the security. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are subject to further analysis to determine if it is probable that not all the contractual cash flows will be received. We obtain fair value estimates from additional independent sources and perform cash flow analysis to determine if other-than-temporary impairment has occurred. Of the securities with gross unrealized losses at March 31, 2014, none had been in a loss position for 12 months or more and had an unrealized loss position of more than 10% of amortized cost and therefore were not subject to additional analysis.

As a member of the Federal Home Loan Bank ("FHLB,") we are required to hold FHLB stock. The amount of Federal Home Loan Bank Chicago ("FHLBC") stock that we are required to hold is based on the Bank’s asset size and the amount of borrowings from the FHLBC. At March 31, 2014, we held $37.8 million of FHLBC stock and maintained $965.0 million of FHLB advances. We have assessed the ultimate recoverability of our FHLBC stock and believe no impairment has occurred as of March 31, 2014.

Loans

The composition of our loan portfolio as of March 31, 2014 and December 31, 2013 was as follows:

	March 31, 2014					December 31, 2013
	Amount			Percentage of Gross Loans		Amount			Percentage of Gross Loans
	(dollars in thousands)
Loans:
Commercial and industrial	$	1,940,095		53	%	$	1,935,377		53	%
Commercial real estate secured	1,109,042			30		1,124,227			31
Residential construction and land	45,417			1		46,079			1
Commercial construction and land	132,729			4		121,682			3
Lease receivables	143,091			4		132,013			4
Total commercial loans	3,370,374			92		3,359,378			92
Consumer	294,546			8		301,377			8
Gross loans	3,664,920			100	%	3,660,755			100	%
Less: Unearned discount	(13,907		)			(12,380		)
Loans	3,651,013					3,648,375
Less: Allowance for loan losses	(82,891		)			(81,864		)
Loans, net	$	3,568,122				$	3,566,511
Loans Held for Sale:
Total Loans Held for Sale	$	436,086				$	473,890

Gross loans were $3.66 billion at March 31, 2014 and December 31, 2013. Commercial loans, which include commercial and industrial (“C&I”), commercial real estate secured, construction and land loans and lease receivables, increased $11.0 million, or 0.3%. The increase in commercial loans during the three months endedMarch 31, 2014 consisted of a $4.7 million, or 0.2%, increase in C&I loans, an $11.0 million, or 9.1%, increase in commercial construction and land loans and a $11.1 million, or 8.4%, increase in lease receivables. These increases were offset by a $15.2 million, or 1.4%, decrease in commercial real estate secured loans, a $662,000, or 1.4%, decrease in residential construction and land loans and a $6.8 million, or 2.3%, decrease in consumer loans from December 31, 2013 to March 31, 2014.

C&I loans are made to businesses or to individuals on either a secured or unsecured basis for a wide range of business purposes, terms, and maturities. These loans are made primarily in the form of seasonal or working-capital loans or term loans. Repayment of these loans is generally provided through the operating cash flow of the borrower.

The risk characteristics of C&I loans are largely influenced by general economic conditions, such as inflation, recessionary pressures, the rate of unemployment, changes in interest rates and money supply, and other factors that affect the borrower’s operations and the value of the underlying collateral. Our credit risk strategy emphasizes consistent underwriting standards and diversification by industry and customer size. Our C&I loan portfolio is comprised of loans made to a variety of

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businesses in a diverse range of industries. This portfolio diversification is a significant factor used to mitigate the risk associated with fluctuations in economic conditions.

C&I loans also include those loans made by our asset-based lending division. Asset-based loans are made to businesses with the primary source of repayment derived from payments on the related assets securing the loan. Collateral for these loans may include accounts receivable, inventory, equipment and other fixed assets, and is monitored regularly to ensure ongoing sufficiency of collateral coverage and quality. The primary risk for these loans is a significant decline in collateral values due to general market conditions. Loan terms that mitigate these risks include typical industry amortization schedules, percentage of collateral coverage, maintenance of cash collateral accounts and regular asset monitoring. Because of the national scope of our asset-based lending, the risk of these loans is also diversified by geography.

Total C&I loans were relatively flat at $1.94 billion at March 31, 2014 compared to $1.94 billion at December 31, 2013, and accounted for 53% of our total loan portfolio at March 31, 2014. While overall C&I loans were flat, increases in our asset-based lending and equipment finance lending units were offset by decreases in our commercial banking unit.

Commercial real estate loans on completed properties include loans for the purchase of real property or for other business purposes where the primary collateral is the underlying real property. Our commercial real estate loans consist of loans on commercial owner occupied properties and investment properties. Investment properties refer to multi-family residences and income producing non-owner occupied commercial real estate, including retail strip centers or malls, office and mixed use properties and other commercial and specialized properties, such as nursing homes, churches, hotels and motels. Repayment of these loans is generally provided through the operating cash flow of the property.

The risk in a commercial real estate loan depends primarily on the loan amount in relation to the value of the underlying collateral, the interest rate, and the borrower’s ability to repay in a timely fashion. The credit risk of these loans is influenced by general economic and market conditions and the resulting impact on a borrower’s operation of the owner-occupied business or upon the fluctuation in value and earnings performance of an income producing property. In addition, the value of the underlying collateral is influenced by local real estate market trends and general economic conditions. Credit risk is managed in this portfolio through underwriting standards, knowledge of the local real estate markets, periodic reviews of the loan collateral and the borrowers’ financial condition. In addition, all commercial real estate loans are supported by an independent third party appraisal at inception.

The following table presents the composition of our commercial real estate portfolio as of the dates indicated:

	March 31, 2014				December 31, 2013
	Balance		Percentage of Total Commercial Real Estate Loans		Balance		Percentage of Total Commercial Real Estate Loans
	(dollars in thousands)
Commercial non-owner occupied:
Retail strip centers or malls	$	95,371	9	%	$	102,195	9	%
Office/mix use property	146,822		13		126,662		11
Commercial properties	123,796		11		126,608		11
Specialized – other	102,014		9		101,813		9
Other commercial properties	20,866		2		27,739		3
Subtotal commercial non-owner occupied	488,869		44		485,017		43
Commercial owner occupied	491,413		44		513,126		46
Multi-family properties	128,760		12		126,084		11
Total commercial real estate secured	$	1,109,042	100	%	$	1,124,227	100	%

Our commercial real estate secured loans decreased $15.2 million, or 1.4%, to $1.11 billion at March 31, 2014, as compared to $1.12 billion at December 31, 2013. Approximately 88% of the total commercial real estate secured portfolio consists of loans secured by owner and non-owner occupied commercial properties. The remainder of this portfolio consists of loans secured by residential income properties. The decrease in commercial real estate secured loans reflects run-off of balances.

Residential construction and land loans primarily consist of loans to real estate developers to construct single-family homes, town-homes and condominium conversions. Commercial construction and land loans primarily consist of loans to

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construct commercial real estate or income-producing properties. Both the residential and commercial construction and land loans are repaid from proceeds from the sale of the finished units by the developer or may be converted to commercial real estate loans at the completion of the construction process. The risk characteristics of these loans are influenced by national and local economic conditions, including the rate of unemployment and consumer confidence and the related impact that these conditions have on demand, housing prices and real estate values. In addition, credit risk on individual projects is influenced by the developers’ ability and efficiency in completing construction, selling finished units or obtaining tenants to occupy these properties. Credit risk for these loans is primarily managed by underwriting standards, lending primarily in local markets to developers with whom we have experience and ongoing oversight of project progress.

Our residential construction and land loans decreased by $662,000 or 1.4%, to $45.4 million at March 31, 2014, as compared to $46.1 million at December 31, 2013. Commercial construction and land loans totaled $132.7 million at March 31, 2014 as compared to $121.7 million at December 31, 2013, an increase of $11.0 million, or 9.0%. We are selectively reentering certain commercial construction and land markets.

Our lease financing business offers a full range of equipment finance options and specializes in originating and syndicating commercial equipment leases for U.S. middle market companies. We have a general equipment focus with limited specialization of equipment types.

The risk characteristics of equipment leases are similar to those of C&I loans and are largely influenced by general economic conditions, such as inflation, recessionary pressures, the rate of unemployment and other factors that affect the borrower's operations and the value of the underlying equipment. Our credit risk strategy emphasizes consistent underwriting standards and diversification by industry and customer size. In addition to credit risk, equipment leases may entail residual value risk. Residual values are thoroughly analyzed prior to entering into a lease and closely monitored during the term. Lease conditions also mitigate residual risk. Our approach places syndication at the front end of the sales process which enables market confirmation of our judgment as to structure, term, residual value and price; however, we had no syndicated leases as of March 31, 2014. Our leasing business has a national focus which also diversifies our risk geographically.

Our lease receivables totaled $129.2 million (net of unearned discounts) at March 31, 2014, compared to $119.6 million at December 31, 2013. Lease receivables increased primarily as a result of new leases sourced by our recently expanded direct sales channel.

Our consumer loans consist of open- and closed-end credit extended to individuals for household, family, and other personal expenditures. Consumer loans primarily include loans to individuals secured by their personal residence, including first mortgages and home equity and home improvement loans. The primary risks in consumer lending are loss of income of the borrower that can result from job losses or unforeseen personal hardships due to medical or family issues that may impact repayment. In the case of first and second mortgage or home equity lending, a significant reduction in the value of the asset financed can influence a borrower’s ability to repay the loan. Because the size of consumer loans is typically smaller than commercial loans, the risk of loss on an individual consumer loan is usually less than that of a commercial loan. Credit risk for these loans is managed by reviewing creditworthiness of the borrower, monitoring payment histories and obtaining adequate collateral positions.

Total consumer loans decreased $6.8 million, or 2.3%, to $294.5 million at March 31, 2014, compared to $301.4 million at December 31, 2013. This decrease was primarily the result of the planned run-off of home equity loans.

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Nonperforming Assets

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

	March 31, 2014			December 31, 2013			March 31, 2013
	(dollars in thousands)
Loans contractually past due 90 days or more but still accruing interest	$	—		$	—		$	—
Nonaccrual loans:
Commercial and industrial	17,841			15,879			16,010
Commercial real estate secured	26,589			37,474			23,096
Residential construction and land	—			—			742
Commercial construction and land	22,550			22,550			26,375
Consumer	5,956			5,922			5,181
Total nonaccrual loans	72,936			81,825			71,404
Total nonperforming loans	72,936			81,825			71,404
OREO and repossessed assets	9,950			10,049			27,218
Total nonperforming assets	$	82,886		$	91,874		$	98,622
Performing restructured loans not included in nonperforming assets	35,605			$	20,736		22,739
Nonperforming loans to total loans	2.00		%	2.24		%	2.22		%
Nonperforming assets to total loans plus OREO and repossessed property	2.26		%	2.51		%	3.03		%
Nonperforming assets to total assets	1.47		%	1.62		%	1.71		%

Nonperforming assets were $82.9 million, or 1.47% of total assets, at March 31, 2014, compared to $91.9 million, or 1.62% of total assets, at December 31, 2013, and $98.6 million, or 1.71% of total assets, at March 31, 2013. Nonperforming assets decreased from December 31, 2013 to March 31, 2014 due to net payoffs of certain commercial real estate secured nonaccrual loans. During the three months ended March 31, 2014, $1.6 million of net charge-offs were recognized.

Nonperforming loans

Nonperforming loans include nonaccrual loans and interest-accruing loans that are contractually past due 90 days or more. We evaluate all loans on which principal or interest is contractually past due 90 days or more to determine if they are adequately secured and in the process of collection. If sufficient doubt exists as to the full collection of principal and interest on a loan, we place it on nonaccrual and no longer recognize interest income. After a loan is placed on nonaccrual status, any current period interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date the loan is placed on nonaccrual status only as interest is received and so long as management is satisfied that there is a high probability that principal will be collected in full. The loan is returned to accrual status only when the borrower has made required payments for a minimum length of time and demonstrates the ability to make future payments of principal and interest as scheduled.

Commercial real estate secured loans were the largest category of nonaccrual loans at $26.6 million as of March 31, 2014 and comprised approximately 36% of all nonaccrual loans at that date.

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Other real estate owned and repossessed assets

OREO and repossessed assets totaled $10.0 million at each of March 31, 2014 and December 31, 2013 compared to $27.2 million at March 31, 2013. The following table provides a rollforward, for the periods indicated, of OREO and repossessed assets:

	For the Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Balance at beginning of period	$	10,049		$	24,259
Transfers from loans	636			5,040
Dispositions	(608		)	(2,081		)
Change in impairment	(127		)	—
Balance at end of period	$	9,950		$	27,218

The level of OREO and repossessed assets was flat during the first three months of 2014. During the three months ended March 31, 2014, we transferred $636,000 from loans into OREO and repossessed assets. The loans transferred primarily consisted of $275,000 from our commercial real estate secured portfolio and $361,000 from our consumer portfolio. During the three months ended March 31, 2014, we sold several OREO properties. We also reduced the carrying value of certain OREO and repossessed assets by $127,000 during the three months ended March 31, 2014, to reflect a decrease in the estimated fair value of these assets.

Impaired loans

At March 31, 2014, impaired loans totaled $106.1 million, compared to $96.5 million at December 31, 2013, and $90.1 million at March 31, 2013. The balance of impaired loans and the related allowance for loan losses for impaired loans was as follows:

	March 31, 2014		December 31, 2013		March 31, 2013
	(in thousands)
Impaired loans:
Commercial and industrial	$	29,242	$	17,335	$	20,197
Commercial real estate secured	47,365		50,615		36,305
Residential construction and land	—		—		742
Commercial construction and land	22,550		22,550		26,375
Consumer	6,909		5,951		6,494
Total impaired loans	$	106,066	$	96,451	$	90,113
Recorded balance of impaired loans:
With related allowance for loan losses	$	61,026	$	46,400	$	50,189
With no related allowance for loan losses	45,040		50,051		39,924
Total impaired loans	$	106,066	$	96,451	$	90,113
Allowance for losses on impaired loans:
Commercial and industrial	$	13,129	$	8,555	$	8,540
Commercial real estate secured	3,030		3,265		1,584
Commercial construction and land	1,890		1,867		3,546
Total allowance for losses on impaired loans	$	18,049	$	13,687	$	13,670

The increase in impaired loans during the three months ended March 31, 2014 was due to migration into accruing impaired loans. The allowance for loan losses related to impaired loans increased during the three months ended March 31, 2014 and totaled $18.0 million at March 31, 2014, as compared to $13.7 million at each of December 31, 2013 and March 31, 2013. The increase in the allowance for losses on impaired loans in the three months ended March 31, 2014 was primarily due to an increase in specific reserves on a limited number of credits. The percentage of allowance on impaired loans to total impaired loans increased to 17.0% at March 31, 2014, compared to 14.2% at December 31, 2013. Commercial real estate

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secured loans comprised approximately 45% of all impaired loans and 17% of the allowance for loan losses on impaired loans at March 31, 2014.

Through an individual impairment analysis, we determined that at March 31, 2014, $61.0 million of our impaired loans had a specific measure of impairment and required a related allowance for loan losses of $18.0 million. We also held $45.0 million of impaired loans for which the individual analysis did not result in a measure of impairment and, therefore, no related allowance for loan losses was provided. Once we determine a loan is impaired, we perform an individual analysis to establish the amount of the related allowance for loan losses, if any, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. Because the majority of our impaired loans are collateral-dependent real estate loans, the fair value is determined by a current appraisal. The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets, such as equipment, inventory, and accounts receivable. The fair value of these loans is based on estimates of realizability and collectability of the underlying collateral. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the impairment analysis may not result in a related allowance for loan losses for each individual loan.

For impaired commercial loans that are collateral dependent, our practice is to obtain an updated appraisal every nine to 18 months, depending on the nature and type of the collateral and the stability of collateral valuations, as determined by senior members of credit management. OREO and repossessed assets require an updated appraisal at least annually. We have established policies and procedures related to appraisals and maintain a list of approved appraisers who have met specific criteria. In addition, our policy for appraisals on real estate dependent commercial loans generally requires each appraisal to have an independent compliance and technical review by a qualified third party to ensure the consistency and quality of the appraisal and valuation. We discount appraisals for estimated selling costs, and, when appropriate, consider the date of the appraisal and stability of the local real estate market when analyzing the estimated fair value of individual impaired loans that are collateral dependent.

Impaired loans include all nonaccrual loans and accruing loans judged to have higher risk of noncompliance with the current contractual repayment schedule for both interest and principal, as well as TDRs. Unless modified in a TDR, certain homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans. At March 31, 2014, we held $35.6 million of loans classified as performing restructured loans (performing TDRs) which includes commercial loans of $28.4 million and consumer loans of $7.2 million.

The balance of nonaccrual and impaired loans as of March 31, 2014 is presented below:

	Nonaccrual Loans		Impaired Loans
	(dollars in thousands)
Commercial nonaccrual loans	$	66,980	$	66,980
Commercial loans on accrual but impaired	n/a		32,177
Consumer loans	5,956		6,909
	$	72,936	$	106,066

Potential problem loans

As part of our standard credit administration process, we risk rate our commercial loan portfolio. As part of this process, loans that are rated with a higher level of risk are monitored more closely. We internally identify certain loans in our loan risk ratings that we have placed on heightened monitoring because of certain weaknesses that may inhibit the borrower’s ability to perform under the contractual terms of the loan agreement but have not reached the status of nonaccrual loans. At March 31, 2014, these potential problem loans totaled $15.2 million. Of these potential problem loans at March 31, 2014, $8.0 million were in our C&I portfolio, $5.2 million were in our commercial real estate secured portfolio and $2.0 million were in our residential construction and land loan portfolio. In comparison, potential problem loans at December 31, 2013 totaled $24.4 million. The potential problem loans at December 31, 2013 included $7.2 million of C&I loans, $13.6 million of commercial real estate secured loans and $3.6 million of residential construction and land loans. The balance of potential problem loans decreased from December 31, 2013 to March 31, 2014 due to migration of several loans to nonaccrual status and the upgrade of one loan to accrual status. We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans can carry a higher probability of default and may require additional attention by management.

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Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of the allowance includes identifying problem loans, estimating the amount of probable loss related to those loans, estimating probable losses from specific portfolio segments and evaluating the impact on our loan portfolio of a number of economic and qualitative factors. When we estimate the amount of probable loss related to specific portfolio segments, we calculate historic loss rates based upon current and a number of prior years charge-off experience for each separate loan grouping identified. The historical loss rates are then weighted based on our evaluation of the duration of the economic cycle to arrive at a current expected loss rate. The allowance reflects the loss experience from the last four years. 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.

The following table includes an analysis of our allowance for loan losses and other related data for the periods indicated:

	Three months ended
	March 31, 2014			March 31, 2013
	(dollars in thousands)
Average loans	$	3,624,226		$	3,177,615
Loans at end of period	$	3,651,013		$	3,222,794
Allowance for loan losses:
Allowance at beginning of period	$	81,864		$	82,191
Charge-offs, net of recoveries:
Commercial and commercial real estate	(1,817		)	114
Real estate construction	426			174
Residential real estate mortgages and consumer	(182		)	(629		)
Total net charge-offs	(1,573		)	(341		)
Provision for loan losses	2,600			300
Allowance at end of period	$	82,891		$	82,150
Annualized net charge-offs to average total loans	0.17		%	0.04		%
Allowance to total loans at end of period	2.27		%	2.55		%
Allowance to nonperforming loans	113.65		%	115.05		%

Our allowance for loan losses was $82.9 million at March 31, 2014, or 2.27% of end of period loans and 113.65% of nonperforming loans. In comparison, at March 31, 2013, our allowance for loan losses was $82.2 million, or 2.55% of end of period loans (excluding loans held for sale) and 115.05% of nonperforming loans. Net charge-offs during the three months ended March 31, 2014 were $1.6 million, or 0.17% of average loans on an annualized basis. In comparison, net charge-offs during the three months ended March 31, 2013 were $341,000, or 0.04% of average loans on an annualized basis.

Loans Held for Sale

At March 31, 2014 and December 31, 2013, the held for sale portfolio consisted predominately of loans originated by Cole Taylor Mortgage. At March 31, 2014, we held $436.1 million of loans classified as held for sale as compared to $473.9 million at December 31, 2013. The decrease in loans held for sale was primarily due to the sale of loans in the first quarter of 2014 that had been transferred from the loan portfolio in the fourth quarter of 2013. The aggregate, unpaid principal balance associated with loans held for sale was $424.0 million at March 31, 2014, with an unrealized gain of $12.0 million, which was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Income. The aggregate, unpaid principal of loans held for sale was $466.2 million at December 31, 2013, with an unrealized gain of $7.0 million.

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Mortgage Servicing Rights

We sell residential mortgage loans originated by Cole Taylor Mortgage into the secondary market and retain servicing rights on a portion of the loans sold. On sales where MSRs are retained, a MSR asset is capitalized, which represents the fair value of future net cash flows expected to be realized for performing servicing activities. In addition to the MSRs resulting from the retention of servicing on loans originated by Cole Taylor Mortgage, we completed purchases of MSRs of $10.3 million in the three months ended March 31, 2014 and $4.2 million of MSRs in the three months ended March 31, 2013, which were recorded at at the purchase price at the date of purchase and at fair value thereafter.

We have elected to account for all MSRs using the fair value option. The balance of the MSR asset was $227.7 million at March 31, 2014 and $216.1 million at December 31, 2013. The amount of residential mortgage loans serviced for others at March 31, 2014 was $20.14 billion and $18.50 billion at December 31, 2013.

Deposits

Total deposits increased $302.4 million to $3.95 billion at March 31, 2014 from $3.65 billion at December 31, 2013. During the three months ended March 31, 2014, interest-bearing deposits increased $283.1 million and noninterest-bearing deposits increased $19.3 million. The increase in interest-bearing deposits reflects the impact of on-going deposit raising efforts and an increase in time deposits for liquidity management purposes. The increase in noninterest-bearing deposits was due an increase in mortgage escrow deposits related to growth in the MSR asset and the normal cycle of tax and insurance payments, partially offset by a decrease due to the seasonality of deposits in our commercial banking unit.

Increases during the three months ended March 31, 2014 included certificates of deposit, which increased $35.0 million brokered certificates of deposit, which increased $224.8 million, and CDARS time deposits, which increased $71.6 million. Decreases during the three months ended March 31, 2014 included money market accounts, which decreased $13.9 million, and brokered money market deposits, which decreased $45.0 million.

The following table sets forth the period end balances of total deposits as of each of the dates indicated.

	March 31, 2014		December 31, 2013
	(in thousands)
Noninterest-bearing deposits	$	1,068,207	$	1,048,946
Interest-bearing deposits
Commercial interest checking	373,467		377,631
NOW accounts	572,259		566,269
Savings accounts	41,229		40,357
Money market accounts	684,358		698,302
Brokered money market deposits	6,081		51,124
Certificates of deposit	507,239		472,222
Brokered certificates of deposit	428,502		203,715
CDARS time deposits	214,479		142,835
Public time deposits	57,564		49,582
Total interest-bearing deposits	2,885,178		2,602,037
Total deposits	$	3,953,385	$	3,650,983

Average deposits for the three months ended March 31, 2014 increased $79.2 million, or 2.1%, to $3.84 billion, compared to $3.76 billion for the three months ended March 31, 2013. Total average time deposits increased $240.7 million, or 26.5%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 related to an increase of $109.0 million, or 60.0%, in brokered certificates of deposit, an increase of $171.6 million, or 105.5%, in CDARS time deposits and an increase of $34.1 million, or 247.5%, in average public time deposits, partially offset by a $79.9 million, or 16.2% decrease in CDs. In addition to the increase in time deposits, average commercial interest checking and NOW accounts increased $215.5 million, or 30.0%, from the three months ended March 31, 2013 to the three months ended March 31, 2014. Money market deposits decreased $52.0 million, or 7.0%, from the three months ended March 31, 2013 to the three months ended March 31, 2014.

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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:

	Three months ended March 31, 2014
	Average Balance		Percent Of Deposits		Rate
	(dollars in thousands)
Noninterest-bearing demand deposits	$	1,011,485	26.4	%	—	%
Commercial interest checking	377,103		9.8		0.50	%
NOW accounts	555,784		14.5		0.46	%
Money market accounts	694,531		18.1		0.29	%
Brokered money market accounts	9,085		0.2		0.27	%
Savings deposits	40,600		1.1		0.05	%
Time deposits:
Certificates of deposit	476,370		12.4		0.82	%
Brokered certificates of deposit	290,749		7.6		0.41	%
CDARS time deposits	334,262		8.7		0.31	%
Public time deposits	47,921		1.2		0.40	%
Total time deposits	1,149,302		29.9		0.55	%
Total deposits	$	3,837,890	100.0	%

Borrowings

Short-term borrowings include customer repurchase agreements, federal funds purchased and short-term FHLB advances, which consist of borrowings from the FHLBC. Short-term borrowings decreased $335.2 million to $1.04 billion at March 31, 2014, as compared to $1.38 billion at December 31, 2013. This decrease was the result of a decrease of $300.0 million in FHLB advances and a $34.3 million decrease in federal funds purchased. The decrease in short term borrowings was due to changes in the overall mix of the balance sheet.

At March 31, 2014, subject to available collateral and current borrowings, the Bank had available pre-approved repurchase agreement lines of $600.0 million. At December 31, 2013, subject to available collateral and current borrowings, the Bank had available pre-approved repurchase agreement lines of $850.0 million.

At March 31, 2014 all borrowings from the FHLBC were collateralized by $802.3 million of investment securities and a blanket lien on $709.6 million of qualified first-mortgage residential, multi-family, home equity and commercial real estate loans. Based on the value of collateral pledged, we had additional borrowing capacity of $248.6 million at March 31, 2014. At December 31, 2013, we maintained collateral of $887.1 million of investment securities and a blanket lien on $702.0 million on qualified first-mortgage residential, home equity and commercial real estate loans and had additional borrowing capacity of $34.1 million.

We participate in the Federal Reserve Bank's ("FRB") Borrower In Custody (“BIC”) program. At March 31, 2014, the Bank pledged $527.2 million of commercial loans as collateral and had available $441.0 million of borrowing capacity at the FRB. In comparison, the Bank had pledged $520.4 million of commercial loans as collateral and had available $440.9 million of borrowing capacity under the BIC program at December 31, 2013. There were no borrowings under the BIC program at either March 31, 2014 or December 31, 2013.

Junior Subordinated Debentures

At March 31, 2014, we had $86.6 million outstanding of junior subordinated debentures, comprised of $45.4 million issued to TAYC Capital Trust I and $41.2 million issued to TAYC Capital Trust II. The junior subordinated debentures issued to each of these trusts are currently callable at par, at our option. At March 31, 2014, unamortized issuance costs were $1.9 million relating to TAYC Capital Trust I and $317,000 related to TAYC Capital Trust II. Unamortized issuance costs would be immediately recognized as noninterest expense if the debentures were called by us.

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CAPITAL RESOURCES

At March 31, 2014 and December 31, 2013, both the Company and the Bank were considered “well capitalized” under regulatory capital guidelines for bank holding companies and banks. The Company’s and the Bank’s capital ratios were as follows as of the dates indicated:

	ACTUAL			FOR CAPITAL ADEQUACY PURPOSES			TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS
	AMOUNT	RATIO		AMOUNT	RATIO		AMOUNT	RATIO
	(dollars in thousands)
As of March 31, 2014
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$600,876	12.93	%	>$371,766	>8.00	%	>$464,707	>10.00	%
Cole Taylor Bank	$558,514	12.07	%	>$370,155	>8.00	%	>$462,694	>10.00	%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$542,464	11.67	%	>$185,883	>4.00	%	>$278,824	>6.00	%
Cole Taylor Bank	$500,350	10.81	%	>$185,077	>4.00	%	>$277,616	>6.00	%
Leverage (to average assets)
Taylor Capital Group, Inc.	$542,464	9.73	%	>$223,055	>4.00	%	>$278,818	>5.00	%
Cole Taylor Bank	$500,350	9.01	%	>$222,141	>4.00	%	>$277,676	>5.00	%
As of December 31, 2013
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$591,908	12.65	%	>$374,262	>8.00	%	>$467,828	>10.00	%
Cole Taylor Bank	$554,242	11.90	%	>$372,689	>8.00	%	>$465,861	>10.00	%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$533,123	11.40	%	>$187,131	>4.00	%	>$280,697	>6.00	%
Cole Taylor Bank	$495,699	10.64	%	>$186,344	>4.00	%	>$279,517	>6.00	%
Leverage (to average assets)
Taylor Capital Group, Inc.	$533,123	9.18	%	>$232,249	>4.00	%	>$290,311	>5.00	%
Cole Taylor Bank	$495,699	8.57	%	>$231,366	>4.00	%	>$289,208	>5.00	%

All of our capital ratios increased from December 31, 2013 to March 31, 2014, primarily due to growth in capital which outpaced the growth in average assets. Our ability to continue to grow our MSR asset may be constrained as we consider the risks of further growth of this asset relative to the Bank's capital.

While the Bank continues to be considered “well capitalized” under the regulatory capital guidelines, our regulators could require us to maintain capital in excess of these required levels. We have agreed, consistent with past practice, to continue to provide our regulators notice before the payment of dividends. The Bank is also subject to dividend restrictions set forth by regulatory authorities.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million).  The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital.  A number of instruments that now generally qualify as Tier 1 Capital will not qualify, or their qualifications will change when the Basel III Rules are fully implemented..  The Basel III Rules also permit banking organizations with less

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than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more.  Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes.  Management is in the process of assessing the effect the Basel III Rules may have on the Company's and the Bank's capital positions and will monitor developments in this area.

LIQUIDITY

During the three months ended March 31, 2014, total assets decreased $32.8 million, or 0.6%, primarily due to decreases in our investment securities, loans held for sale and investment in FHLB stock, partially offset by increases in cash and cash equivalents and MSRs. Cash inflows during the three months ended March 31, 2014 consisted primarily of proceeds of $1.09 billion from sales of loans originated for sale, $32.2 million of sales, principal payments and maturities of investment securities, and proceeds of $28.0 million from redemptions of FHLB and FRB stock. In addition, we increased deposits by $302.9 million.

Cash outflows during the three months ended March 31, 2014 included $1.06 billion for loans originated for sale, the paydown of $335.2 million in short-term borrowings, the purchase of $13.0 million of FHLB and FRB stock, the purchase of $10.3 million of MSRs, and the payment of $2.0 million in dividends on our Series A Preferred.

In connection with our liquidity risk management, we evaluate and closely monitor significant customer deposit balances for stability and average life. In order to maintain sufficient liquidity to meet all of our loan and deposit customers’ withdrawal and funding demands, we routinely measure and monitor the volume of our liquid assets and available funding sources. Additional sources of liquidity for the Bank include FHLB advances, the FRB’s BIC program, federal funds borrowing lines from larger correspondent banks and pre-approved repurchase agreement availability with major brokers and banks.

At the holding company level, cash and cash equivalents increased to $24.1 million at March 31, 2014 from $21.8 million at December 31, 2013. Cash inflows during the first three months of 2014 included the payment of $5.8 million of dividends from the Bank to the Company. Significant cash outflows during the first three months of 2014 included $1.4 million of interest paid on our junior subordinated debentures and $2.0 million for the payment of dividends on our Series A Preferred.

Off-Balance Sheet Arrangements

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

At March 31, 2014, we had $980.2 million of undrawn commitments to extend credit and $70.4 million of financial and performance standby letters of credit. In comparison, at December 31, 2013, we had $1.01 billion of undrawn commitments to extend credit and $66.3 million of financial and performance standby letters of credit. We expect most of these letters of credit to expire undrawn with no significant loss for these obligations to the extent not already recognized as a liability on the Company’s Consolidated Balance Sheets. At March 31, 2014, we maintained a liability of $1.4 million for unfunded loan commitments and commitments under standby letters of credit for which we believe funding and loss were probable. At December 31, 2013, we maintained this liability at $1.5 million.

Derivative Financial Instruments

At March 31, 2014, we had $96.9 million of notional amount interest rate swaps that were designated as fair value hedges against certain brokered CDs. The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on the interest rate swaps is recorded in other derivative income on the Consolidated Statements of Income in noninterest income.

At March 31, 2014, we had $20.0 million of notional amount interest rate swaps that were designated as cash flow hedges against the variability in the interest paid on our junior subordinated debentures. The fair value of these hedging derivative

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instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged cash flows is reported as an adjustment to OCI.

We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. As of March 31, 2014, $873.4 million of derivative instruments were interest rate swaps related to customer transactions, which were not designated as hedges. At March 31, 2014, we had notional amounts of $436.7 million of interest rate swaps with customers with whom we agreed to receive a fixed interest rate and pay a variable interest rate. In addition, as of March 31, 2014, we had offsetting interest rate swaps with other counterparties with a notional amount of $436.7 million in which we agreed to receive a variable interest rate and pay a fixed interest rate.

As a normal course of business, Cole Taylor Mortgage uses interest rate swaps, mortgage TBAs, interest rate lock commitments and forward loan sale commitments as derivative instruments to hedge the risk associated with interest rate volatility. The instruments qualify as non-hedging derivatives.

Interest rate swaps are used in order to lessen the price volatility of the MSR asset. At March 31, 2014, we had a notional amount of $485.0 million of interest rate swaps hedging MSRs. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded in mortgage banking revenue in noninterest income.

We enter into mortgage TBAs, which are forward commitments to buy to-be-announced securities for which we do not expect to take physical delivery, to lessen the price volatility of the MSR asset. At March 31, 2014, we had a notional amount of $120.0 million of mortgage TBAs. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statement of Income in mortgage banking revenue in noninterest income.

We enter into interest rate lock commitments for originated residential mortgage loans. We then use forward loan sale commitments to sell originated residential mortgage loans to offset the interest rate risk of the rate lock commitments, as well as mortgage loans held for sale. At March 31, 2014, we had notional amounts of $567.8 million of interest rate lock commitments and $683.0 million of forward loan sale commitments. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets or other liabilities with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue on the Consolidated Statements of Income in noninterest income.

We enter into covered call option transactions from time to time that are designed primarily to increase the total return associated with the investment securities portfolio. There were no covered call options that remained outstanding as of March 31, 2014.

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 (“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, swaptions, floors, collars and corridors to manage interest rate and market risk. Our asset and liability management and investment policies do not allow the use of derivative financial instruments for trading purposes. Therefore, at inception, these contracts are designated as hedges of specific existing assets and liabilities.

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 and a parallel interest rate rising or declining ramp and uses the balances, rates, maturities and repricing characteristics of all of our existing assets and liabilities, including derivative instruments. These models are built with the sole objective of measuring the volatility of the embedded interest rate risk as of the balance sheet date and, as such, do not provide for growth or changes in balance sheet composition. Projected net interest income is computed by the model assuming market rates remain unchanged and we compare those results to other interest rate scenarios with changes in the magnitude, timing, and relationship between various interest rates. The impact of embedded

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options in products, such as callable agencies and mortgage-backed securities, real estate mortgage loans and callable borrowings, are also considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. ALCO utilizes the results of the model to quantify the estimated exposure of our net interest income to sustained interest rate changes.

Net interest income for the next 12 months in a 200 basis points rising rate scenario was calculated to increase $3.5 million, or 2.1%, from the net interest income in the rates unchanged scenario at March 31, 2014. At December 31, 2013, the projected variance in the rising rate scenario was an increase of $31,000. These exposures were within our policy guidelines. No simulation for net interest income at risk in a falling rate scenario was calculated due to the low level of market interest rates at both March 31, 2014 and December 31, 2013.

The following table indicates the estimated change in future net interest income from the rates unchanged simulation 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 from Rates Unchanged Simulation
	March 31, 2014				December 31, 2013
	(dollars in thousands)
Change in interest rates	Dollar Change		Percentage Change		Dollar Change		Percentage Change
+200 basis points over one year	$	3,508	2.1	%	$	31	—	%
-200 basis points over one year	N/A		N/A		N/A		N/A

______________________ 

N/A – Not applicable

Computation of the 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 that we may take in response to changes in interest rates. We make no assurances that our actual net interest income would increase or decrease by the amounts computed by the simulations.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-04, "Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40)." ASU 2014-04 clarifies when an in- substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. The ASU also amends some disclosure requirements. This ASU will become effective for reporting periods beginning after December 15, 2014. We are currently assessing the impact that the adoption of ASU No. 2014-04 will have on our consolidated financial statements.

In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 provides for consistent presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU will become effective for reporting periods beginning after December 15, 2013. This accounting standard was adopted by the Company as of the first quarter 2014 and the adoption did not have a material effect on our consolidated financial statements.

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Quarterly Financial Information

The following table sets forth unaudited financial data regarding our operations for each of 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.

	2014 Quarter Ended		2013 Quarter Ended												2012 Quarter Ended
	Mar. 31		Dec. 31			Sep. 30			Jun. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30
	(in thousands, except per share data)
Interest income	$	48,842	$	50,380		$	51,661		$	47,975		$	47,674		$	47,684		$	46,192		$	46,005
Interest expense	4,988		5,176			5,634			6,893			6,991			7,174			8,996			9,627
Net interest income	43,854		45,204			46,027			41,082			40,683			40,510			37,196			36,378
Provision for loan losses	2,600		1,100			300			700			300			1,200			900			100
Noninterest income	29,098		39,640			32,472			46,101			39,719			51,962			47,250			31,889
Noninterest expense	54,563		62,079			54,542			60,271			51,755			55,284			55,899			43,986
Income before income taxes	15,789		21,665			23,657			26,212			28,347			35,988			27,647			24,181
Income taxes	5,845		6,701			9,488			10,595			11,090			14,530			10,898			9,956
Net income	9,944		14,964			14,169			15,617			17,257			21,458			16,749			14,225
Preferred dividends and discounts	—		(4,876		)	(3,583		)	(3,780		)	(3,661		)	(1,765		)	(1,757		)	(1,748		)
Net income available to common stockholders	$	9,944	$	10,088		$	10,586		$	11,837		$	13,596		$	19,693		$	14,992		$	12,477
Income per share:
Basic	$	0.32	$	0.33		$	0.35		$	0.39		$	0.45		$	0.66		$	0.50		$	0.42
Diluted	0.32		0.33			0.34			0.39			0.44			0.65			0.49			0.41

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information contained in the section of this Quarterly Report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risks” is incorporated herein by reference.

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 is 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 our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. 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 of achieving our control objectives.

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There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 report, management knows of no pending or threatened legal actions against the Company, or to which any of our property is subject, that is likely to have a material adverse effect on our business, financial position or results of operations.

On July 26, 2013, a class action complaint, captioned James Sullivan v. Taylor Capital Group, Inc., et al., was filed under Case No. 2013-CH-17751 in the Circuit Court of Cook County, Illinois (the “Court”), against the Company, its directors and MB Financial (collectively, the “Defendants”) challenging the pending MB Financial/Taylor Capital merger. On August 8, 2013, a second class action complaint, captioned Dennis Panozzo v Taylor Capital Group, Inc., et. al., was filed under Case No. 2013-CH-18546 in the Court against the Defendants. Subsequently, the two cases were consolidated pursuant to court order under the first-filed Sullivan case number (as so consolidated, the “Action”). On October 24, 2013, the plaintiffs in the Action (the “Plaintiffs”) filed a consolidated amended complaint. The complaint alleged, among other things, that the Company’s directors breached their fiduciary duties to the Company and its stockholders by agreeing to the proposed merger at an unfair price pursuant to a flawed sales process, by agreeing to terms with MB Financial that discouraged other bidders and by issuing a preliminary joint proxy statement/prospectus, included in the Form S-4 registration statement filed with the SEC by MB Financial, that purportedly omitted material information. Plaintiffs further alleged that certain of the Company’s directors and officers were not independent or disinterested with respect to the proposed merger. Plaintiffs also alleged that MB Financial aided and abetted the Company’s directors' breaches of fiduciary duties. The complaint sought, among other things, an order enjoining the defendants from consummating the merger, as well as attorneys' and experts' fees and certain other damages.

On February 17, 2014, solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted in the Action to rest, the Defendants entered into a memorandum of understanding (the “MOU”) with the Plaintiffs regarding the settlement of the Action pursuant to which the Company and MB Financial agreed to make certain supplemental disclosures concerning the proposed merger, which each of the Company and MB Financial did in a Current Report on Form 8-K filed by each of them on February 18, 2014 (the “Form 8-Ks”). Nothing in the MOU, any settlement agreement or any public filing, including the Form 8-Ks, shall be deemed an admission of the legal necessity of filing or the materiality under applicable laws of any of the additional information contained therein or in any public filing associated with the proposed settlement of the Action.

The MOU also provides that, solely for purposes of settlement, the Court will certify a class consisting of all persons who were record or beneficial stockholders of the Company when the proposed merger was approved by the Company’s Board or any time thereafter (the “Class”). In addition, the MOU provides that, subject to approval by the Court after notice to the members of the Class (the “Class Members”), the Action will be dismissed with prejudice and all claims that the Class Members may possess with regard to the proposed merger, with the exception of claims for statutory appraisal, will be released. In connection with the settlement, the Plaintiffs’ counsel have expressed their intention to seek an award by the Court of attorneys’ fees and expenses. The amount of the award to the Plaintiffs’ counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration to be paid by MB Financial or that any stockholder of the Company will receive in the proposed merger. There can be no assurance that the parties will ultimately enter into a definitive settlement agreement or that the Court will approve the settlement even if the parties enter into such an agreement. In the absence of either event, the proposed settlement as contemplated by the MOU may be terminated.

The Defendants continue to believe that the Action is without merit, have vigorously denied, and continue to vigorously deny, all of the allegations of wrongful or actionable conduct asserted in the Action, and the Company’s board of directors vigorously maintains that it diligently and scrupulously complied with its fiduciary duties, that the joint proxy statement/prospectus, dated January 14, 2014, mailed to the stockholders of the Company and MB Financial is complete and accurate in all material respects and that no further disclosure is required under applicable law.

Based on information currently available, consultations with counsel and established reserves, we believe that the eventual outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2013 Annual Report on Form 10-K.

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

The following table presents information for the three months ended March 31, 2014 related to our repurchases of our outstanding common shares:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2014 - January 31, 2014	—	$	—	—	$	—
February 1, 2014 - February 28, 2014	21,157	22.88		—	—
March 1, 2014 - March 31, 2014	—	—		—	—
Total	21,157	$	22.88	—	$	—
(1) The shares in this column represent the shares that were withheld by us to satisfy income tax withholding obligations in connection with the vesting of restricted stock awards.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description of Exhibits
2.1	Agreement and Plan of Merger, dated July 14, 2013, between MB Financial, Inc. and Taylor Capital Group, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on July 18, 2013).
3.1	Form of Fourth Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed June 6, 2012).
3.2	Certificate of Designations of Perpetual Non-cumulative Preferred Stock, Series A, of Taylor Capital Group, Inc. dated November 19, 2012 (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed November 20, 2012).
3.3	Fourth Amended and Restated Bylaws of Taylor Capital Group, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed June 4, 2013).
10.1	Form of Notice of Cash Performance Award Grant*
10.2	Fourth Amendment to Lease (Pointe O'Hare), dated as of January 31, 2014, by and between Long Ridge Office Portfolio, L.P. and Cole Taylor Bank*
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.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three months ended March 31, 2014 and March 31, 2013; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 and March 31, 2013; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and March 31, 2013; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and March 31, 2013; and (vi) Notes to Consolidated Financial Statements.

______________________

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities 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: May 2, 2014
	/s/ MARK A. HOPPE
	Mark A. Hoppe
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ RANDALL T. CONTE
	Randall T. Conte
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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