UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1 to Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 0-50034

TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

9550 West Higgins Road

Rosemont, Illinois 60018

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

(847) 653-7978

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $0.01 per share

9.75% Trust Preferred Securities Issued by TAYC Capital Trust I and the

Guarantee With Respect Thereto

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $126,707,406 and is based upon the last sales price as quoted on the Nasdaq National Market on March 2, 2005.

At March 2, 2005, there were 9,659,549 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III – Portions of the Proxy Statement for the Annual Meeting of Stockholders held on June 16, 2005 are incorporated by reference into Part III hereof.

TAYLOR CAPITAL GROUP, INC.

INDEX

		Page No.
	Explanatory Note – Restatement of 2004 Financial Information	1
Part II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3
Item 6.	Selected Financial Data	5
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk.	57
Item 8.	Financial Statements and Supplementary Data	58
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	107
Item 9A.	Controls and Procedures	107
Item 9B.	Other Information	110
Part IV.
Item 15.	Exhibits, Financial Statement Schedules	111

TAYLOR CAPITAL GROUP, INC.

EXPLANATORY NOTE – RESTATEMENT OF 2004 FINANCIAL INFORMATION

This Amendment No. 1 to Form 10-K (“Amendment No. 1”) is being filed by Taylor Capital Group, Inc. to amend and restate its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission (“SEC”) on March 10, 2005 (“Initial Form 10-K”). This Amendment No. 1 is being filed to correct errors in the Initial Form 10-K related to our derivative accounting under Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and to reflect a change in the amortization period of issuance costs relating to our junior subordinated debentures.

Amendment No. 1 restates the Consolidated Financial Statements and the other financial information for the year ended December 31, 2004, and for each of the quarters in 2004, previously reported in the Initial Form 10-K and supercedes our previously issued Consolidated Financial Statements and other financial information for 2004. The impact of these errors for the years ended December 31, 2003 and 2002 were not material and, therefore, the Consolidated Financial Statements for 2003 and 2002 have not been restated.

In 2004 and prior years, we applied a method of fair value hedge accounting under SFAS 133 to account for the interest rate swap agreements (CD swaps) relating to certain of our brokered certificates of deposit (brokered CDs) that allowed us to assume no ineffectiveness in these transactions (the so-called “short-cut” method). We recently concluded that the CD swaps did not qualify for this method in prior periods because the related CD broker placement fee was determined, in retrospect, to have caused the swap not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut method). Furthermore, although historical effectiveness testing performed in November 2005 demonstrated that the CD swaps would have qualified for hedge accounting under the “long-haul” method, hedge accounting under SFAS 133 is not allowed retrospectively because the hedge documentation required for the long-haul method was not in place at the inception of the hedge. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that were made to the hedged items, the brokered CDs, and results in the recording and subsequent amortization of the CD broker placement fee, which was incorporated into the CD swap, as an adjustment to the par amount of the brokered CDs.

In connection with the determination of the appropriate amortization period for the brokered CD placement fees, we also determined that the issuance costs relating to our junior subordinated debentures should have been amortized through the maturity date of the debentures, rather than their earlier call dates. For additional information regarding our restatement, see Note 1 to our Consolidated Financial Statements contained herein.

Amendment No. 1 includes restated financial information and related disclosures in Part II Items 6, 7, 8 and 9, including disclosures within “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as a result of the restatement described above. The restatement does not change any of the disclosures previously reported in Part I Items 1, 2, 3 and 4 or Part III Items 10, 11, 12, 13 and 14 of the Initial Form 10-K and therefore, those parts are not included in this Amendment No. 1.

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Except as otherwise specifically noted, all information contained herein is as of December 31, 2004 and does not reflect any events or changes that have occurred subsequent to that date. We are not required to and have not updated any forward-looking statements previously included in the Initial Form 10-K filed with the SEC on March 10, 2005.

The impact of this non-cash restatement (in thousands) on 2004 net income is summarized below:

Period	Effect of Corrections Increase (Decrease) in Net Income			Restated Net Income
1st Quarter 2004	$	838		$	4,974
2nd Quarter 2004		(1,528	)		2,779
3rd Quarter 2004		1,226			8,058
4th Quarter 2004		(224	)		7,162
Cumulative through December 31, 2004	$	312		$	22,973

This Amendment No. 1 includes changes to our prior disclosures in Item 9A, “Controls and Procedures” and reflects management’s restated assessment of our disclosure controls and procedures as of December 31, 2004. This restatement of our assessment results from a material weakness in our internal control over financial reporting relating to our accounting for derivative financial instruments under SFAS 133. Specifically, we lacked sufficient technical expertise as to the application of SFAS 133, and our procedures relating to hedging transactions were not designed effectively to ensure that each of the requirements for fair value hedge accounting treatment set forth in SFAS 133 was evaluated properly with respect to the CD swaps entered into to hedge the interest rate risk inherent in certain of our brokered CDs. This deficiency resulted in accounting errors, the correction of which results in eliminating the application of fair value hedge accounting for these CD swaps and separately recording the CD broker placement fee as an adjustment to the par amount of the brokered CDs.

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TAYLOR CAPITAL GROUP, INC.

PART II

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

Our common stock trades on the Nasdaq National Market under the symbol “TAYC”. The high and low sales price of our common stock for the periods indicated is set forth below:

	High		Low
2004
Quarter Ended March 31	$	28.75	$	23.00
Quarter Ended June 30		25.00		19.97
Quarter Ended September 30		24.46		21.38
Quarter Ended December 31		35.20		23.46
2003
Quarter Ended March 31	$	20.85	$	17.78
Quarter Ended June 30		25.80		19.55
Quarter Ended September 30		25.12		20.60
Quarter Ended December 31		27.99		23.23

As of March 2, 2005, the closing price of our common stock was $31.41.

As of March 2, 2005, there were 58 stockholders of record of the common stock, based upon securities position listings furnished to us by our transfer agent. We believe the number of beneficial owners is greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name”.

The following table sets forth, for each quarter in 2004 and 2003, the dividends declared on our common stock:

	2004 Dividends Per Share of Common Stock		2003 Dividends Per Share of Common Stock
First quarter	$	0.06	$	0.06
Second quarter		0.06		0.06
Third quarter		0.06		0.06
Fourth quarter		0.06		0.06

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

It is our intention to continue to pay cash dividends on the common stock to the extent permitted by our loan agreement, applicable banking regulations and the terms of the trust preferred securities. As a holding company, we ultimately are dependent upon the Bank to provide funding for our operating expenses, debt service, and dividends. Various banking laws applicable to the Bank limit the payment of dividends, management fees and other distributions

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by the Bank to us, and may therefore limit our ability to pay dividends on our common stock. We will also be prohibited from paying dividends on our common stock if we fail to make distributions or required payments on the trust preferred securities. In addition, our loan agreement also limits our ability to pay dividends on our common stock. See the section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, captioned “Liquidity” for additional details of restrictions on our ability to pay dividends and the ability of the Bank to pay dividends to us.

We did not repurchase any shares of our common stock during the fourth quarter of 2004. We currently do not have any Board of Director authorized share repurchase programs.

In 2004, we did not make any unregistered sales of equity securities.

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Item 6: Selected Financial Data

The selected consolidated financial data presented below under the caption “Taylor Capital Group, Inc.” as of and for the five years ended December 31, 2004, is derived from our historical financial statements. The selected financial information presented below under the caption of “Cole Taylor Bank” is derived from unaudited financial statements of the Bank or from the audited consolidated financial statements of Taylor Capital Group, Inc. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this annual report. Results from past periods are not necessarily indicative of results that may be expected for any future period. All share and per share information for all periods presented has been adjusted for a three-for-two split of our common stock that was effected as a dividend to stockholders of record as of October 2, 2002.

	Year Ended December 31,
	(Restated) 2004			2003			2002			2001			2000
	(dollars in thousands, except per share data)
TAYLOR CAPITAL GROUP, INC. (consolidated):
Income Statement Data:
Net interest income	$	94,523		$	95,730		$	101,335		$	91,718		$	87,322
Provision for loan losses		10,083			9,233			9,900			9,700			7,454
Net interest income after provision for loan losses		84,440			86,497			91,435			82,018			79,868
Noninterest income:
Service charges		10,854			12,336			12,206			11,914			10,346
Trust and investment management fees		5,471			5,051			5,541			6,425			4,654
Gain on sale of investment securities, net		144			—			2,076			2,333			750
Net cash settlements on CD swaps		2,166			—			—			—			—
Change in fair value of CD swaps		27			—			—			—			—
Other noninterest income		2,857			2,654			2,156			3,601			3,523
Total noninterest income		21,519			20,041			21,979			24,273			19,273
Noninterest expense:
Salaries and employee benefits		38,951			41,066			43,780			43,207			39,383
Legal fees, net		1,808			943			4,098			2,504			12,053
Goodwill amortization		—			—			—			2,316			2,326
Lease abandonment and termination charges		984			3,534			—			—			—
Litigation settlement charge		—			—			61,900			—			—
Other noninterest expense		29,930			33,680			33,376			31,105			26,821
Total noninterest expense		71,673			79,223			143,154			79,132			80,583
Income (loss) before income taxes		34,286			27,315			(29,740	)		27,159			18,558
Income taxes		11,313			8,568			11,675			9,528			9,604
Net income (loss)		22,973			18,747			(41,415	)		17,631			8,954
Preferred dividend requirements		(1,875	)		(3,443	)		(3,442	)		(3,443	)		(3,443	)
Net income (loss) applicable to common stockholders	$	21,098		$	15,304		$	(44,857	)	$	14,188		$	5,511
Common Share Data: (1)
Basic earnings (loss) per share	$	2.21		$	1.62		$	(6.12	)	$	2.07		$	0.80
Diluted earnings (loss) per share		2.19			1.61			(6.12	)		2.05			0.79
Cash dividends per share		0.24			0.24			0.24			0.24			0.24
Book value per share		16.12			14.57			13.87			19.41			17.25
Dividend payout ratio		10.96	%		14.91	%		(3.92	)%		11.61	%		30.13	%
Weighted average shares – basic earnings per share		9,539,242			9,449,336			7,323,979			6,862,761			6,919,751
Weighted average shares – diluted earnings per share		9,644,515			9,528,785			7,323,979			6,908,070			6,960,494
Shares outstanding – end of year		9,653,549			9,486,724			9,410,660			6,836,028			6,902,289

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	Year Ended December 31,
	(Restated) 2004			2003			2002			2001			2000
	(dollars in thousands, except per share data)
TAYLOR CAPITAL GROUP, INC. (consolidated):
Balance Sheet Data (at end of year):
Total assets	$	2,889,048		$	2,603,656		$	2,535,461		$	2,390,670		$	2,263,323
Investment securities		533,619			488,302			501,606			494,208			510,187
Total loans		2,211,606			1,962,008			1,879,474			1,741,637			1,611,692
Allowance for loan losses		37,484			34,356			34,073			31,118			29,568
Goodwill		23,354			23,354			23,354			23,354			25,671
Total deposits		2,284,697			2,013,084			1,963,749			1,833,689			1,742,830
Short-term borrowings		229,547			219,108			215,360			244,993			249,819
Notes payable and FHLB advances		85,500			110,500			110,500			111,000			77,000
Junior subordinated debentures		87,638			45,000			45,000			—			—
Preferred stock		—			38,250			38,250			38,250			38,250
Common stockholders’ equity		155,573			138,235			130,487			132,666			119,061
Total stockholders’ equity		155,573			176,485			168,737			170,916			157,311
Earnings Performance Data:
Return on average assets		0.84	%		0.73	%		(1.70	)%		0.75	%		0.40	%
Return on average stockholders’ equity		14.00			10.86			(26.29	)		10.62			5.93
Net interest margin (non tax-equivalent) (2)		3.60			3.91			4.37			4.13			4.14
Noninterest income to revenues		13.54			12.85			13.08			12.72			9.84
Efficiency ratio (3)		61.84			68.43			118.08			69.62			76.13
Loans to deposits		96.80			97.46			95.71			94.98			92.48
Average interest earning assets to average interest bearing liabilities		125.99			124.71			124.48			122.48			122.58
Ratio of earnings to fixed charges: (4)
Including interest on deposits		1.65x			1.47x			0.32x			1.27x			1.14x
Excluding interest on deposits		2.85x			2.17x			(1.18	)x		1.97x			1.49x
Asset Quality Ratios:
Allowance for loan losses to total loans		1.69	%		1.75	%		1.81	%		1.79	%		1.83	%
Allowance for loan losses to nonperforming loans (5)		265.98			150.79			186.62			178.84			264.69
Net loan charge-offs to average total loans		0.34			0.47			0.39			0.49			0.27
Nonperforming assets to total loans plus repossessed property (6)		0.64			1.17			1.00			1.03			0.71
Capital Ratios:
Total stockholders’ equity to assets – end of year		5.38	%		6.78	%		6.66	%		7.15	%		6.95	%
Average stockholders’ equity to average assets		5.99			6.73			6.45			7.09			6.79
Leverage ratio		6.49			7.64			7.21			5.99			5.55
Tier 1 risk-based capital ratio		7.29			8.73			8.82			7.70			7.25
Total risk-based capital ratio		10.27			10.44			10.61			8.96			8.51
COLE TAYLOR BANK:
Net Income	$	28,314		$	24,042		$	25,387		$	22,508		$	21,797
Return on average assets		1.04	%		0.94	%		1.04	%		0.96	%		0.98	%
Stockholder’s equity to assets – end of year		8.82			9.16			8.72			8.41			8.35
Leverage ratio		8.29			8.31			7.52			7.37			7.06
Tier 1 risk-based capital ratio		9.30			9.50			9.22			9.46			9.22
Total risk-based capital ratio		10.55			10.75			10.47			10.72			10.47

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

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

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

(4) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes and cumulative effect of change in accounting principle plus interest and rent expense. Fixed charges consist of interest expense, rent expense and preferred stock dividend requirements.

(5) Nonperforming loans includes nonaccrual loans and loans contractually past due 90 days or more but still accruing interest.

(6) Nonperforming assets include nonperforming loans, other real estate, and other repossessed assets.

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

Introduction

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

The following discussion and analysis presents our consolidated financial condition at December 31, 2004 and 2003 and the results of operations for the years ended December 31, 2004, 2003 and 2002. This discussion should be read together with the “Selected Consolidated Financial Data”, our audited consolidated financial statements and the notes thereto and other financial data contained elsewhere in this annual report. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed in the section captioned “Risk Factors” in Amendment No. 1 to our Registration Statement on Form S-3 (Registration No. 333-126864), filed with the SEC on August 5, 2005. All share and per share information for all periods presented has been adjusted for a three-for-two split of our common stock that was effected as a dividend to stockholders of record as of October 2, 2002.

Restatements of Results of Operations and Financial Condition

We are restating our previously reported financial information for the year ended December 31, 2004 to correct errors in those consolidated financial statements relating to our derivative accounting under Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and to reflect a change in the amortization period of issuance costs related to our junior subordinated debentures.

Since December 2002, we have entered into interest rate swap agreements (CD swaps) to hedge the interest rate risk inherent in certain of our brokered certificates of deposit (brokered CDs). We believe using interest rate swaps to convert the interest expense on brokered CDs from fixed to variable is prudent from a risk management standpoint. The brokered CDs are typically structured with terms of 5 to 7 years with a call option on our part, but no surrender option for the CD holder, other than death. The extended term of the brokered CDs minimize liquidity risk while our option to call the CDs after 1 year provides us with funding flexibility. This variable rate funding matches well with our large floating rate loan portfolio. We consider these CD swaps to be valuable economic transactions that benefit our Company.

From the inception of the hedging program, we applied a method of fair value hedge accounting under SFAS 133 to account for the CD swaps that allowed us to assume no ineffectiveness in these transactions (the so-called “short-cut” method). We recently concluded that the CD swaps did not qualify for this method in prior periods because the related CD broker

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placement fee was determined, in retrospect, to have caused the swap not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut method). Furthermore, although historical effectiveness testing performed in November 2005 demonstrated that the CD swaps would have qualified for hedge accounting under the “long-haul” method, hedge accounting under SFAS 133 is not allowed retrospectively because the hedge documentation required for the long-haul method was not in place at the inception of the hedge.

Fair value hedge accounting allows a company to record the effective portion of the change in fair value of the hedged item (in this case, the brokered CDs) as an adjustment to income that offsets the fair value adjustment on the related interest rate swaps. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that were made to the brokered CDs. Therefore, while the interest rate swap is recorded on the consolidated balance sheet at its fair value, the related hedged item, the brokered CDs, are required to be carried at par, net of the unamortized balance of the CD broker placement fee. In addition, the CD broker placement fee, which was incorporated into the swap, is now separately recorded as an adjustment to the par amount of the brokered CDs and amortized through the maturity date of the related CDs. Because the majority of the swaps and the brokered CDs have mirror call options after one year, the call of a brokered CD prior to maturity will now result in the expensing of the unamortized CD broker placement fee on the call date.

The net cumulative pre-tax effect of eliminating the fair value adjustment to the brokered CDs at December 31, 2004 is $660,000 (representing a $2.0 million elimination of the fair value adjustment to the brokered CDs less a $1.3 million adjustment to record the unamortized CD broker placement fees). The cumulative after-tax impact was a $401,000 reduction to net income and retained earnings. Although these CD swaps cannot retrospectively qualify for hedge accounting under SFAS 133, there is no effect on cash flows for these changes and the effectiveness of the CD swaps as economic hedge transactions has not been affected by these changes in accounting treatment.

On November 18, 2005, we re-designated our interest rate swaps relating to our brokered CDs utilizing the “long-haul” method and completed new contemporaneous hedging documentation. Accordingly, we believe these CD swaps should qualify for fair value hedge accounting in future periods under SFAS 133.

In connection with the determination of the appropriate amortization period for the brokered CD placement fees, we also determined that the issuance costs relating to our junior subordinated debentures should have been amortized through the maturity date of the debentures, rather than their earlier call dates. The cumulative effect through December 31, 2004 of amortization of the debt issuance costs through the maturity date of the related debt is an increase to net income and retained earnings of $713,000 ($1.2 million pre-tax). Our net unamortized debt issuance cost at December 31, 2004 is $3.4 million.

The combined impact of the errors in derivative accounting and debt issuance cost increased net income for the year ended December 31, 2004 and retained earnings by $312,000. The impact of these errors on our financial statements for the years ended December 31, 2003 and 2002 was not material and, therefore, those financial statements have not been restated. The reduction to previously reported net income in any of the restated quarterly periods did not

8

cause any violation of our debt covenants and did not cause either Cole Taylor Bank’s or Taylor Capital Group’s regulatory capital ratios to fall below the “well-capitalized” levels as of the end of any of these periods.

Further information regarding the impact of these restatements to our results of operations, financial condition, and stockholders equity and comprehensive income can be found in Note 1 to the consolidated financial statements. The following discussion and tables include the adjustments made to correct for the incorrect application of fair value hedge accounting under SFAS 133 and the amortization period for the debt issuance costs.

Overview

We reported net income applicable to common stockholders for the year ended December 31, 2004 of $21.1 million, or $2.19 per diluted common share, compared with $15.3 million, or $1.61 per diluted common share, for the year ended December 31, 2003. The increased net income applicable to common stockholders was a result of reduced noninterest expense and reduced preferred stock dividends. Noninterest expense declined $7.6 million, or 9.5%, for the year ended December 31, 2004 as compared with 2003. We achieved the reduction in noninterest expense through reduced salary and advertising expense as well as a lower charge relating to our facilities initiatives. We also lowered our cost of capital by redeeming our Series A, 9% preferred stock with the proceeds from junior subordinated debentures in mid-2004. The lower interest rate and the tax deductibility of the interest on the debentures, as compared to the preferred stock dividends, resulted in after-tax savings of approximately $870,000 in 2004.

We reported net income applicable to common stockholders of $15.3 million, or $1.61 per diluted common share, during 2003, compared to a net loss applicable to common stockholders of $44.9 million, or $6.12 per common share, during 2002. Our net loss applicable to common stockholders during 2002 resulted from a charge of $61.9 million in connection with the settlement of litigation associated with our acquisition of the Bank in 1997. See the section of this discussion and analysis captioned “Litigation and Settlement” for further details of the litigation settlement charge. Without the net $61.9 million litigation settlement charge, we would have recorded net income applicable to common stockholders in 2002 of $17.0 million, or $2.32 per diluted common share. Net income applicable to common stockholders in 2003 was $1.7 million less than 2002 net income exclusive of the litigation settlement charge. The lower level of income was primarily a result of decreased net interest income and noninterest income. The decline in diluted earnings per share was also a result of an increase in the number of common shares outstanding. In the fourth quarter of 2002, we issued 2,587,500 additional shares of common stock in an initial public offering.

Management uses certain non-GAAP financial measures and ratios to evaluate the Company’s performance. Specifically, management reviews net income and the related earnings per share amounts excluding the $61.9 million litigation settlement charge during 2002. We believe that excluding the non-recurring litigation settlement charge from both net income and

9

earnings per share presents a more suitable comparison of our period-to-period results because of the extraordinary nature of the litigation that led to the settlement charge and the likelihood that such a significant event will not reoccur. The following table reconciles net income as reported under generally accepted accounting principles, or GAAP, on our consolidated statements of income to the non-GAAP pro forma net income.

	For the Year Ended December 31,
	(Restated) 2004			2003			2002
	(dollars in thousands, except per share data)
Net income (loss) - as stated	$	22,973		$	18,747		$	(41,415	)
Add back: Litigation settlement charge		—			—			61,900
Pro forma net income	$	22,973		$	18,747		$	20,485
Less preferred dividend requirements		(1,875	)		(3,443	)		(3,442	)
Net income applicable to common stockholders –Pro forma	$	21,098		$	15,304		$	17,043
Earnings (loss) per common share:
Basic - as stated	$	2.21		$	1.62		$	(6.12	)
Diluted - as stated		2.19			1.61			(6.12	)
Basic - pro forma	$	2.21		$	1.62		$	2.33
Diluted - pro forma		2.19			1.61			2.32

Total assets increased $285.4 million, or 11.0%, during 2004 to $2.89 billion at December 31, 2004, as compared to $2.60 billion at December 31, 2003. The increase in total assets during 2004 was due to loan growth and the higher amount of investment securities. Net loans increased $246.5 million, or 12.8%, to $2.17 billion at December 31, 2004 as compared to $1.93 billion at year-end 2003. Investment securities increased $45.3 million, or 9.3%, to $533.6 million at the end of 2004. Total deposits increased $271.6 million, or 13.5%, to $2.28 billion at December 31, 2004 as compared to total deposits at December 31, 2003 of $2.01 billion. Total stockholders’ equity was $155.6 million at December 31, 2004 compared to $176.5 million at year-end 2003, a decrease of $20.9 million. The lower stockholders’ equity reflects the redemption of the $38.25 million Series A preferred stock in mid-2004.

Capital Transactions

On June 17, 2004, TAYC Capital Trust II, our wholly owned (non-consolidated) subsidiary, issued $40.0 million of trust preferred securities in a private placement. The trust preferred securities were sold under an exemption from registration under the Securities Act of 1933, as amended, and have not been registered under the Securities Act or any state securities laws. TAYC Capital Trust II invested the proceeds, along with $1.2 million received from us for the purchase of its common equity securities, in $41.2 million of junior subordinated debentures issued by Taylor Capital Group, Inc. On July 16, 2004, we used the proceeds from the junior subordinated debentures to redeem all of our outstanding shares of Series A 9% noncumulative perpetual preferred stock. The redemption price was the stated liquidation value of the Series A preferred stock of $25.00 per share, totaling $38.25 million, plus $153,000 of accrued and unpaid dividends since the last dividend distribution date. The remaining proceeds from the issuance of the junior subordinated debentures after issuance costs and redemption of the Series A preferred stock were used for general corporate purposes.

10

On October 21, 2002, we completed a concurrent offering of common stock and trust preferred securities. We issued 2,250,000 shares of common stock at an initial public offering price of $16.50 per share. Concurrently, we raised $45.0 million of gross proceeds through the issuance of $45.0 million aggregate principal amount of 9.75% trust preferred securities by TAYC Capital Trust I, our wholly owned (non-consolidated) subsidiary. On November 6, 2002, we sold an additional 337,500 shares of common stock to our underwriters pursuant to an option granted in connection with the initial public offering to cover over allotments and received additional net proceeds of $5.2 million. The total net amount raised from the 2002 initial public offering of common stock and the trust preferred securities and the subsequent exercise by our underwriters of the over allotment option was $80.3 million. We used $61.9 million to settle the litigation described below. In addition, we used $17.0 million to restructure and reduce our outstanding indebtedness. See the section of this annual report captioned “Notes to Consolidated Financial Statements – Junior Subordinated Debentures” for additional details.

Litigation and Settlement

During 2002, we agreed to settle outstanding litigation concerning our 1997 acquisition of the Bank. We entered into certain settlement agreements with the plaintiffs and other parties in the cases to halt the substantial expense, inconvenience, and distraction of continued litigation and to eliminate any exposure and uncertainty that may have existed as a result of such litigation. These agreements provided that, subject to our completion of a public offering of trust preferred and common securities and the dismissal of the lawsuits, we would pay an amount equal to (1) $65 million, plus (2) a contingent amount based on the offering price of the common shares, minus (3) a minimum of $3.1 million as a partial reimbursement to us of offering expenses.

The settlement of this litigation was completed on October 21, 2002 following our initial public offering of common stock and trust preferred securities. From the net proceeds of these offerings, we paid $61.9 million in full satisfaction of our obligation under the settlement agreements. We recorded a $61.9 million charge to earnings in 2002 to reflect the cost of settling this litigation.

Application of Critical Accounting Policies

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

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Our accounting policies are contained in the section of this annual report captioned “Notes to Consolidated Financial Statements–Summary of Significant Accounting and Reporting Policies”. Certain accounting policies require us to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made by us are based upon historical experience or other factors that we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from these judgments and estimates which could have a material affect on our financial condition and results of operations.

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

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors to categories of loans outstanding in the portfolio, specific allowances for identified problem loans and portfolio segments, and the unallocated allowance. We maintain the allowance for loan losses at a level considered adequate to absorb probable losses inherent in our portfolio as of the balance sheet date. In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors including historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position, work-out plans and estimated collateral values under various liquidation scenarios to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors including general and economic business conditions, duration of the current business cycle, the impact of competition on our underwriting terms, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. The significant uncertainties surrounding our portfolio of borrowers’ abilities to successfully execute their business models through changing economic environments and competitive challenges as well as management and other changes greatly complicate the estimate of the risk of loss and amount of loss on any loan. Because of the degree of uncertainty and susceptibility of these factors to change, actual losses may vary from current estimates.

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

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Goodwill Impairment

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

Income Taxes

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

Derivative Financial Instruments

We use derivative financial instruments (derivatives), including interest rate exchange and floor agreements, to assist in our interest rate risk management. In accordance with SFAS 133, all derivatives are measured and reported at fair value on our consolidated balance sheet as either an asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the effective portion of the hedged risk, are recognized in current earnings during the period of the change in the fair values. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change. Similarly, the changes in the fair value of derivatives that do not qualify for hedge accounting under SFAS 133 are also reported currently in earnings.

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

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

Results of Operations as of and for the years ended December 31, 2004, 2003, and 2002

Net Interest Income

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

Year Ended December 31, 2004 as Compared to Year Ended December 31, 2003. Net interest income was $94.5 million during 2004, as compared to $95.7 million during 2003, a decrease of $1.2 million, or 1.3%. With an adjustment for tax-exempt income, our consolidated net interest income was $95.8 million, a decrease from the $97.2 million of net interest income in 2003. Net interest income decreased 1.4%, as the benefit from the 7.3% increase in interest-earning assets was more than offset by a 32 basis point decline in our net interest margin. The tax-equivalent net interest margin was 3.65% for all of 2004 compared to 3.97% for 2003. Our net interest margin declined as the yield on our interest-earning assets declined while our cost of interest-bearing liabilities remained unchanged. The third and fourth quarters of 2004 included the incremental interest expense of approximately $450,000 and $500,0000, respectively, arising from the $41.2 million of junior subordinated debentures issued in June 2004, which increased interest expense by 4 basis points each quarter.

Average interest-earning assets during 2004 increased $177.5 million, or 7.3%, to $2.62 billion as compared to $2.45 billion during 2003. An increase in average loans, primarily in our commercial portfolio, produced the increase in average earning assets. Average commercial loans increased $256.9 million, or 17.5%, during 2004 to $1.72 billion as compared to $1.47 billion during 2003. This increase was partly offset by lower consumer-related loans. A $56.4 million increase in average investment securities also contributed to the increase in average earning assets. The asset growth was funded primarily with time deposits. Total average time deposits were $1.04 billion during 2004, a $116.5 million increase from average time deposits of $927.5 million during 2003. Higher average brokered and customer certificates of deposit produced the majority of the increase. Additional funding was also provided by a $52.8 million increase in average non-interest bearing demand deposits.

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The interest rate risk position of our overall balance sheet is asset sensitive, which means our assets are expected to re-price before our liabilities over the one-year horizon. This balance sheet structure provides opportunity for an increase in net interest margin during periods of rising interest rates, such as we experienced during the last half of 2004, as the Bank’s prime lending rate increased 125 basis points over that period. If interest rates remain unchanged in future periods, we would expect to be exposed to the negative impact of a large percentage of our interest-bearing liabilities repricing at current market rates, while a large portion of our assets has already repriced. If interest rates continue to gradually rise in future periods, we would expect our net interest margin to increase. See the section of this discussion and analysis captioned “Quantitative and Qualitative Disclosure About Market Risks” for further discussion on the impact of interest rates.

Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002. Net interest income was $95.7 million during the year ended December 31, 2003, as compared to $101.3 million during 2002, a decrease of $5.6 million, or 5.5%. With an adjustment for tax-exempt income, our consolidated net interest income was $97.2 million, a decrease of $5.9 million, or 5.7%, as compared to $103.1 million during 2002. The net interest income declined because of compression in our net interest margin, despite an increase in average interest-earning assets. The tax equivalent net interest margin was 3.97% during 2003 compared to 4.44% during 2002. The low interest rate environment negatively impacted our net interest margin during 2003. Our interest-earning asset yield declined 76 basis points to 5.61% during 2003 from 6.37% during 2002. However, the cost of interest-bearing liabilities declined only 35 basis points from 2.40% during 2002 to 2.05% during 2003. The $45.0 million of 9.75% junior subordinated debentures, which were issued in October 2002, caused approximately 17 basis points of the decline in the net interest margin between the two annual periods. The tax equivalent net interest spread was 3.56% during 2003 as compared to 3.97% during 2002.

Average interest-earning assets during 2003 rose to $2.45 billion, an increase of $126.7 million, or 5.5%, as compared to average interest-earning assets of $2.32 billion during 2002. Growth in the loan portfolio accounted for the majority of the increase in average interest earning assets. An increase in cash equivalent balances of $21.5 million accounted for the remainder of the increase in average interest-earning assets. Average total loans were $1.90 billion during 2003 compared to $1.80 billion during 2002. A $165.9 million, or 12.8%, increase in average commercial and commercial real estate loans produced most of the loan growth. The increase in commercial loans was partly offset by lower residential mortgage, home equity and consumer loans, products that we chose to de-emphasize. Between the two annual periods, the yield on loans declined 68 basis points to 5.91% during 2003 as compared to 6.59% during 2002. The asset growth was funded with interest-bearing deposit balances, with time deposit balances comprising the majority of the increase. Average time deposit balances increased to $927.5 million during 2003 compared to $794.7 million during 2002. Higher average brokered and out-of-local-market certificates of deposit produced the majority of the increase.

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

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

	For the Year Ended December 31,
	(Restated) 2004			2003			2002
	(dollars in thousands)
Net interest income as stated	$	94,523		$	95,730		$	101,335
Tax equivalent adjustment-investments		1,085			1,263			1,525
Tax equivalent adjustment-loans		172			181			190
Tax equivalent net interest income	$	95,780		$	97,174		$	103,050
Yield on earning assets without tax adjustment		5.24	%		5.56	%		6.30	%
Yield on earning assets - tax equivalent		5.28	%		5.61	%		6.37	%
Net interest margin without tax adjustment		3.60	%		3.91	%		4.37	%
Net interest margin - tax equivalent		3.65	%		3.97	%		4.44	%
Net interest spread - without tax adjustment		3.18	%		3.51	%		3.90	%
Net interest spread - tax equivalent		3.23	%		3.56	%		3.97	%

16

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

	Year Ended December 31,
	(Restated) 2004							2003							2002
	AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)		AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)		AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)
	(dollars in thousands)
INTEREST-EARNING ASSETS:
Investment securities (1):
Taxable	$	517,110		$	20,486	3.96	%	$	454,956		$	21,158	4.65	%	$	439,889		$	24,448	5.56	%
Tax-exempt (tax equivalent) (2)		43,538			3,083	7.08			49,316			3,572	7.24			57,278			4,284	7.48
Total investment securities		560,648			23,569	4.20			504,272			24,730	4.90			497,167			28,732	5.78
Cash Equivalents		17,264			271	1.55			43,248			454	1.04			21,743			364	1.65
Loans (3):
Commercial and commercial real estate		1,723,210			96,724	5.52			1,466,351			85,883	5.78			1,300,409			84,918	6.44
Residential real estate mortgages		70,963			3,806	5.36			105,484			6,216	5.89			137,915			9,631	6.98
Home equity and consumer		251,550			12,402	4.93			326,769			16,418	5.02			362,220			20,791	5.74
Fees on loans					1,838							3,627							3,294
Net loans (tax equivalent) (2)		2,045,723			114,770	5.61			1,898,604			112,144	5.91			1,800,544			118,634	6.59
Total interest earning assets		2,623,635			138,610	5.28			2,446,124			137,328	5.61			2,319,454			147,730	6.37
NON-EARNING ASSETS:
Allowance for loan losses		(36,756	)						(35,160	)						(33,347	)
Cash and due from banks		59,878							58,616							60,263
Accrued interest and other assets		90,266							97,104							95,896
TOTAL ASSETS	$	2,737,023						$	2,566,684						$	2,442,266
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits	$	564,920			4,370	0.77		$	564,645			4,672	0.83		$	618,819			8,524	1.38
Savings deposits		89,678			279	0.31			90,975			346	0.38			89,360			750	0.84
Time deposits		1,044,023			26,593	2.55			927,481			23,378	2.52			794,728			26,011	3.27
Total interest-bearing deposits		1,698,621			31,242	1.84			1,583,101			28,396	1.79			1,502,907			35,285	2.35
Short-term borrowings		219,438			2,228	1.02			219,913			2,124	0.97			227,557			3,339	1.47
Notes payable and FHLB advances		95,582			4,336	4.46			113,374			4,617	4.02			124,007			5,098	4.05
Trust preferred securities		68,709			5,024	7.31			45,000			5,017	11.15			8,877			958	10.79
Total interest-bearing liabilities		2,082,350			42,830	2.05			1,961,388			40,154	2.05			1,863,348			44,680	2.40
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits		447,345							394,511							372,387
Accrued interest and other liabilities		43,286							38,170							48,986
Total noninterest-bearing liabilities		490,631							432,681							421,373
STOCKHOLDERS’ EQUITY		164,042							172,615							157,545
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,737,023						$	2,566,684						$	2,442,266
Net interest income (tax equivalent)				$	95,780						$	97,174						$	103,050
Net interest spread (4)						3.23	%						3.56	%						3.97	%
Net interest margin (5)						3.65	%						3.97	%						4.44	%

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

(2) Calculations are computed on a taxable-equivalent basis using a tax rate of 35%.

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

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

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

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

	Year Ended December 31,
	2004 (Restated) over 2003 INCREASE/(DECREASE)									2003 over 2002 INCREASE/(DECREASE)
	VOLUME			RATE			NET			VOLUME			RATE			NET
	(in thousands)
INTEREST EARNED ON:
Investment securities:
Taxable	$	2,687		$	(3,359	)	$	(672	)	$	816		$	(4,106	)	$	(3,290	)
Tax-exempt		(411	)		(78	)		(489	)		(578	)		(134	)		(712	)
Cash equivalents		(344	)		161			(183	)		259			(169	)		90
Loans		8,469			(5,843	)		2,626			6,217			(12,707	)		(6,490	)
Total interest-earning assets								1,282									(10,402	)
INTEREST PAID ON:
Interest-bearing demand deposits		3			(305	)		(302	)		(694	)		(3,158	)		(3,852	)
Savings deposits		(5	)		(62	)		(67	)		13			(417	)		(404	)
Time deposits		2,937			278			3,215			3,914			(6,547	)		(2,633	)
Short-term borrowings		(5	)		109			104			(109	)		(1,106	)		(1,215	)
Notes payable and FHLB advances		(753	)		472			(281	)		(443	)		(38	)		(481	)
Junior subordinated debentures		2,094			(2,087	)		7			4,026			33			4,059
Total interest-bearing liabilities								2,676									(4,526	)
Net interest income	$	6,949		$	(8,343	)	$	(1,394	)	$	5,546		$	(11,422	)	$	(5,876	)

Provision for Loan Losses

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

Our provision for loan losses was $10.1 million during 2004, an increase of $850,000, or 9.2%, over the provision for loan losses of $9.2 million in 2003. The increase in the provision was mainly due to the growth in commercial loans. Net charge-offs totaled $7.0 million during 2004 compared to $9.0 million in 2003.

Our provision of $9.2 million during 2003 was $667,000, or 6.7%, less than the provision of $9.9 million during 2002. The lower provision in 2003 as compared to 2002 was due to a more favorable outlook, based on evaluations of key qualitative factors, including the economic environment and the continuing improvement in our credit administration. Net charge-offs totaled $6.9 million in 2002.

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We expect our provisioning to fluctuate as the circumstances of our individual commercial borrowers and the economic environment changes. Accordingly, the provision for loan losses in any accounting period is not an indicator of provisioning in subsequent reporting periods.

Noninterest Income

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

	Year Ended December 31,
	(Restated) 2004			2003			2002
	(in thousands)
Service charges	$	10,854		$	12,336		$	12,206
Trust and investment management fees		5,471			5,051			5,541
Gain on sale of trust assets		—			—			510
Mortgage-banking activities		(83	)		(408	)		332
Gain on sale of investment securities, net		144			—			2,076
Loan syndication fees (1)		1,350			1,000			—
Letter of credit fees		565			807			261
ATM fees		459			603			666
Net cash settlements of CD swaps		2,166			—			—
Change in fair value of CD swaps		27			—			—
Other noninterest income		566			652			387
Total noninterest income	$	21,519		$	20,041		$	21,979

(1) Loan syndication fees in 2003 were formerly reported as part of net interest margin.

Our noninterest income was $21.5 million during 2004, an increase of $1.5 million, or 7.4%, as compared to the $20.0 million of noninterest income in 2003. An increase in trust, investment management and loan syndication fees and net cash settlements on CD swaps, partly offset by lower service charges, produced the increase. Noninterest income of $20.0 million during 2003 was $1.9 million, or 8.8%, less than the noninterest income of $22.0 million during 2002. Most of the decline was due to gains realized on the sale of investment securities of $2.1 million during 2002. In addition, lower trust and investment management income and losses from mortgage banking activities in 2003 also contributed to the decline. The receipt of $1.0 million in loan syndication fees and higher letter of credit fees in 2003 partly offset these decreases.

Service charges arise principally on deposit accounts. Service charges declined to $10.9 million during 2004, compared to $12.3 million and $12.2 million during 2003 and 2002, respectively. Reported service charge income is impacted by a number of factors, including the volume of deposit accounts and service transactions, the price established for each deposit service, the earnings credit rate and the collected balances customers maintain in their commercial checking accounts. The decrease in service charge revenue during 2004 was mainly caused by lower commercial service charge income as a result of reduced activity fees.

Trust and investment management fees include corporate trust, land trust and tax deferred exchange trust services, as well as wealth management services, such as financial planning,

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insurance, and asset management services. Total trust and investment management fees increased $420,000, or 8.3%, to $5.5 million in 2004 compared to $5.1 million in 2003. Corporate and exchange trust fees increased $503,000 to $2.8 million producing the increase in revenues. Total trust and investment management fees in 2003 declined $490,000, or 8.8%, because we exited fiduciary personal and employee benefit trust services in late 2002. During the second half of 2002, we sold a portion of these lines of trust business and recorded a gain of $510,000, which is reported separately in the table above. We have signed a letter of intent to potentially sell our land trust business in 2005. In 2004, land trust revenues totaled $1.1 million.

We incurred losses related to our mortgage-banking activities of $83,000 and $408,000 during 2004 and 2003, respectively. The losses resulted from indemnification agreements on loans sold in prior periods. No such losses were incurred in 2002. As of December 31, 2004, we had approximately $1.4 million of loans that we had sold in prior years for which we had agreed to indemnify a third party for losses that may result from underwriting or documentation deficiencies. The losses recorded include actual indemnification losses incurred to date as well as our estimate of future losses from sold loans still outstanding and subject to such indemnification agreements. Revenue from mortgage-banking activities was $332,000 for the year ended December 31, 2002. We discontinued most mortgage banking activities during 2002.

During 2004, we recorded a net gain on the sale of investment securities of $144,000. The net gain primarily resulted from the sale of $99.7 million of U.S. government agency securities with short remaining maturities. The proceeds from the sale were reinvested in longer duration, higher yielding securities. In addition, we sold low par value mortgage-backed securities to enhance the operational efficiency of our investment portfolio. We recorded no gains or losses on the sale of investment securities in 2003. Net gains on the sale of available-for-sale investment securities totaled $2.1 million during 2002, resulting from the sale of $93 million of U.S. government agency securities. We reinvested the proceeds from these sales in U.S. government agency securities with longer maturities to extend the duration of the investment portfolio.

During 2004, we received $1.35 million of loan syndication fees compared to $1.0 million in 2003. In our 2003 Annual Report the loan syndication fees were included in loan fees and therefore, were reported as part of net interest income. No such fees were received in 2002. These fees were earned through the syndication of certain commercial real estate development loans for our customers. While professional real estate developers have for years been a significant part of our commercial banking business, we have not been active in loan syndication. We expect the opportunity to provide this service to recur, but not necessarily on a routine, predictable basis.

ATM fees have declined since 2002 as the number of automatic teller machines we have deployed in our market has decreased.

We use certain interest rate exchange agreements, or swaps, to convert fixed rate brokered certificates of deposits to a variable rate. For the year ended December 31, 2004, the net cash settlements from these CD swaps are reported in noninterest income.

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For the year ended December 31, 2004, we had a gain in fair value from these CD swaps of $27,000. For additional information concerning the accounting treatment for these CD swaps, please see “Application of Critical Accounting Policies—Derivative Financial Instruments” and Notes 1 and 19 to our consolidated financial statements in this Form 10-K/A.

Other noninterest income principally includes safe deposit rental fees and gains (losses) from equity, partnership or deferred compensation plan investments and totaled $566,000, $652,000 and $387,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Noninterest Expense

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

	For the Year Ended December 31,
	2004		2003			2002
	(In thousands)
Salaries and employee benefits:
Salaries, employment taxes, and medical insurance	$	31,813	$	34,723		$	35,985
Incentives, commissions, and retirement benefits		7,138		6,343			7,795
Total salaries and employee benefits		38,951		41,066			43,780
Occupancy of premises		7,465		7,203			6,500
Furniture and equipment		3,892		3,457			3,457
Lease abandonment and termination charge		984		3,534			—
Building sale write down		—		—			386
Corporate insurance		2,334		2,989			1,634
Computer processing		1,874		2,038			2,400
Holding company legal fees, net		624		(1,019	)		1,600
Bank legal fees, net		1,184		1,962			2,498
Advertising and public relations		1,489		3,050			2,187
Consulting		527		1,184			1,264
Other real estate and repossessed asset expense		472		155			393
Other intangible assets amortization		13		370			366
Litigation settlement charge		—		—			61,900
Other noninterest expense		11,864		13,234			14,789
Total noninterest expense	$	71,673	$	79,223		$	143,154

Our noninterest expense in 2004 was $71.7 million compared to $79.2 million during 2003, a decrease of $7.6 million, or 9.5%. The decrease in noninterest expense was primarily a result of our efforts to reduce our operating expenses. Salaries and benefits and advertising expense declined in 2004 compared to 2003. In addition, in 2004 we recorded a $984,000 charge to terminate an operating lease for our former administrative offices in Wheeling, Illinois. In 2003, we recorded a $3.5 million charge when we abandoned the Wheeling facility as part of our corporate center consolidation. Noninterest expense in 2003 was $79.2 million compared to $143.2 million during 2002. Excluding the litigation settlement charge of $61.9 million in 2002, noninterest expense for 2003 would have decreased $2.0 million, or 2.5%, as compared to 2002. Lower net legal fees and salaries and benefits expense, partially offset by the $3.5 million charge for the abandonment of a leased facility, resulted in the lower noninterest expense in 2003.

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Salaries and employee benefits represent the largest category of our noninterest expense. Total salaries and benefits during 2004 were $39.0 million compared to $41.1 million during 2003, and $43.8 million in 2002, reflecting decreases of $2.1 million and $2.7 million, respectively. As part of our initiative to reduce our operating expenses, we have reduced our workforce and eliminated positions throughout the organization. The number of full-time equivalent employees decreased almost 20% to 431 at the end of 2004 compared to 483 at the end of 2003 and 531 at the end of 2002. Total costs for salaries, employment taxes and medical expenses in 2004 was $31.8 million compared to $34.7 million in 2003 and $36.0 million in 2002. Salary expense in each year included severance expense of $1.1 million in 2004, $533,000 in 2003 and $1.8 million in 2002. Total incentives, commissions, and retirement benefits were $7.1 million for 2004 compared to $6.3 million for 2003, and $7.8 million for 2002.

Salaries and employee benefits expense in 2005 and in the future will be impacted by the implementation of Statement of Financial Accounting Standard No. 123, “Share-Based Payment” (“SFAS 123R”), which is revised and reissued guidance on the accounting for stock-based compensation. SFAS 123R eliminates the intrinsic value method that we currently use to account for the granting of employee stock options. Beginning in the third quarter of 2005, we will be required to record compensation expense in the future for all existing stock options that have not vested as of June 30, 2005 and for all future grants of employee stock options. While, we have not yet completed our evaluation of the impact of adoption on the consolidated financial statements and the transitional provisions of SFAS 123R, we expect to record increased salary and employee benefit expense as a result of implementation. See the section of this discussion and analysis captioned “New Accounting Pronouncements” for additional details.

Total noninterest expense, including occupancy of premises and furniture and equipment, has been impacted and will continue to be impacted by our initiative to rationalize our occupancy space. We have taken steps to both consolidate our administrative and operating departments and to modify our banking center profile. During late 2003, we transitioned our administrative and operations departments to our new corporate center, 108,000 square feet of leased office space in Rosemont, Illinois. We moved departments to the corporate center that were previously located in our Wheeling, Ashland, and Burbank facilities. We pursued alternatives regarding these vacated facilities, all of which previously held administrative offices as well as banking centers. In June 2004, we sold our Burbank facility and agreed to lease back approximately one-half of the space for our existing banking center and the lending offices that remained at that location. Upon sale, we realized a gain of approximately $245,000 that was deferred and is being amortized over the 10-year life of the new operating lease. In December 2004, we also completed the sale of our Ashland property. We agreed to sell this property in 2002 and recorded a $386,000 charge at that time to reduce the book value of the property to the expected net sales price. We retained a smaller parcel of land to build a smaller banking facility that we expect to be operational in late 2005. In the fourth quarter of 2004, we reached an agreement to terminate the existing operating lease at the abandoned Wheeling facility. We closed this transaction on February 18, 2005 and upon termination of our obligation under the existing lease, we signed a new 10-year operating lease for a smaller portion of that facility for a banking center.

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We have also modified our banking center profile by opening two new banking centers and exiting two others. During the second quarter of 2004, we opened a 2,500 square foot leased banking center in Itasca, Illinois, a northwest suburb of Chicago. We also signed an operating lease for a 2,800 square foot facility in Orland Park, Illinois, a southern suburb of Chicago. We expect the Orland Park facility to open during the first half of 2005. In October of 2003, we closed our Jackson banking center just before its operating lease expired. Finally, on January 27, 2005, we completed the sale of our Broadview banking center. See the section of this discussion and analysis captioned “Financial Condition—Non-earning Assets” for additional details.

Our occupancy of premises expense was $7.5 million during 2004 as compared to $7.2 million during 2003, an increase of $262,000. Most of the increase was due to higher rent expense resulting for our new Rosemont corporate center and rent payments on the new operating lease at our Burbank facility that began in the third quarter of 2004. These increases were partly offset by a decline in depreciation of building-related improvements related to the abandonment of our Wheeling and Burbank facilities. Our occupancy of premises expense increased $703,000, or 10.8%, to $7.2 million during 2003 from $6.5 million during 2002. Most of the increase was associated with the additional space leased for our new Rosemont corporate center.

Furniture and equipment expense was $3.9 million during 2004 compared to $3.5 million during both 2003 and 2002. The increase in expense during 2004 resulted from additional depreciation from the new furniture and equipment acquired in the fourth quarter of 2003 in connection with the corporate center consolidation.

In connection with the corporate center consolidation, we abandoned our administrative offices on the second and third floors of our Wheeling facility, a 58,000 square foot facility. Upon ceasing to use this space in 2003, we recorded a $3.5 million lease abandonment charge. The charge was comprised of a $976,000 write-off of leasehold improvements, furniture and other equipment that were abandoned and a $2.6 million charge for the liability related to the operating lease that represented the estimated liability for the lease payments that we would incur for the remaining term of the lease for which we would receive no future economic benefit other than through subleasing. The abandonment liability was reduced by $357,000 in 2004 as we made rent payments. During 2004, we continued to pursue alternatives to terminate this lease obligation, which was scheduled to end in March 2010. At the end of 2004, we reached an agreement to terminate the lease for a cash payment of $3.3 million and the transfer of a small parcel of land we owned next to the site. In connection with this agreement, we recorded an additional charge of $984,000 in the fourth quarter of 2004 to increase our lease termination liability to $3.3 million, write-off the small parcel of land, and accrue the related transaction costs. On February 18, 2005, we closed this transaction and terminated the lease. No additional expense was recorded in the first quarter of 2005 related to this lease termination transaction. Upon termination of our obligation under the existing lease, we signed a new 10-year operating lease for 8,274 square feet on the first floor of the facility for a smaller banking center. We expect to save approximately $400,000 per year by operating the smaller space at this facility.

Corporate insurance totaled $2.3 million during 2004, compared to $3.0 million and $1.6 million during the years ended December 31, 2003 and 2002, respectively. An adjustment to our

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directors and officers insurance coverage, among other factors, caused the decrease in expense during 2004. The increase in expense during 2003, as compared to 2002, was caused by higher costs for our directors and officers’ insurance policy associated with the first full year of a being a publicly-traded company.

Our computer processing expense is comprised of payments to third party processors, primarily for our “mission critical” data processing applications including loans, deposits, and general ledger and ATM operations. Our computer processing expense was $1.9 million, $2.0 million, and $2.4 million during years ending December 31, 2004, 2003, and 2002, respectively. A slight decline in expense for our primary data processing vendor caused the declines.

Currently, holding company legal fees consist primarily of costs for general corporate matters, including securities law compliance and other costs associated with being a publicly-traded company. During 2002, holding company legal fees included costs related to the defense and settlement of litigation concerning our 1997 acquisition of the Bank. Portions of our defense costs related to the litigation, which were recorded as expenses in previous periods, had been submitted to insurance carriers for reimbursement. During 2003, we received a $2.1 million reimbursement of such legal costs. We received no such reimbursements in 2004 or 2002 and we do not expect to receive any further reimbursements related to that litigation. Because of the reimbursement received in 2003, we reported higher holding company legal expenses during 2004 and 2002 as compared to 2003.

Bank legal fees relate to collection activities as well as general corporate and compliance matters. Legal fees were $1.2 million, $2.0 million, and $2.5 million during 2004, 2003, and 2002, respectively. The decline in expense during 2004, as compared to 2003 resulted from lower legal fees incurred in our special asset loan work out area. In addition to the decrease in gross expense, we were able to obtain more in reimbursements from these borrowers than in prior years. The higher legal fees in 2002 as compared to 2003 were primarily caused by increased collection activity and professional fees related to our decision to exit some non-core lines of business and to develop new products and services for our core business banking customers.

We substantially reduced our advertising activities during 2004, resulting in a $1.6 million, or 51.2%, decrease to $1.5 million in 2004 from $3.1 million in 2003. Advertising and public relations expense was $2.2 million during 2002. Our advertising expense increased in 2003 because of a media campaign to increase the Bank’s visibility in the business community. This campaign included television commercials, which began airing in 2003, print advertising, and the introduction of a new corporate identity with a more contemporary logo. The costs of producing the television commercials were capitalized in 2002 and 2003 and were being amortized, beginning in 2003, over three years, which had been the expected time horizon over which the commercials would be aired. At December 31, 2003, we had capitalized advertising costs totaling $503,000 recorded in other assets on the Consolidated Balance Sheet. As part of our expense management initiative, we reduced planned advertising activities and discontinued the use of the television advertising campaign. Upon making the decision to discontinue the television advertising, we wrote off the remaining balance of the capitalized advertising costs during the second quarter of 2004.

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Consulting expense was $527,000, $1.2 million, and $1.3 million during the years ended December 31, 2004, 2003, and 2002, respectively. The higher expense in 2003 and 2002 was due to projects related to information technology, strategic and facilities planning, and marketing consultation.

Other real estate and repossessed asset expense was $472,000 for the year ended December 31, 2004, compared to expense of $155,000 and $393,000 for 2003 and 2002, respectively. The increase in expense during 2004 as compared to 2003 was associated with higher losses on the disposal of owned real estate properties. This net expense is influenced to a large degree by the number and complexity of properties being maintained pending their sale.

At December 31, 2004, we had $54,000 of net intangible assets related to the purchase of land trust business in 1998. Intangible assets are amortized over their estimated useful life, which is periodically reevaluated. The unamortized balance of $54,000 will be charged against the proceeds from the anticipated sale of our land trust business in 2005. Other intangible assets amortization expense was $13,000, $370,000, and $366,000 during 2004, 2003, and 2002, respectively. The higher amortization expense in 2003 and 2002 related to other trust business purchased, the value of which was deemed expired at the end of 2003.

Noninterest expense in 2002 reflects a $61.9 million charge related to our settlement of the split-off litigation. This settlement was funded with a portion of the net proceeds from the concurrent offerings of common stock and trust preferred securities completed in October 2002. See the section of this discussion and analysis captioned “Litigation and Settlement” for additional details. The amount of the settlement was based, in part, on the anticipated initial public offering price of our common stock. After completion of the initial public offering in October 2002, we paid $61.9 million in full satisfaction of our settlement agreements.

Other noninterest expense principally includes certain professional fees, FDIC insurance, outside services, operating losses and other operating expenses such as telephone, postage, office supplies, and printing. Other noninterest expense was $11.9 million during 2004 compared to $13.2 million and $14.8 million during 2003 and 2002, respectively. Other noninterest expense in 2003 and 2002 included charges of $500,000 and $1.0 million, respectively, related to our portfolio of indirect manufactured homes. Because of negative trends in the manufactured housing industry, we recorded the $1.0 million charge in 2002 to establish a reserve related to interest receivable carried in connection with this portfolio. We increased this reserve by $500,000 in 2003, and the reserve represents our estimate of the portion of this prepaid interest receivable that may not be collectable. No such charges were recorded in 2004. In addition, during 2002, we recorded an $856,000 charge related to consideration paid for the contractual termination of a revenue sharing agreement associated with the trust business acquired in October 2000. As part of that acquisition, we had agreed to share a portion of the trust revenues earned on the accounts purchased over the following five years. In connection with our exit of certain fiduciary trust activities we have sold some of the trust accounts that were subject to this revenue sharing agreement.

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Income Taxes

Our income tax expense was $11.3 million during 2004, resulting in an effective tax rate of 33.0%, compared to our income tax expense of $8.6 million during 2003, or an effective income tax rate of 31.4%. The higher level of pre-tax income caused the increase in income tax expense during 2004. The effective tax rates in 2004 and 2003 were impacted by the recognition of $1.1 million and $1.0 million income tax benefits, respectively, relating to expenses deducted on prior years’ tax returns for which the statute of limitations has expired. Without the recognition of these benefits, the effective income tax rates would have been 36.1% and 35.0% for 2004 and 2003, respectively.

Despite a net loss in 2002, we recorded income tax expense of $11.7 million primarily because we did not recognize any income tax benefit for financial reporting purposes with respect to the litigation settlement charge of $61.9 million. In October 2002, the Company paid its obligation to a settlement fund to satisfy the claims of various plaintiff groups under certain lawsuits. The Company has not recognized any income tax benefit for financial reporting purposes with respect to the litigation settlement payment of $61.9 million. However, the Company did deduct a portion of the settlement ($28.7 million) on its 2002 income tax return, because management believes that a portion of the settlement that relates to specific settled claims is more likely than not deductible as ordinary and necessary business expense. This degree of certainty is not sufficient to recognize an income tax benefit for financial reporting purposes. The Company will recognize all or a portion of the income tax benefit for financial reporting purposes if and when the Company determines that the position it took on its 2002 income tax return becomes probable of being sustained by the taxing authorities. Given the complexity of the litigation, the settlement and related tax law, management continues to believe that only a specific resolution of the matter with the taxing authorities or the expiration of the statute of limitations would provide sufficient evidence for management to conclude that the deductibility is probable. While the statute of limitations for the 2002 tax return expires in September 2006, the Internal Revenue Service can request an extension of the statute of limitations at any time prior to that date. Accrued interest, taxes and other liabilities on our consolidated balance sheet at December 31, 2004 include $12.2 million representing the tax benefit of the deduction of $11.4 million and $787,000 of related accrued interest through such date, if the deduction were disallowed by the taxing authorities.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of our financial position and operating results in terms of historical amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services.

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Financial Condition

Our total assets increased $285.4 million, or 11.0%, during 2004 to $2.89 billion at December 31, 2004 compared to $2.60 billion at year-end 2003. An increase in loans and investment securities primarily produced the increase. Total deposits increased $271.6 million, or 13.5%, to reached $2.28 billion at December 31, 2004 as compared to total deposits of $2.01 billion at December 31, 2003. Total stockholders’ equity decreased $20.9 million during 2004 to $155.6 million at December 31, 2004 compared to $176.5 million at December 31, 2003. The redemption of the $38.25 million of Series A preferred stock during mid-2004 produced the decrease in total stockholders’ equity.

Average interest-earning assets during 2004 totaled $2.62 billion, an increase of $177.5 million, or 7.3%, as compared to average interest-earning assets of $2.45 billion during 2003. An $147.1 million increase in total average loans and a $56.4 million increase in average investment securities produced the increase in average interest-earning assets. Average interest-bearing deposits during 2004 increased $115.5 million to $1.70 billion as compared to $1.58 billion during 2003, while average noninterest-bearing deposits increased $52.8 million to $447.3 million over the same time period.

Interest-bearing Cash Equivalents

Interest-bearing cash equivalents consist of federal funds sold and deposits with the Federal Home Loan Bank. These balances are overnight or over weekend investments and are maintained primarily for liquidity management purposes.

Investment Securities

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

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

	AVAILABLE-FOR-SALE				HELD-TO-MATURITY				TOTAL
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
	(in thousands)
December 31, 2004:
U.S. government agency securities	$	194,370	$	193,693	$	—	$	—	$	194,370	$	193,693
Collateralized mortgage obligations		117,020		115,693		—		—		117,020		115,693
Mortgage-backed securities		181,515		180,351		—		—		181,515		180,351
State and municipal obligations		41,668		43,607		—		—		41,668		43,607
Other debt securities		—		—		275		275		275		275
Total	$	534,573	$	533,344	$	275	$	275	$	534,848	$	533,619
December 31, 2003:
U.S. government agency securities	$	176,888	$	180,243	$	—	$	—	$	176,888	$	180,243
Collateralized mortgage obligations		116,053		116,300		—		—		116,053		116,300
Mortgage-backed securities		143,259		143,072		—		—		143,259		143,072
State and municipal obligations		45,918		48,162		—		—		45,918		48,162
Other debt securities		—		—		525		564		525		564
Total	$	482,118	$	487,777	$	525	$	564	$	482,643	$	488,341
December 31, 2002:
U.S. government agency securities	$	152,143	$	157,726	$	—	$	—	$	152,143	$	157,726
Collateralized mortgage obligations		227,207		234,382		—		—		227,207		234,382
Mortgage-backed securities		51,944		55,200		—		—		51,944		55,200
State and municipal obligations		51,539		53,473		—		—		51,539		53,473
Other debt securities		—		—		825		884		825		884
Total	$	482,833	$	500,781	$	825	$	884	$	483,658	$	501,665

Investment securities do not include investments in Federal Home Loan Bank and Federal Reserve Bank stock of $12.5 million, $12.1 million and $11.0 million, at December 31, 2004, 2003, and 2002, respectively. These investments are stated at cost.

Our investment portfolio increased by $45.3 million, or 9.3%, to $533.6 million at December 31, 2004 compared to $488.3 million at year-end 2003. We increased our investment portfolio to increase net interest income by increasing interest-earning assets. During 2004, we sold $103.5 million of available-for-sale investment securities at a net gain of $144,000. We sold U.S. government agency securities with short maturities and reinvested the proceeds in both agency and mortgage-backed securities with longer durations and higher yields. We also sold approximately $3.7 million of mortgage-related securities with very low par values to improve the operating efficiency of our investment portfolio. We purchased a total of $251.9 million of investment securities in 2004.

The net unrealized loss on the available for sale portfolio was $1.2 million at the end of 2004 compared to an unrealized gain of $5.7 million at the end of 2003. The decline in the fair value of the portfolio was due to changes in market interest rates and to a lesser degree prepayment speeds on mortgage-related securities. At December 31, 2004, we had 24

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

Our investment portfolio totaled $488.3 million at December 31, 2003, a decrease of $13.3 million as compared to the investment portfolio of $501.6 million at December 31, 2002. The portfolio experienced significant repayments of mortgage-related securities in 2003. To offset these repayments, we purchased additional mortgage-backed securities, and to a lesser extent, collateralized mortgage obligations, or CMOs, and U.S. government agency securities during 2003. In addition, the unrealized gain on the available-for-sale portion of the portfolio declined $12.3 million due to changes in market interest rates and prepayment speeds during the year.

Investment Portfolio – Maturity and Yields

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

	AS OF DECEMBER 31, 2004
	WITHIN ONE YEAR				AFTER ONE BUT WITHIN FIVE YEARS				AFTER FIVE BUT WITHIN TEN YEARS				AFTER TEN YEARS				TOTAL
	AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD		TOTAL		YIELD
	(dollars in thousands)
Available-for-sale securities (1):
U.S. government agency securities	$	9,967	4.51	%	$	138,085	3.28	%	$	45,641	4.33	%	$	—	—	%	$	193,693	3.59	%
Collateralized mortgage obligations (2)		12,538	3.73			71,518	3.90			31,637	3.98			—	—			115,693	3.90
Mortgage-backed securities (2)		32,890	4.28			88,803	4.25			47,426	4.28			11,232	4.58			180,351	4.28
States and political subdivisions (3)		3,835	6.51			11,151	6.00			10,768	7.48			17,853	7.65			43,607	7.08
Total available-for-sale		59,230	4.34			309,557	3.80			135,472	4.48			29,085	6.46			533,344	4.18
Held-to-maturity securities (4):
Other debt securities		—	—			275	7.11			—	—			—	—			275	7.11
Total held-to-maturity		—	—			275	7.11			—	—			—	—			275	7.11
Total securities	$	59,230	4.34	%	$	309,832	3.80	%	$	135,472	4.48	%	$	29,085	6.46	%	$	533,619	4.18	%

(1) Based on estimated fair value.

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

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

(4) Based on amortized cost.

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

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We generally invest in state and municipal obligations that are rated investment grade by nationally recognized rating organizations. However, certain municipal issues, which are restricted to our local market area, are not rated and undergo the Bank’s standard underwriting procedures for loan transactions. We also have investments in Federal Reserve Bank stock and Federal Home Loan Bank stock which are required to be maintained for various purposes. At December 31, 2004, we held no securities of any single issuer, other than U.S. government agency securities, that exceeded 10% of stockholders’ equity. Although we hold securities issued by municipalities within the State of Illinois that, in the aggregate, exceed 10% of stockholders’ equity, none of the holdings from any individual municipal issue exceed this threshold.

Investment securities with an approximate book value of $304 million and $270 million at December 31, 2004 and 2003, respectively, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, FHLB advances, and for other purposes as required or permitted by law.

Loan Portfolio

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

	As of December 31,
	2004			2003			2002			2001			2000
	(in thousands)
Commercial and industrial	$	656,099		$	589,987		$	586,885		$	521,592		$	481,812
Commercial real estate secured		732,251			642,364			484,015			354,214			353,043
Real estate – construction		531,868			364,294			317,739			380,674			328,856
Residential real estate – mortgages		64,569			86,710			117,652			160,699			188,766
Mortgage loans held-for-sale		—			—			—			1,147			7,004
Home equity loans and lines of credit		207,164			253,006			336,727			273,133			209,870
Consumer		18,386			24,636			34,572			47,572			40,414
Other loans		1,460			1,330			2,412			3,461			2,836
Gross loans		2,211,797			1,962,327			1,880,002			1,742,492			1,612,601
Less: Unearned discount		(191	)		(319	)		(528	)		(855	)		(909	)
Total loans		2,211,606			1,962,008			1,879,474			1,741,637			1,611,692
Less: Allowance for loan losses		(37,484	)		(34,356	)		(34,073	)		(31,118	)		(29,568	)
Loans, net	$	2,174,122		$	1,927,652		$	1,845,401		$	1,710,519		$	1,582,124

At December 31, 2004, our gross loan portfolio totaled $2.2 billion compared to gross loans at December 31, 2003 and 2002 of $1.96 billion and $1.88 billion, respectively. Our loan portfolio is comprised primarily of commercial loans, which constituted 87% of total loans at December 31, 2004. Our commercial loan portfolio, which includes commercial and industrial, commercial real estate secured, and real estate—construction, totaled $1.92 billion at year-end, an increase of $323.6 million, or 20.3%, over commercial loans of $1.60 billion at December 31, 2003. Our consumer-oriented loan products, which include residential real estate mortgages, home equity loans and lines of credit, and consumer loans decreased to $290.1 million at year-end

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2004 compared to $364.4 million and $489.0 million at December 31, 2003 and 2002, respectively. Consumer loans have continued to decline as we discontinued origination of indirect auto and manufactured homes, de-emphasized first mortgage products, and ceased acquiring home equity loans and lines from mortgage brokers.

Commercial and industrial (C&I) loans consist of loans to businesses or for business purposes that are either unsecured or secured by collateral other than the business real estate. These loans totaled $656.1 million, $590.0 million, and $586.9 million, at December 31, 2004, 2003, and 2002, respectively and have represented approximately 30% of our total loan portfolio in each of the last three years. Commercial and industrial loans increased $66.1 million, or 11%, during 2004. While total commercial credit line commitments have increased each year, the percentage of the total commercial credit lines actually drawn on by the borrowers was 63%, 59% and 62% at December 31, 2004, 2003 and 2002, respectively.

Loans secured by commercial real estate consist of commercial owner-occupied properties as well as investment properties. These loans totaled $732.3 million, $642.4 million, and $484.0 million, at December 31, 2004, 2003, and 2002, respectively and have represented approximately 33% of our total loan portfolio over the past two years and 26% at the end of 2002. Commercial real estate secured loans increased $89.9 million, or 14%, during 2004. At December 31, 2004 our commercial real estate secured portfolio was comprised of $215 million (or 29%) owner-occupied commercial real estate, $109 million (or 15%) multi-family investment properties and the remaining 56% was secured by commercial income-producing properties. The growth in commercial real estate secured loans in 2004 and 2003 related primarily to investment and income-producing commercial properties. Commercial real estate lending has remained strong over the last two years as historically low interest rates have added to the attractiveness of real estate investments.

Real estate-construction loans consist primarily of loans to professional real estate developers for the construction of single-family homes, town-homes, condominium conversions and commercial property. These loans totaled $531.9 million, $364.3 million, and $317.7 million at December 31, 2004, 2003 and 2002, respectively. These loans represented 24% of our total loan portfolio at December 31, 2004, compared to 19% and 17% at December 31, 2003 and 2002, respectively. Real estate construction loans increased $167.6 million, or 46%, in 2004. Approximately two thirds of the growth in 2004 was related to residential real estate development.

Our portfolio of residential real estate-mortgages continues to decline as a result of our decision to de-emphasize this product in 2001. At December 31, 2004, this portfolio totaled $64.6 million compared to $86.7 million and $117.7 million at December 31, 2003 and 2002, respectively. Correspondingly, this portfolio as a percentage of total loans has decreased to 3% at year-end 2004 from 6% at December 31, 2002. We expect that this portfolio of loans will continue to decline. In 2001, we also stopped originating loans for sale into the secondary market, and as a result, we no longer have loans classified as held-for-sale.

Our portfolio of home equity loans and lines of credit continues to decline as a result of our decision to discontinue the origination of third-party sourced home equity products in 2002. At

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December 31, 2004, this portfolio totaled $207.2 million, compared to $253.0 million and $336.7 million at December 31, 2003 and 2002 respectively. Correspondingly, this portfolio as a percentage of total loans has decreased to 9% at year-end 2004 from 18%, at December 31, 2002. The percentage of our home equity loans and lines that exceed 80% of the appraised value of the underlying real estate, after giving effect to any outstanding first mortgage loans, was 24% at December 31, 2004 as compared to 35% at year-end 2002. The Bank’s general underwriting guidelines do not allow lines in excess of 100% of appraised value. The percentage of our outstanding home equity loans and lines that were originally sourced through mortgage brokers was 33% at year-end 2004 compared to 56% at December 31, 2002.

Consumer loans were $18.4 million, $24.6 million, and $34.6 million at December 31, 2004, 2003, and 2002, respectively and represent approximately 1% of total loans at December 31, 2004. Of total consumer loans at December 31, 2004, 74% were indirect manufactured home loans, 8% were indirect auto and boat loans, 3% were direct auto loans, and the remaining 15% were other personal secured and unsecured loans. During 2003, we sold the remaining portion of our credit card portfolio for a modest gain, and we had previously discontinued the origination of indirect auto and manufactured homes. As a result, we expect our indirect consumer loan portfolio to continue to decline as these loans repay.

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

	As of December 31, 2004(1)
	ONE YEAR OR LESS		OVER 1 YEAR THROUGH 5 YEARS				OVER 5 YEARS				TOTAL
			FIXED RATE		FLOATING OR ADJUSTABLE RATE		FIXED RATE		FLOATING OR ADJUSTABLE RATE
	(in thousands)
Commercial and commercial real estate	$	573,787	$	407,812	$	291,370	$	99,180	$	16,201	$	1,388,350
Real estate – construction		272,115		33,644		210,590		15,519		—		531,868
Residential real estate – mortgages		4,704		8,704		7,186		7,193		36,782		64,569
Home equity loans and lines of credit		7,367		18,067		19,080		4,320		158,330		207,164
Consumer		2,312		3,882		78		11,632		482		18,386
Other loans		1,460		—		—		—		—		1,460
Total gross loans	$	861,745	$	472,109	$	528,304	$	137,844	$	211,795	$	2,211,797

(1) Maturities are based upon contractual dates. Demand loans are included in the one year or less category and totaled $6.2 million as of December 31, 2004.

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Nonperforming Assets and Impaired Loans

Lending officers and their managers are responsible for continuous review of present and estimated future performance of the loans within their assigned portfolio and for risk rating such loans in accordance with the Bank’s risk rating system. In addition, an objective loan review process independently risk rates loans to monitor and confirm the effectiveness of the lending officer’s loan risk rating conclusion. Delinquency reports are reviewed monthly by the lending officers, their managers and credit administration. The current status of loans past due or current but graded below a designated level is reported by the responsible lending officer to a loan committee where consideration is given to placing the loan on nonaccrual, the need for a specific allowance for loan loss, or, if appropriate, a partial or full charge-off.

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

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

	As of December 31,
	2004			2003			2002			2001			2000
	(dollars in thousands)
Loans contractually past due 90 days or more but still accruing interest	$	1,807		$	4,728		$	6,151		$	3,744		$	4,487
Nonaccrual loans		12,286			18,056			12,107			13,656			6,684
Total nonperforming loans		14,093			22,784			18,258			17,400			11,171
Other real estate		46			141			602			322			153
Other repossessed assets		12			23			23			247			132
Total nonperforming assets	$	14,151		$	22,948		$	18,883		$	17,969		$	11,456
Restructured loans not included in nonperforming assets	$	1,777		$	130		$	313		$	—		$	—
Nonperforming loans to total loans		0.64	%		1.16	%		0.97	%		1.00	%		0.69	%
Nonperforming assets to total loans plus repossessed property		0.64	%		1.17	%		1.00	%		1.03	%		0.71	%
Nonperforming assets to total assets		0.49	%		0.88	%		0.74	%		0.75	%		0.51	%

A loan is considered impaired if, based upon current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Certain homogenous loans, including residential mortgage and consumer loans, are collectively evaluated for impairment and, therefore, do not have individual credit risk ratings and are excluded from impaired loans. Impaired loans include all nonaccrual loans as well as certain accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal. Once a loan has been determined to be impaired, it is measured to establish the amount of the impairment. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the measurement of impairment may not always

33

result in an allowance for loan loss for every impaired loan. The amount in the allowance for loan losses for impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, net of cost to sell.

Information about the impaired loans at or for the years ended December 31, 2004, 2003, and 2002 is as follows:

	2004		2003		2002
	(in thousands)
Recorded balance of impaired loans, at end of year:
With related allowance for loan loss	$	12,271	$	12,788	$	9,454
With no related allowance for loan loss		6,056		11,559		7,453
Total	$	18,327	$	24,347	$	16,907
Allowance for loan losses related to impaired loans, at end of year	$	1,067	$	5,503	$	3,333
Average balance of impaired loans for the year		20,797		23,377		16,616
Interest income recognized on impaired loans for the year		1,004		982		598

In addition to the impaired loans, we continue to closely monitor the credit quality trends in the manufactured housing industry and its potential impact on our portfolio of loans secured by manufactured homes. These trends could lead to higher net charge-offs in the future. At December 31, 2004, our consumer loan portfolio included $13.7 million of loans to consumers secured by manufactured homes.

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula described below, specific allowances for identified problem loans and portfolio segments, and the unallocated allowance.

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

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

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

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

Although management believes that the allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectible, there can be no assurance that our allowance will prove sufficient to cover actual loan losses in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance for loan losses. Such agencies may require us to make additional provisions to the allowance based upon their judgments about information available to them at the time of their examinations.

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

	Year Ended December 31,
	2004			2003			2002			2001			2000
	(dollars in thousands)
Average total loans	$	2,045,723		$	1,898,604		$	1,800,544		$	1,660,082		$	1,550,403
Total loans at end of year	$	2,211,606		$	1,962,008		$	1,879,474		$	1,741,637		$	1,611,692
Allowance for loan losses:
Allowance at beginning of year	$	34,356		$	34,073		$	31,118		$	29,568		$	26,261
Charge-offs:
Commercial and commercial real estate		(6,783	)		(8,099	)		(6,603	)		(7,987	)		(3,862	)
Real estate –construction		(85	)		—			(350	)		—			—
Residential real estate – mortgages		(202	)		(101	)		(152	)		(96	)		(136	)
Consumer and other (1)		(2,050	)		(1,748	)		(1,428	)		(914	)		(952	)
Subtotal		(9,120	)		(9,948	)		(8,533	)		(8,997	)		(4,950	)
Recoveries:
Commercial and commercial real estate		1,550			560			1,403			615			661
Real estate –construction		2			—			—			—			—
Residential real estate– mortgages		47			46			43			—			8
Consumer and other (1)		566			392			142			232			134
Subtotal		2,165			998			1,588			847			803
Net charge-offs		(6,955	)		(8,950	)		(6,945	)		(8,150	)		(4,147	)
Provision for loan losses		10,083			9,233			9,900			9,700			7,454
Allowance at end of year	$	37,484		$	34,356		$	34,073		$	31,118		$	29,568
Net charge-offs to average total loans		0.34	%		0.47	%		0.39	%		0.49	%		0.27	%
Allowance to total loans at end of year		1.69	%		1.75	%		1.81	%		1.79	%		1.83	%
Allowance to non-performing loans		265.98	%		150.79	%		186.62	%		178.84	%		264.69	%

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

Loans are charged off when the loss is highly probable and clearly identified. Net charge-offs were $7.0 million, or 0.34% of average loans during 2004. In comparison, net charge-offs totaled $9.0 million, or 0.47% of average loans, during 2003 and $6.9 million, or 0.39% of average loans, during 2002. The provision for loan losses was $10.1 million, $9.2 million, and $9.9 million for the years ended December 31, 2004, 2003 and 2002 respectively. In each year, the provision for loan losses exceeded net charge offs.

As a business bank, our loan portfolio is comprised primarily of commercial loans to businesses, the loans to which are inherently larger in amount than loans to individual consumers. At December 31, 2004, our top 20 borrowing customers had balances outstanding from $12 million to $25 million and those loan balances totaled $308.6 million. Individually larger commercial loans can cause greater volatility in reported credit quality performance measures, such as total impaired or nonperforming loans. For example, our current credit risk rating and loss estimate with respect to a single material loan can have a material impact on our

36

reported impaired loans and related loss exposure estimates. We review our estimates on a quarterly basis and, as we identify changes in estimates, the allowance for loan losses is adjusted through the recording of a provision for loan losses.

The table below presents an allocation of the allowance for loan losses among the various loan categories and sets forth the percentage of loans in each category to gross loans. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	As of December 31,
	2004				2003				2002				2001				2000
	AMOUNT		LOAN CATEGORY TO GROSS LOANS (1)		AMOUNT		LOAN CATEGORY TO GROSS LOANS (1)		AMOUNT		LOAN CATEGORY TO GROSS LOANS (1)		AMOUNT		LOAN CATEGORY TO GROSS LOANS (1)		AMOUNT		LOAN CATEGORY TO GROSS LOANS (1)
	(dollars in thousands)
Allocated:
Commercial and commercial real estate	$	17,031	62.8	%	$	21,438	62.8	%	$	18,751	56.9	%	$	17,516	50.3	%	$	16,697	51.9	%
Real estate – construction		10,808	24.0			6,337	18.6			5,564	16.9			5,710	21.9			4,933	20.5
Residential real estate – mortgages		406	2.9			526	4.4			376	6.3			402	9.2			472	11.8
Consumer and other		3,501	10.3			3,389	14.2			4,614	19.9			2,131	18.6			1,698	15.8
Unallocated		5,738	—			2,666	—			4,768	—			5,359	—			5,768	—
Total allowance for loan losses	$	37,484	100.0	%	$	34,356	100.0	%	$	34,073	100.0	%	$	31,118	100.0	%	$	29,568	100.0	%

(1) Excludes mortgage loans held-for-sale.

Nonearning Assets

At December 31, 2004 and 2003, we had goodwill of $23.4 million, created from our 1997 acquisition of the Bank, which is no longer subject to amortization. The goodwill is tested annually for impairment, and if at any time impairment exists, we will record an impairment loss. The goodwill was most recently tested for impairment as of July 1, 2004, and we determined that no impairment charge was necessary.

Premises, leasehold improvements, and equipment, net of accumulated depreciation and amortization, decreased to $14.8 million at December 31, 2004, compared to $20.5 million at December 31, 2003. The decrease in premises, leasehold improvements and equipment was due to the sale of our Burbank and Ashland facilities, as well as normal depreciation expense. We have been executing an initiative to better rationalize our occupancy of premises. Steps that we have taken under this facilities initiative included the following:

• In the fourth quarter of 2003, we transitioned our administrative and operations departments to our new corporate center, a 108,000 square feet leased office space in Rosemont, Illinois. We consolidated administrative and operating departments that had been at our Wheeling, Burbank, and Ashland facilities to this new corporate center.

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• In the fourth quarter of 2003, we abandoned our administrative offices on the second and third floors of our Wheeling facility as a result of the corporate center consolidation. Upon ceasing to use this space, we recorded a $3.5 million lease abandonment charge, recorded in noninterest expense. The charge was comprised of a $976,000 write-off of leasehold improvements, furniture and other equipment that were abandoned and a $2.6 million charge for the liability related to the operating lease which was scheduled to continue until March 2010. This $2.6 million charge was computed based upon the remaining lease payments reduced by estimated sublease rentals that could reasonably be obtained from the property. The charge represented the estimated liability for the lease payments that we would incur for the remaining term of the lease for which we would receive no economic benefit other than through subleasing. The liability for lease abandonment was adjusted in 2004 as we made lease payments. In 2004, we reached an agreement to terminate the lease for a cash payment of $3.3 million and the transfer of a small parcel of land we owned next to the site. In the fourth quarter of 2004, we recorded an additional charge of $984,000 to recognize our obligation under the lease termination agreement. The transaction was closed on February 18, 2005. Upon termination of our obligation under the existing lease, we signed a new 10-year operating lease for approximately 8,300 square feet on the first floor of the facility for a smaller banking center.

• In June 2004, we sold our Burbank facility, which had a net book value of $1.8 million. Upon sale of the Burbank facility, we agreed to lease back space on the ground and fourth floors for the banking center and lending departments still at that location. We had vacated the second and third floors as a result of the corporate center consolidation. The gain of $245,000 realized from the sale was deferred and is being amortized over the 10-year life of the lease.

• In December 2004, we also completed the sale of our Ashland banking center, which had a book value of $1.7 million. We agreed to sell this property in 2002 and, at that time, recorded a $386,000 loss to reduce the net book value to the estimated net sales price. We have retained a portion of the land at the site to build a smaller banking center, which is expected to be operational by late 2005.

• We continue to examine our existing network of banking centers. In June 2004, we opened a 2,470 square foot banking center located in an office building in Itasca, Illinois, a northwest suburb of Chicago. The facility is leased under an operating lease with a three year term. We also signed a three-year operating lease for a 2,790 square feet banking center located in Orland Park, Illinois, a southern suburb of Chicago. We expect the banking center to be operational by mid-2005. During the fourth quarter of 2003, we closed our leased Jackson banking center. The lease was scheduled to expire in the first quarter of 2004.

• On January 27, 2005, we completed the sale of our Broadview banking center. In addition to selling the physical land and building, we sold approximately $19.7 million of

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deposit balances and $5.3 million of loans associated with the banking center. We will record a $1.6 million gain on the sale of this banking center during the first quarter of 2005.

Deposits

Our core deposits consist of noninterest and interest-bearing demand deposits, savings deposits, certificates of deposit, certain public funds and core customer repurchase agreements. Our customer repurchase agreements are reported as short-term borrowings. We also use brokered and other out-of-local-market certificates of deposit and FHLB advances to support our asset base.

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

	Year Ended December 31,
	(Restated) 2004						2003						2002
	AVERAGE BALANCE		PERCENT OF DEPOSITS		RATE		AVERAGE BALANCE		PERCENT OF DEPOSITS		RATE		AVERAGE BALANCE		PERCENT OF DEPOSITS		RATE
	(dollars in thousands)
Noninterest-bearing demand deposits	$	447,345	20.8	%	—	%	$	394,511	20.0	%	—	%	$	372,387	19.9	%	—	%
Interest-bearing demand deposits		564,920	26.3		0.77			564,645	28.5		0.83			618,819	33.0		1.38
Savings deposits		89,678	4.2		0.31			90,975	4.6		0.38			89,360	4.7		0.84
Time deposits:
Certificates of deposit		510,632	23.8		2.39			475,827	24.0		2.58			472,238	25.2		3.26
Out-of-local-market certificates of deposit		96,663	4.5		2.59			92,499	4.7		3.00			67,225	3.5		4.02
Brokered certificates of deposit		369,735	17.3		2.92			290,255	14.7		2.51			183,005	9.8		3.45
Public Funds		66,993	3.1		1.61			68,900	3.5		1.51			72,260	3.9		2.20
Total time deposits		1,044,023	48.7		2.55			927,481	46.9		2.52			794,728	42.4		3.27
Total deposits	$	2,145,966	100.0	%			$	1,977,612	100.0	%			$	1,875,294	100.0	%

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The following table sets forth the period end balances of interest-bearing deposits at December 31, 2004, 2003 and 2002, respectively.

	At December 31,
	(Restated) 2004		2003		2002
	(in thousands)
NOW accounts	$	124,015	$	136,119	$	137,705
Savings accounts		85,371		90,177		88,000
Money market deposits		421,529		425,449		463,761
Time deposits:
Certificates of deposit		525,173		498,189		458,671
Out-of-local-market certificates of deposit		124,005		76,475		91,501
Brokered certificates of deposit		415,811		285,689		249,643
Public time deposits		69,635		55,793		73,818
Total time deposits		1,134,624		916,146		873,633
Total interest-bearing deposits	$	1,765,539	$	1,567,891	$	1,563,099

We evaluate trends in funding by changes in average balances. Year-to-date average deposit balances increased $168.4 million, or 8.5%, to $2.15 billion in 2004 from $1.98 billion during 2003. The increase in deposits was almost equally split between local customer and out-of-market funding sources. Out-of-market funding continues to be an important source of funds. Average brokered certificates of deposits increased $79.5 million during 2004, to $369.7 million in 2004 compared to an average of $290.3 million in 2003. In addition, average out-of-local-market certificates of deposits increased $4.2 million during 2004 to $96.7 million. From local customer sources, the largest increases in average balances were in noninterest-bearing demand deposits and customer certificates of deposits. Average noninterest bearing demand deposits were $447.3 million during 2004, an increase of $52.8 million, or 13.4%, from $394.5 million during 2003. Average customer certificates of deposits increased $34.8 million, or 7.3%, during 2004 to $510.6 million as compared to $475.8 million during 2003.

Period-end deposit balances increased $271.6 million, or 13.5%, to $2.28 billion at December 31, 2004 compared to $2.01 billion at December 31, 2003. Brokered certificates of deposit increased $130.1 million during 2004 to $415.8 million and out-of-local market certificates of deposit increased $47.5 million during 2004 to $124.0 million at year-end 2004. The largest increases in local customer funding occurred in noninterest-bearing demand deposits, which increased by $74.0 million to $519.2 million at year-end 2004, and customer certificates of deposit that increased by $27.0 million to $525.2 million at December 31, 2004.

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

During 2003, year-to-date average deposits balances increased $102.3 million, or 5.5%, to $1.98 billion compared to $1.88 billion during 2002. Period-end deposits increased $49.3 million or 2.5%, to $2.01 billion at December 31, 2003, compared to $1.96 billion at December 31, 2002.

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The year-to-date average deposit balances showed a larger increase than the period-end balances because asset growth in the first half of 2003 was not maintained in the last half of the year. We relied on wholesale deposits as a source of funds in 2003, as deposits from customers were essentially flat. An increase in noninterest-bearing demand deposits was largely offset by a decline in interest-bearing demand deposits. Year-to-date average balances of brokered CDs rose $107.2 million during 2003 to meet heavy asset funding needs in the first half of the year. However, period-end brokered CDs increased by only $36.0 million at December 31, 2003 from December 31, 2002. Additionally, while our year-to-date average out-of-local-market CD balances increased $25.3 million to $92.5 million, the period-end balances actually declined by $15.0 million. Year-to-date average noninterest-bearing demand deposits increased $22.1 million, or 5.9%.

Over the years, our earning asset growth has exceeded our local customer deposit growth, which has resulted in our use of brokered and out-of-local-market certificates of deposit and other borrowed funds. We offer certificates of deposit to out-of-local-market customers by providing rates to a private third-party electronic system that provides certificate of deposit rates from institutions across the country to its subscribers. These certificates of deposit are generally issued at amounts of $100,000 or less as the purchasers seek to maintain full FDIC deposit insurance protection. The balance of certificates of deposit obtained through this marketing medium was $124.0 million at December 31, 2004, as compared to $76.5 million and $91.5 million at December 31, 2003, and 2002, respectively. We also issue brokered certificates of deposit. The balance of our brokered certificates of deposit was $415.8 million, $285.7 million, and $249.6 million at December 31, 2004, 2003, and 2002, respectively. Under FDIC regulations, only “well-capitalized” institutions may fund brokered certificates of deposit without prior regulatory approval. The Bank is categorized as “well-capitalized”. Adverse operating results at the Bank or changes in industry conditions or overall market liquidity could lead to our inability to replace brokered deposits at maturity, which could result in higher costs to, or reduced asset levels at, the Bank.

We have entered into interest rate exchange contracts to change the fixed interest expense on certain brokered certificates of deposit to variable. Under these contracts, we receive a fixed interest rate over the term of the agreement and pay a floating interest rate based upon 3-month LIBOR. The notional amount of these interest rate exchange contracts related to brokered certificates of deposit totaled $130.0 million and $50.0 million at December 31, 2004 and 2003, respectively.

Municipal deposits, consisting of public fund time deposits and repurchase agreements with state and local governments, are a significant funding source for the Bank. Total municipal deposits and repurchase agreements approximated $138 million, $130 million, and $124 million, at December 31, 2004, 2003, and 2002, respectively. Most of these deposits are collateralized by investment securities in our investment portfolio.

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Time deposits, including public funds, in denominations of $100,000 or more totaled $331.3 million at December 31, 2004. The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2004:

	December 31, 2004
	(in thousands)
3 months or less	$	124,099
Between 3 months and 6 months		38,302
Between 6 months and 12 months		95,182
Over 12 months		73,744
Total	$	331,327

Short-Term Borrowings

We also use short-term borrowings to support our asset base. Our short-term borrowings include federal funds purchased, securities sold under agreements to repurchase and U.S. Treasury tax and loan note option accounts. The federal funds purchased are primarily noncollateralized funds obtained from financial institutions where the Bank acts as one of the selling institution’s primary correspondent banks. The securities sold under agreement to repurchase are collateralized financing transactions and are primarily executed with local Bank customers. At December 31, 2004, our short-term borrowings totaled $229.5 million as compared to $219.1 million at December 31, 2003. Average short-term borrowings for 2004 and 2003 were $219.4 million and $219.9 million, respectively. At December 31, 2004, subject to available collateral, the Bank had available pre-approved overnight federal funds borrowings and repurchase agreement lines of $120 million and $650 million, respectively.

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

	Year Ended December 31,
	2004			2003			2002
	(dollars in thousands)
Securities sold under repurchase agreements:
Balance at year end	$	185,737		$	169,890		$	175,504
Weighted average interest rate at year end		1.19	%		0.75	%		1.02	%
Maximum amount outstanding (1)	$	223,404		$	219,658		$	211,150
Average amount outstanding during the year	$	176,944		$	182,017		$	190,287
Daily average interest rate during the year		0.97	%		0.97	%		1.44	%

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

Notes Payable and FHLB Advances

Notes payable consists of our subordinated debt, revolving credit facility, and term debt. FHLB advances consist of the Bank’s borrowings from the Federal Home Loan Bank of Chicago.

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Notes payable. At both December 31, 2004 and 2003, we had $10.0 million of unsecured, subordinated debt that is subordinate to the claims of our general creditors. This debt requires interest only payments until maturity. The agreement was amended in 2004 to extend the maturity date by two years to November 27, 2011. The subordinated debt bears interest, based upon our election, at the prime rate plus 2.50% or LIBOR plus 2.75%. The interest rate at December 31, 2004 and 2003 was 5.13% and 3.92%, respectively. The subordinated debt qualifies as Tier II capital under Federal Reserve capital adequacy guidelines.

We also had $500,000 outstanding under our term loan at both December 31, 2004 and 2003. This loan requires interest only payments until maturity. The agreement was also amended in 2004 to extend the maturity date by two years to November 27, 2011. The loan bears interest, based upon our election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of 3.50%. The interest rate at December 31, 2004 and 2003 was 3.53% and 3.50%, respectively. In addition, we have an $11.5 million revolving credit facility that has not yet been drawn upon. This facility bears interest, based upon our election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of 3.50%. This facility also requires interest only payments until maturity. The facility was renewed during 2004 and the maturity date extended to November 27, 2005. The term note and the revolving credit facility are secured by all of our common stock of the Bank. We capitalized costs associated with obtaining the notes payable, such as loan fees and attorney costs. We are amortizing these costs to interest expense over seven years, the original term of the loans, using the straight-line method.

The notes payable require compliance with certain defined financial covenants relating to the Bank, including covenants related to regulatory capital, return on average assets, nonperforming assets, and Company leverage. As of December 31, 2004, we were in compliance with these covenants. The agreement also restricts the amount of dividends that we can pay to shareholders and the amount of dividends that the Bank can pay to us. We are restricted from paying annual cash dividends to our common shareholders during a calendar year in excess of 25% of that year’s annual net income, additionally the Bank is restricted from paying annual cash dividends in a calendar year to us in excess of 60% of that year’s Bank net income.

FHLB advances. Our borrowings from the FHLB totaled $75.0 million at December 31, 2004 and $100.0 million at December 31, 2003. At December 31, 2004, the FHLB advances were collateralized by $43.2 million of investment securities, $7.6 million of FHLB stock, and a blanket lien on $97.6 million of qualified first-mortgage residential and home equity loans. At December 31, 2003, the FHLB advances were collateralized by $22.3 million of investment securities, $7.2 million of FHLB stock, and a blanket lien on $128.7 million of qualified first-mortgage residential and home equity loans. The weighted average interest rates at December 31, 2004 and 2003 were 4.56% and 4.04%, respectively. For additional details of the FHLB advances, see the section captioned “Notes to Consolidated Financial Statements–Notes Payable and FHLB Advances” from our audited financial statements contained elsewhere in this annual report.

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Junior Subordinated Debentures

At December 31, 2004, we had $87.6 million of junior subordinated debentures that were comprised of $46.4 million issued to TAYC Capital Trust I and $41.2 million issued to TAYC Capital Trust II. Beginning on January 1, 2004, we deconsolidated TAYC Capital Trust I in accordance with the guidance from Financial Accounting Standards Board (“FASB”) Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities” (“FIN 46R”). At December 31, 2003, we had consolidated TAYC Capital Trust I and reported the $45.0 million trust preferred securities on the Consolidated Balance Sheets. We reported the cash distributions on the trust preferred securities of TAYC Capital Trust I in interest expense on the Consolidated Statements of Income. However, upon implementation of FIN 46R on January 1, 2004, we deconsolidated TAYC Capital Trust I and we do not consolidate TAYC Capital Trust II, which we formed in 2004. At December 31, 2004, we report a liability for the total balance of the junior subordinated debentures issued to the Trusts. We report the equity investments in the Trusts of $2.6 million in other assets on the Consolidated Balance Sheet at December 31, 2004. Interest expense on the junior subordinated debentures is reported in interest expense.

TAYC Capital Trust I is a wholly owned subsidiary we formed for the purpose of issuing $45.0 million of trust preferred securities in October 2002. Proceeds from the sale of these trust preferred securities, along with $1.4 million received from the purchase of its common equity securities, were invested by TAYC Capital Trust I in $46.4 million of our 9.75% junior subordinated debentures. The sole assets of the TAYC Capital Trust I are our junior subordinated debentures. Interest on both the trust preferred securities and junior subordinated debentures are payable quarterly at a rate of 9.75% per year.

In June 2004, we formed TAYC Capital Trust II, a wholly owned subsidiary, for the purpose of issuing $40.0 million of floating rate trust preferred securities. Proceeds from the sale of these trust preferred securities, along with $1.2 million received from the purchase of its common equity securities, were invested by TAYC Capital Trust II in $41.2 million of our floating rate junior subordinated debentures. The sole assets of the TAYC Capital Trust II are our junior subordinated debentures. The interest rate on both the trust preferred securities and the junior subordinated debentures equals the three-month LIBOR plus 2.68% and re-prices quarterly on the 17^th of September, December, March and June. The interest rate on both was 5.18% at December 31, 2004.

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

Capital Resources

We monitor compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the

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balance sheet and the amount and composition of off-balance sheet items, in addition to the level of capital. Generally, Tier I capital includes common stockholders’ equity, trust preferred securities (up to certain limits), and, in prior periods, our noncumulative perpetual preferred stock. Goodwill is deducted from Tier I capital. Total capital represents Tier I capital plus the allowance for loan loss, subject to certain limits, our subordinated note payable and the portion of the trust preferred securities not includable in Tier I capital.

At December 31, 2004, 2003, and 2002, the holding company was considered “well capitalized” under capital guidelines set by the Federal Reserve for bank holding companies. The holding company’s regulatory capital ratios declined in 2004 as a result of the increase in average and risk-weighted assets and the redemption of the preferred stock. During 2004, we redeemed the $38.25 million of Series A noncumulative perpetual preferred stock, all of which qualified as Tier I capital. The Series A preferred stock was redeemed with the proceeds from the issuance of $40.0 million of trust preferred securities by TAYC Capital Trust II on June 16, 2004. A portion of the trust preferred securities qualifies as Tier I capital and the remainder qualifies as Tier II capital. As a result, the redemption of the preferred stock and the issuance of the trust preferred securities caused a decline in Tier I capital, but no material impact on total capital (Tier I and Tier II). Total capital increased in 2004 because of earnings retention. At December 31, 2003, although our total regulatory capital increased, our ratios of total capital and Tier I capital to risk-weighted assets declined due to the increase in our total risk-weighted assets.

At December 31, 2004, 2003, and 2002, the Bank was considered “well capitalized” under regulatory capital guidelines. During 2004, the Bank’s ratio of Tier I to risk weighted assets and total capital to risk weighted assets both decreased. The decrease was a result of higher risk weighted assets, partly offset by an increase in regulatory capital. Regulatory capital increased through earnings retention. The Bank’s dividend payout as a percentage of Bank net income was 28% for the year ended December 31, 2004. All of the Bank’s capital ratios increased during 2003, as the Bank did not pay dividends to the holding company and growth in equity out paced the higher risk-weighted and average assets. We intend to maintain the Bank’s capital levels at amounts above the regulatory “well capitalized” guidelines.

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

	ACTUAL				FOR CAPITAL ADEQUACY PURPOSES					TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS
	AMOUNT		RATIO		AMOUNT		RATIO			AMOUNT		RATIO
	(dollars in thousands)
As of December 31, 2004 (Restated):
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$	255,616	10.27	%	>$	199,125	>	8.00	%	>$	248,906	>	10.00	%
Cole Taylor Bank		262,350	10.55		>	198,954	>	8.00		>	248,692	>	10.00
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.		181,437	7.29		>$	99,563	>	4.00		>$	149,344	>	6.00
Cole Taylor Bank		231,185	9.30			>99,477	>	4.00		>	149,215	>	6.00
Leverage (to average assets)
Taylor Capital Group, Inc.		181,437	6.49		>$	111,757	>	4.00		>$	139,696	>	5.00
Cole Taylor Bank		231,185	8.29		>	111,611	>	4.00		>	139,514	>	5.00
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$	231,328	10.44	%	>$	177,300	>	8.00	%	>$	221,625	>	10.00	%
Cole Taylor Bank		237,702	10.75		>	176,823	>	8.00		>	221,028	>	10.00
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.		193,543	8.73		>	88,650	>	4.00		>	132,975	>	6.00
Cole Taylor Bank		209,990	9.50		>	88,411	>	4.00		>	132,617	>	6.00
Leverage (to average assets)
Taylor Capital Group, Inc.		193,543	7.64		>	101,357	>	4.00		>	126,697	>	5.00
Cole Taylor Bank		209,990	8.31		>	101,130	>	4.00		>	126,413	>	5.00
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.	$	213,555	10.61	%	>$	161,089	>	8.00	%	>$	201,362	>	10.00	%
Cole Taylor Bank		210,180	10.47		>	160,547	>	8.00		>	200,684	>	10.00
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc.		177,700	8.82		>	80,545	>	4.00		>	120,817	>	6.00
Cole Taylor Bank		184,984	9.22		>	80,273	>	4.00		>	120,410	>	6.00
Leverage (to average assets)
Taylor Capital Group, Inc.		177,700	7.21		>	98,625	>	4.00		>	123,281	>	5.00
Cole Taylor Bank		184,984	7.52		>	98,406	>	4.00		>	123,008	>	5.00

During 2004, 2003, and 2002, we declared common stock dividends of $0.24 per share in each year. The amount of dividends paid was $2.3 million in both 2004 and 2003 and $1.8 million during 2002. The increase in common shares outstanding because of the October 2002 initial public offering of common stock caused the increase in the amount of dividends paid in the last two years.

During 2004, we also declared preferred stock dividends of $1.225 per share, totaling $1.9 million. We redeemed the Series A preferred stock on July 16, 2004, and therefore no longer pay preferred dividends. During 2003 and 2002, we declared preferred stock dividends of $2.25 per share, totaling $3.4 million in each year.

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As of December 31, 2004, we had purchased 323,007 shares of our common stock, at a cost of $7.1 million, which are held as treasury shares. Previously, under the terms of our employee stock ownership plan, stock option agreements, and the restricted stock program, we were obligated to purchase shares of our stock from terminated employees related to “put” rights. We purchased 91,527 treasury stock shares during 2002 at a total cost of $1.7 million. Following the completion of our common stock offering, we are no longer obligated to purchase shares of our stock under any of these plans and we purchased no additional treasury shares in 2004 or 2003.

Liquidity

In addition to the normal influx of liquidity from core deposit growth, together with repayments and maturities of loans and investments, the Bank utilizes brokered and out-of-local-market certificates of deposit, FHLB borrowings, broker/dealer repurchase agreements and federal funds purchased to meet its liquidity needs. We manage the risk associated with reliance on wholesale funding sources by extending and laddering the maturity of these liabilities and pledging collateral. The FHLB borrowings are collateralized by the Bank’s first mortgage residential and home equity loans, selected investment securities, and FHLB stock. In addition, the Bank is able to borrow from the Federal Reserve Bank using securities or commercial loans as collateral through the Borrower-in-Custody Program. Under this program, at December 31, 2004, the Bank maintained $298 million of commercial loans as collateral with a lendable value of $225 million. The Bank also maintains pre-approved overnight federal funds borrowing lines at various correspondent banks, which provide additional short-term borrowing capacity of $120 million at December 31, 2004. Pre-approved repurchase agreement availability with major brokers and banks totaled $650 million at December 31, 2004, subject to acceptable unpledged marketable securities.

From December 31, 2003 to December 31, 2004, our total assets increased by $285.4 million, or 11.0%. The increase in total assets was primarily funded with the $273.0 million increase in deposits. Noninterest-bearing demand deposits increased $74.0 million, brokered and out-of-local-market certificates of deposit increased $177.7 million and other customer deposits increased $20 million. Cash inflow from operations exceeded cash outflows by $37.1 million in 2004. We believe that our current sources of funds are adequate to meet all of our financial commitments and asset growth targets for 2005.

During 2003, total assets grew by $68.2 million, or 2.7%. The asset growth was funded almost equally by wholesale deposits and cash provided by operations. Most of the increase in wholesale deposits was from higher brokered CD balances. Cash inflows from operations exceeded cash outflows by $41.2 million during 2003.

During 2002, our asset growth was primarily funded with wholesale funds. During the year, we increased brokered and out-of-market certificates of deposit by $137.8 million and $40.8 million respectively, and increased our borrowings from the FHLB by $15.0 million. These additional wholesale sources provided funds for asset growth and net deposit outflows from customers. The decline in customer deposit balances mainly occurred in money market account balances due to withdrawals by two large-deposit commercial customers. During the year ended December 31, 2002, cash outflows from operating activities exceeded cash inflows by $29.0

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million. The net outflow was largely due to the $61.9 million litigation settlement payment made during 2002. We used proceeds from the common stock and trust preferred securities offerings to fund this payment.

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

Our net cash outflows from investing activities for the years ended December 31, 2004, 2003, and 2002 were $305.8 million, $94.2 million, and $140.3 million, respectively. During all three annual periods, the net outflow was caused by increased loans. In addition, during all three years, cash provided by repayments, maturities, and sales of investment securities were mostly reinvested in the purchase of investment securities. During 2004, we used $53.7 million of liquidity to increase our investment portfolio.

Our net cash inflows from financing activities for years ended December 31, 2004, 2003, and 2002 were $259.4 million, $48.6 million, and $173.9 million, respectively. During 2004, a net increase in deposits produced $273.0 million of cash inflow. Short-term-borrowings increased by $10.4 million, while FHLB advances decreased by $25.0 million because of maturities. We used proceeds from the issuance of $41.2 million of junior subordinated debentures to TAYC Capital Trust II in mid-2004 to redeem all of the outstanding Series A preferred stock at its stated amount of $38.25 million. During 2003, the net inflow was primarily produced by a $49.3 million increase in deposits, primarily from wholesale sources. During 2002, from the issuance of 2,587,500 common shares, net of issuance costs, we received proceeds of $38.4 million, while we received net proceeds from the issuance of trust preferred securities of $41.9 million. In addition, during 2002, cash inflows of $130.1 million were also provided by deposit growth, primarily from wholesale funding sources. We also used a portion of the proceeds from the common stock and trust preferred offerings to reduce our notes payable.

Holding Company Liquidity. Historically, our primary source of funds has been dividends received from the Bank. During 2004, the Bank declared $8.0 million of dividends to the holding company. During 2003, the Bank did not declare any dividends because we had sufficient liquidity from the proceeds of our concurrent offering of common and trust preferred securities during 2002, the insurance reimbursement and estimated tax payment refund received in 2003. We received $13.0 million of dividends from the Bank during 2002. Our notes payable agreement with our lender limits the amount of common dividends that the Bank can pay to us in any year to 60% of that year’s Bank net income. The Bank is also subject to dividend restrictions set forth by regulatory authorities, whereby the Bank may not, without prior approval of regulatory authorities, declare dividends in excess of the sum of the current year’s earnings plus the retained earnings from the prior two years. The dividends, as of December 31, 2004, that the Bank could declare and pay to us, without the approval of regulatory authorities, amounts to approximately $56.7 million. We also receive funds from the exercise of employee stock options. We received $2.6 million during 2004 from the exercise of employee stock options, compared to $1.3 million and $537,000 in 2003 and 2002, respectively. We also have an $11.5 million revolving credit facility, which was not drawn upon at December 31, 2004.

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Our liquidity uses at the holding company level consist primarily of dividends to stockholders, debt service requirements on the debentures issued to TAYC Capital Trust I and TAYC Capital Trust II, and expenses for general corporate purposes. We expect the Bank to continue paying us dividends during 2005, and we believe that the Bank currently has adequate capital to allow continued dividends out of earnings to support our expected liquidity demands arising from our normal operations.

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

During 2002, we received net proceeds of $38.4 million from the common stock offering and $41.9 million from the trust preferred offering. These proceeds are net of underwriters’ discount and issuance costs, such as legal and accounting fees and printing costs. We used $61.9 million of the net proceeds from the offerings to fully satisfy our obligations under the litigation settlement agreements related to the 1997 acquisition of the Bank. We also used $17.0 million of the net proceeds to restructure our notes payable and reduce outstanding indebtedness.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. We had commitments to extend credit of $870.4 million and $835.0 million at December 31, 2004 and 2003, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many customers do not utilize the total approved commitment amounts. Historically, approximately 60% of available consumer and commercial loan commitment amounts are drawn. Therefore, the total commitment amounts do not usually represent future cash requirements. We had $114.8 million and $103.8 million of financial and performance standby letters of credit at December 31, 2004 and 2003, respectively. Financial standby letters of credit are conditional commitments issued by us to guarantee the payment of a specified financial obligation of a customer to a third party. Performance standby letters of credit are conditional commitments issued by us to make a payment to a specified third party in the event a customer fails to perform under a non-financial contractual obligation. The terms of these financial guarantees range from less than one to five years. The credit risk involved in issuing these letters of credit is essentially the same as that involved in extending loan facilities to customers. We expect most of these letters of credit to expire undrawn and we expect no significant loss from our obligation under financial guarantees.

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The following table shows as of December 31, 2004 the loan commitments and financial guarantees by maturity date.

	December 31, 2004
	Within One Year		One to Three Years		Four to Five Years		After Five Years		Total
	(in thousands)
Commitments to extend credit:
Commercial	$	457,937	$	266,580	$	9,640	$	13,008	$	747,165
Consumer		3,666		10,047		3,642		105,894		123,249
Financial guarantees:
Financial standby letters of credit		38,044		16,574		7,634		1,088		63,340
Performance standby letters of credit		46,170		4,983		190		150		51,493

The following table shows, as of December 31, 2004, our obligations and commitments to make future payments under contracts, debt and lease agreements and maturing time deposits. FHLB advances are categorized by their call date as opposed to maturity date.

	(Restated) December 31, 2004
	Within One Year		One to Three Years		Four to Five Years		After Five Years		Total
	(in thousands)
Notes payable and FHLB advances	$	75,000	$	—	$	—	$	10,500	$	85,500
Junior subordinated debentures		—		—		—		87,638		87,638
Time deposits		743,621		209,190		72,899		108,914		1,134,624
Operating leases		3,163		6,102		5,453		15,816		30,534
Total	$	821,784	$	215,292	$	78,352	$	222,868	$	1,338,296

Derivative Financial Instruments

At December 31, 2004 and 2003, we had interest rate exchange contracts with notional amounts totaling $130.0 million and $50.0 million, respectively, to change the fixed interest expense on certain brokered certificates of deposit to variable. Under these CD swaps, we receive a fixed interest rate equal to the rate paid on the brokered CDs and pay a variable interest rate based upon 3-month LIBOR. Because these CD swaps did not qualify for fair value hedge accounting under SFAS 133, we reported the net cash settlements and the changes in fair value on the CD swaps in 2004 as separate components of noninterest income.

In August 2004, we entered into a three-year swap, with a notional amount of $50.0 million, to hedge the variability in cash flows on certain prime-indexed commercial loans. Under the terms of this swap, we receive a fixed interest rate and pay a floating rate based upon the prime-lending rate. We account for this as a cash flow hedge, and the fair value of the interest rate swap is recorded as an asset or liability with the corresponding gain or loss recorded in other comprehensive income in stockholders’ equity, net of tax.

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During 2003, we entered into swaps with a total notional amount of $200 million, to hedge the variability of cash flows of certain prime-indexed commercial loans and accounted for these transactions as cash flow hedges. However, in October 2003, these swaps were terminated and the resulting gain on termination of $885,000 net of taxes, was deferred and recorded in other comprehensive income in stockholders’ equity. This deferred gain is being reclassified as an adjustment to interest income over the remaining term of the original swaps. For the years ended December 31, 2004 and 2003, $172,000 and $43,000, respectively, of this deferred gain was reclassified into interest income. During 2005, an additional $172,000 of this deferred gain is expected to be reclassified into interest income.

For additional information concerning the accounting treatment for our derivative instruments, please see “Application of Critical Accounting Policies — Derivative Financial Instruments” and Notes 1, 2 and 19 to our consolidated financial statements in this Form 10-K/A.

Quantitative and Qualitative Disclosure About Market Risks

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

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

Our primary measurement of interest rate risk is earnings at risk, which is determined through computerized simulation modeling. The primary simulation model assumes a static balance sheet, a parallel interest rate rising or declining ramp and uses the balances, rates, maturities and repricing characteristics of all of our existing assets and liabilities, including off-balance sheet financial instruments. Net interest income is computed by the model assuming market rates remaining unchanged and compares those results to other interest rate scenarios with changes in the magnitude, timing, and relationship between various interest rates. The impact of imbedded options in products such as callable and mortgage-backed securities, real estate mortgage loans, and callable borrowings are considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. ALCO utilizes the results of the model to quantify the estimated exposure of net interest income to sustained interest rate changes.

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Our net interest margin increased during the second half of 2004 in response to the 125 basis point increase in our prime rate. Our loan interest income increased as our $1.2 billion in prime-indexed, floating-rate commercial loans adjusted to higher yields. Critical factors affecting our net interest margin in future periods will be our pricing strategy on deposit products and whether the current yield curve remains unchanged. Our modeling of the December 31, 2004 balance sheet using the market interest rates in effect at year-end, indicated increased pressure on the margin in future periods as many of our interest-bearing liabilities continue to re-price to current rates as they mature.

Our simulation modeling of a continued rising rate environment indicates that net interest income would increase. Net interest income for year one in a 200 basis points rising rate scenario was calculated to be $3.8 million, or 3.84%, higher than the net interest income in the rates unchanged scenario at December 31, 2004. Conversely, at December 31, 2004, net interest income at risk for year one in a 100 basis points falling rate scenario was calculated at $4.2 million, or 4.23%, lower than the net interest income in the rates unchanged scenario. These exposures were within our policy guidelines of 10%. The direction of our one-year exposure to rising and declining interest rates at December 31, 2004 was generally consistent with our exposure at December 31, 2003. In the December 31, 2003 modeling, we used a 200 basis point rising and a 50 basis point falling rate scenarios.

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

The following table indicates the estimated impact on net interest income in year one under various parallel ramp interest rate scenarios at December 31, 2004 and 2003:

	Change in Future Net Interest Income
	At December 31, 2004					At December 31, 2003
Change in interest rates	Dollar Change			Percentage Change		Dollar Change			Percentage Change
	(dollars in thousands)
+200 basis points over one year	$	3,806		3.84	%	$	3,175		3.46	%
- 50 basis points over one year		—		—			(2,200	)	(2.40	)%
- 100 basis points over one year		(4,194	)	(4.23	)%		—		—

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

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Because our simulation models are based on actual cash flows, rather than accounting principles for income and expense recognition, the errors corrected in this amendment for the CD swaps and the amortization of the issuance costs over maturity has no impact on our interest rate risk measurements.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004, on a consolidated basis, that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believe such assumptions are reasonable, there can be no assurance that assumed repricing rates would approximate our actual future deposit activity.

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	(Restated) Volumes Subject to Repricing Within
	0-30 Days			31-180 Days			181-365 Days			1-3 Years			4-5 Years			Over 5 Years			Total
	(dollars in thousands)
Interest-earning assets:
Short-term investments and federal funds sold	$	24,149		$	—		$	—		$	—		$	—		$	—		$	24,149
Investment securities and FHLB/Federal Reserve Bank stock		9,780			44,804			47,747			204,510			87,921			151,373			546,135
Loans		1,469,338			58,507			63,218			205,430			288,781			126,332			2,211,606
Total interest-earning assets		1,503,267			103,311			110,965			409,940			376,702			277,705			2,781,890
Interest-bearing liabilities:
Interest-bearing checking, savings and money market accounts		217,737			291,679			—			—			—			121,499			630,915
Certificates of deposit		184,118			354,809			333,339			209,046			53,169			143			1,134,624
Short-term borrowings		229,547			—			—			—			—			—			229,547
Notes payable/FHLB advances		—			10,500			—			—			—			75,000			85,500
Junior subordinated debentures		—			41,238			—			—			—			46,400			87,638
Total interest-bearing liabilities		631,402			698,226			333,339			209,046			53,169			243,042			2,168,224
Period gap	$	871,865		$	(594,915	)	$	(222,374	)	$	200,894		$	323,533		$	34,663		$	613,666
Cumulative gap	$	871,865		$	276,950		$	54,576		$	255,470		$	579,003		$	613,666
Period gap to total assets		30.18	%		-20.59	%		-7.70	%		6.95	%		11.20	%		1.20	%
Cumulative gap to total assets		30.18	%		9.59	%		1.89	%		8.84	%		20.04	%		21.24	%
Cumulative interest-earning assets to cumulative interest-bearing liabilities		238.08	%		120.83	%		103.28	%		113.65	%		130.08	%		128.30	%