As filed with the Securities and Exchange Commission on October 10, 2002

Registration Nos. 333-89158, 333-89158-01

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


Taylor Capital Group, Inc.		TAYC Capital Trust I

(Exact name of registrant as specified in its charter)		(Exact name of registrant as specified in its charter)

Delaware		Delaware
(State or other jurisdiction of incorporation or organization)


36-4108550	6712	01-6209821
(I.R.S. Employer Identification No.)	(Primary Standard Industrial Classification Code No.)	(I.R.S. Employer Identification No.)

350 East Dundee Road, Suite 300, Wheeling, Illinois, 60090, (847) 537-0020

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

J. Christopher Alstrin

Chief Financial Officer

350 East Dundee Road, Suite 300, Wheeling, Illinois, 60090, (847) 537-0020

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Jeffrey R. Patt, Esq. Ernest W. Torain, Jr., Esq. Katten Muchin Zavis Rosenman 525 West Monroe Street Chicago, Illinois 60661 (312) 902-5200		William R. Kunkel, Esq. Skadden, Arps, Slate, Meagher & Flom (Illinois) 333 West Wacker Drive Chicago, Illinois 60606 (312) 407-0700

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

TABLE OF CONTENTS


EXPLANATORY NOTE
PROSPECTUS SUMMARY
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE COMPANY
USE OF PROCEEDS
DIVIDEND POLICY
DILUTION
CAPITALIZATION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LITIGATION AND SETTLEMENT
MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
SUPERVISION AND REGULATION
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
CAPITALIZATION
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF THE TRUST
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
DESCRIPTION OF THE DEBENTURES
BOOK-ENTRY ISSUANCE
DESCRIPTION OF THE GUARANTEE
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE DEBENTURES AND THE GUARANTEE
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
Opinion of Katten Muchin Zavis Rosenman
Consent of KPMG LLP

EXPLANATORY NOTE

This Registration Statement contains a prospectus relating to an offering of our common stock, together with separate prospectus pages relating to a concurrent offering by TAYC Capital Trust I, a Delaware statutory trust formed by us for the purpose of offering % cumulative trust preferred securities guaranteed by us. The complete prospectus for the offering of common stock follows immediately. Following the common stock prospectus are alternate pages for the prospectus for the offering of trust preferred securities, including:


	•	Front and back cover pages;

	•	Table of Contents;

	•	“Prospectus Summary;”

	•	“Risk Factors;”

	•	“Use of Proceeds;”

	•	“Capitalization;”

	•	“Principal Stockholders;” and

	•	“Description of the Trust Preferred Securities.”

The trust preferred securities offering prospectus will include the following sections, which are in addition to the sections contained in the common stock offering prospectus:


	•	“Description of the Trust;”

	•	“Description of the Debentures;”

	•	“Book-Entry Issuance;”

	•	“Description of the Guarantee;”

	•	“Relationship among the Trust Preferred Securities, the Debentures and the Guarantee;” and

	•	“Material United States Federal Income Tax Consequences.”

Finally, the trust preferred securities offering prospectus will not contain the following sections, which are contained in the common stock offering prospectus:


	•	“Dividend Policy;”

	•	“Dilution;”

	•	“Principal and Selling Stockholders;”

	•	“Shares Eligible for Future Sale;” and

	•	“Description of Capital Stock.”

Final forms of each prospectus will be filed with the Securities and Exchange Commission in accordance with Rule 424(b) under the Securities Act.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated October 10, 2002

PROSPECTUS

(TAYLOR CAPITAL GROUP LOGO)

2,775,000 Shares

Taylor Capital Group, Inc.

Common Stock

$ per share

We are offering 2,250,000 shares of our common stock and the selling stockholder is offering 525,000 shares of our common stock.

This is an initial public offering of our common stock. We currently expect that the initial public offering price will be between $18.00 and $20.00 per share. We will not receive any proceeds from the sale of common stock by the selling stockholder. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol “TAYC.”

Concurrently with this offering, TAYC Capital Trust I, a Delaware statutory trust we formed for the purpose of issuing trust preferred securities, is offering $40,000,000 aggregate principal amount of % cumulative trust preferred securities guaranteed by us, assuming an offering price of $25.00 per trust preferred security.

Although our common stock and the trust preferred securities are being offered separately, each offering is conditioned upon the completion of the other.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 6.


	Per Share	Total

Initial public offering price of common stock	$	$
Underwriting discount	$	$
Proceeds (before expenses) to Taylor Capital Group	$	$
Proceeds (before expenses) to the selling stockholder	$	$

This offering is on a firm commitment basis. We have granted the underwriters a 30-day option to purchase up to 337,500 additional shares of common stock to cover over-allotments, if any.

These securities are not savings accounts, deposits or other obligations of any bank and are not insured by any insurance fund of the Federal Deposit Insurance Corporation or any other governmental agency.

Neither the Securities and Exchange Commission nor any state securities commission or regulatory authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about , 2002.


Keefe, Bruyette & Woods, Inc.	Stifel, Nicolaus & Company

Incorporated

The date of this prospectus is , 2002.

Chicago, Illinois Primary Metropolitan Statistical Areas (as defined by the U. S. Department of Commerce)

(MAP)

Chicago Metropolitan Market Business Composition


						Reported
	Number					Annual
	of					Sales*
Businesses in the Chicago Metropolitan Statistical Area	Businesses		% of Total			(in millions)

Services		142,380		44.1	%	$	173,293
Retail Trade		56,058		17.4			218,404
Finance, Insurance and Real Estate		29,481		9.1			339,183
Construction		26,815		8.3			43,669
Manufacturing		21,961		6.8			543,028
Wholesale Trade		21,381		6.6			148,496
Transportation and Public Utilities		14,557		4.5			66,132
Agriculture, Forestry and Fishing		6,676		2.1			1,900
Public Administration		3,168		1.0			54
Mining		194		0.1			4,715

Totals		322,671		100.0	%	$	1,538,874

*The number of businesses and reported annual sales are as compiled and reported by Dun and Bradstreet, Inc. as of July 2002.

PROSPECTUS SUMMARY

This summary highlights only some of the information contained in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read carefully the entire prospectus, including the “Risk Factors” section and our consolidated financial statements and notes to those financial statements appearing elsewhere in this prospectus, before making an investment decision.

Taylor Capital Group, Inc.

We are a bank holding company headquartered in Wheeling, Illinois, a suburb of Chicago. We derive virtually all of our revenue from our subsidiary, Cole Taylor Bank, which we refer to throughout this prospectus as the Bank. The Bank has served the Chicago metropolitan area for over 73 years. As of December 31, 2001, the Bank was the tenth largest commercial bank headquartered in the Chicago metropolitan area based on assets. We provide a range of products and services concentrating in four primary banking areas: middle-market business banking, small business banking, commercial real estate lending and wealth management. We currently operate 11 branches throughout the Chicago metropolitan area with approximately $2.5 billion of assets as of June 30, 2002.

Our primary business objectives are to enhance our profitability and be a premier Chicago business bank for small- and mid-sized businesses and the people who own and manage them. Our core customers are middle-market companies, small companies, real estate developers and investors and owners and executives of our business customers. We believe the Chicago market, with over 58,000 small- and mid-sized businesses, is receptive to a locally owned and managed banking institution that provides responsive, personalized service, customized products and local decision making. We believe that our opportunities for expansion in this market are favorable and will increase as the Chicago banking market continues to experience significant consolidation.

Our Strategy

In the fall of 2001, we adopted a strategic plan designed to capitalize on our perceived market opportunity within Chicago’s small- and middle-market business banking environment by focusing on owner-operated, family-held and closely-held companies. It is with these customers that we believe we can add the most value by understanding the challenges that owners experience and offering them advice and solutions to help them achieve their business and personal financial goals. The key elements of our strategy are:


	•	Expand Our Core Customer Base. We intend to expand our core customer base by providing a high level of customer service, competitive products and delivery systems, as well as competing for customers of recently acquired banks in our markets.

	•	Capitalize On Our Relationship Banking Approach. We are working to leverage our business banking relationships in order to capture more personal wealth management business. We believe our existing relationships with businesses provide a natural opportunity to assist with business owners’ personal financial needs.

	•	Focus On Our Targeted Customers. We focus our time and resources on targeted customer segments: small- and mid-size businesses, as well as the individuals who own and manage them. As part of our effort to increase resources available to invest in serving these targeted customers, we have reduced or eliminated other activities. We intend to reallocate our resources to expand our commercial banking business and develop our wealth management business.

	•	Enhance Our Operational Efficiency. We plan to further centralize and automate important operational functions to enhance operating leverage as well as service quality. We anticipate that this realignment will involve the relocation and consolidation of currently dispersed facilities, processes and personnel.

Litigation and Settlement

The Taylor family, including related trusts and a related partnership, acquired a majority interest in Taylor Capital and the Bank from Reliance Acceptance Group, Inc. in a series of split-off transactions in February 1997. In these transactions, the Taylor family exchanged all their common stock of Reliance for all of the outstanding stock of Taylor Capital. In February 1998, Reliance filed for bankruptcy. Thereafter, numerous lawsuits were filed that named as defendants Taylor Capital, the Bank, certain of our directors and officers and members of the Taylor family.

These suits variously allege violations of the federal securities laws and breaches of common law fiduciary duties in connection with the split-off transactions and the public reporting of Reliance. These suits seek monetary damages, attorneys’ fees and other forms of relief, including the unwinding of the split-off transactions.

In order to limit the substantial expense and distraction of continued litigation and to eliminate any exposure to potential liability, we have entered into settlement agreements with the plaintiffs and other parties in these cases. On May 24, 2002, we entered into agreements which provide that we will pay the plaintiffs, out of the net proceeds from this offering and the concurrent offering of trust preferred securities, an amount that will vary based on the initial public offering price of our common stock. Assuming an initial public offering price of $19.00 per share, the midpoint of the range shown on the cover of this prospectus, we anticipate the aggregate net proceeds from this offering will be $39.0 million. We anticipate the net proceeds from the concurrent trust preferred securities offering will be $37.7 million. Of the combined net proceeds from these concurrent offerings, approximately $64.5 million will be used to fully satisfy our obligations under the settlement agreements. Upon our delivery of this payment, each of the Taylor Capital-related defendants will be fully released from any liability with respect to the lawsuits described above. For additional information regarding the settlement agreements, see the section of this prospectus captioned “Litigation and Settlement.”

Other Information

We were incorporated in Delaware in 1996. Our principal executive offices are located at 350 East Dundee Road, Suite 300, Wheeling, Illinois 60090. Our telephone number is (847) 537-0020 and our web site is www.coletaylor.com. Information contained in our web site is not incorporated by reference into this prospectus, and you should not consider information contained in our web site as part of this prospectus.

The Offering


Common stock offered by us		2,250,000 shares

Common stock offered by the selling stockholder		525,000 shares

Common stock to be outstanding immediately after this offering		9,091,779 shares

Use of proceeds		We intend to use our net proceeds from this offering of common stock and the concurrent offering of trust preferred securities described below to satisfy our obligations pursuant to the settlement agreements described in the section of this prospectus captioned “Litigation and Settlement.” We intend to use the remaining net proceeds from this offering and the concurrent offering of trust preferred securities to reduce our outstanding term loan. We will not receive any proceeds from the sale of shares of common stock by the selling stockholder. See the section of this prospectus captioned “Use of Proceeds.”

Nasdaq National Market symbol		TAYC

The number of shares of our common stock outstanding immediately after this offering is based on the number of shares outstanding as of September 26, 2002. This number does not take into account (1) 816,494 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $18.90 per share, and (2) 176,792 shares of common stock reserved for issuance pursuant to future grants under our incentive compensation plan.

Concurrent Offering

Concurrently with this offering, TAYC Capital Trust I is offering $40,000,000 aggregate principal amount of % cumulative trust preferred securities guaranteed by us, assuming an offering price of $25.00 per trust preferred security. For information regarding the trust preferred securities, see the section of this prospectus captioned “Description of the Trust Preferred Securities.”

Unless otherwise indicated, all information in this prospectus assumes:


	•	the completion of a three-for-two stock split of our common stock that will be effected as a dividend to stockholders of record as of October 2, 2002;

	•	the completion of the concurrent offering of trust preferred securities; and

	•	the underwriters do not exercise their over-allotment option with respect to this offering.

SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated financial data presented below under the caption “Taylor Capital Group, Inc.” as of and for the six months ended June 30, 2002 and 2001 and as of and for the four years ended December 31, 2001, and for the period from February 12, 1997 to December 31, 1997, is derived from our historical financial statements. Our consolidated financial statements for each of the four years ended December 31, 2001, and for the period from February 12, 1997 to December 31, 1997, have been audited by KPMG LLP, independent accountants. The financial data as of and for the six months ended June 30, 2002 and 2001 is derived from unaudited financial information. The summary financial information presented below under the caption of “Cole Taylor Bank” is derived from unaudited financial statements of the Bank or from our audited consolidated financial statements. 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 prospectus. Results from past periods are not necessarily indicative of results that may be expected for any future period.

In the second quarter of 2002, we recorded a charge of $64.5 million related to a likely settlement of pending litigation against Taylor Capital that will be funded with the net proceeds from the concurrent offerings of common stock and trust preferred securities. The recognition of the charge resulted in our reporting a consolidated net loss of $54.2 million for the first six months of 2002. The loss reduced total stockholders’ equity to $118.3 million. For additional information on this charge, see the sections of this prospectus captioned “Capitalization,” “Litigation and Settlement” and “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 prospectus.


																						Period from
				For the Six Months																		February 12,
				Ended June 30,						Year Ended December 31,												1997 to
																						December 31,
				2002			2001			2001			2000			1999			1998			1997


				(in thousands, except share and per share data)
TAYLOR CAPITAL GROUP, INC.
Income Statement Data:
	Net interest income			$	50,349		$	44,667		$	91,718		$	87,322		$	78,834		$	70,736		$	62,156
	Provision for loan losses				4,950			4,250			9,700			7,454			6,000			5,135			4,061

		Net interest income after provision for loan loss			45,399			40,417			82,018			79,868			72,834			65,601			58,095
	Noninterest income:
		Service charges			5,864			5,672			11,513			10,346			9,609			8,997			8,279
		Trust fees			2,810			3,234			6,425			4,654			4,563			3,971			3,331
		Mortgage-banking revenues			275			1,118			2,122			1,534			2,682			5,083			2,598
		Gain on sale of investment securities, net			8			2,241			2,333			750			108			11			401
		Other noninterest income			1,351			1,076			1,880			1,989			2,228			2,559			3,264

			Total noninterest income		10,308			13,341			24,273			19,273			19,190			20,621			17,873
	Noninterest expense:
		Salaries and benefits			22,971			19,976			43,207			39,383			38,205			37,303			31,683
		Legal expense, net			1,846			2,369			2,504			12,053			6,226			4,364			2,227
		Goodwill amortization			—			1,158			2,316			2,326			2,393			2,431			2,230
		Litigation settlement charge			64,509			—			—			—			—			—			—
		Other noninterest expense			14,778			14,652			31,105			26,821			25,720			26,330			23,394

			Total noninterest expense		104,104			38,155			79,132			80,583			72,544			70,428			59,534

	Income (loss) before income taxes and cumulative effect of change in accounting principle				(48,397	)		15,603			27,159			18,558			19,480			15,794			16,434
	Income taxes				5,822			5,532			9,528			9,604			7,973			6,353			6,321
	Cumulative effect of change in accounting principle, net of income taxes				—			—			—			—			(214	)		—			—

	Net income (loss)				(54,219	)		10,071			17,631			8,954			11,293			9,441			10,113
	Preferred dividend requirements				(1,721	)		(1,721	)		(3,443	)		(3,443	)		(3,442	)		(3,442	)		(3,052	)

	Net income (loss) applicable to common stockholders			$	(55,940	)	$	8,350		$	14,188		$	5,511		$	7,851		$	5,999		$	7,061

Common Share Data:(1)
	Basic earnings (loss) per share			$	(8.18	)	$	1.21		$	2.07		$	0.80		$	1.13		$	0.86		$	1.04
	Diluted earnings (loss) per share				(8.18	)		1.20			2.05			0.79			1.12			0.86			1.04
	Cash dividends per share				0.12			0.12			0.24			0.24			0.24			0.24			0.24
	Book value per share				11.75			18.83			19.41			17.25			15.76			15.29			14.77
	Dividend payout ratio				(1.47	)%		9.89	%		11.61	%		30.13	%		21.30	%		27.93	%		23.15	%
	Weighted average shares — basic earnings per share				6,838,856			6,881,706			6,862,761			6,919,751			6,967,028			6,981,047			6,810,194


																					Period from
			For the Six Months																		February 12,
			Ended June 30,						Year Ended December 31,												1997 to
																					December 31,
			2002			2001			2001			2000			1999			1998			1997


			(in thousands, except share and per share data)
	Weighted average shares — diluted earnings per share			6,838,856			6,959,393			6,908,070			6,960,494			6,991,478			6,995,766			6,810,194
	Shares outstanding — end of period			6,813,588			6,848,526			6,836,028			6,902,289			6,939,240			6,987,800			6,960,680
Balance Sheet Data (at end of period):
	Total assets		$	2,462,869		$	2,376,506		$	2,390,670		$	2,263,323		$	2,044,370		$	1,910,330		$	1,855,711
	Investment securities			506,699			514,322			494,208			510,187			433,412			426,732			463,821
	Total loans			1,801,676			1,642,069			1,741,637			1,611,692			1,456,805			1,335,981			1,204,437
	Allowance for loan losses			32,918			32,623			31,118			29,568			26,261			24,599			25,813
	Goodwill			23,354			24,512			23,354			25,671			28,860			31,903			34,334
	Total deposits			1,901,100			1,824,124			1,833,689			1,742,830			1,607,550			1,439,737			1,377,957
	Short-term borrowings			224,847			227,100			244,993			249,819			147,129			171,718			186,053
	Notes payable and FHLB advances			127,200			129,000			111,000			77,000			114,500			131,500			112,000
	Preferred stock			38,250			38,250			38,250			38,250			38,250			38,250			38,250
	Common stockholders’ equity			80,034			128,959			132,666			119,061			109,347			106,883			102,820
	Total stockholders’ equity			118,284			167,209			170,916			157,311			147,597			145,133			141,070
Earnings Performance Data(2):
	Return on average assets			(4.50	)%		0.86	%		0.75	%		0.40	%		0.57	%		0.51	%		0.61	%
	Return on average stockholders’ equity			(61.84	)		12.48			10.62			5.93			7.70			6.57			8.64
	Net interest margin (tax-equivalent)(3)			4.50			4.14			4.22			4.25			4.39			4.22			4.23
	Noninterest income to revenues			12.39			13.15			12.72			9.84			11.82			13.15			12.72
	Efficiency ratio(4)			65.29			68.42			69.62			76.13			74.09			77.10			74.77
	Loans to deposits			94.77			90.02			94.98			92.48			90.62			92.79			87.41
	Average interest-earning assets to average interest bearing liabilities			123.40			121.52			122.48			122.58			124.09			124.49			122.80
	Ratio of earnings to fixed charges(5):
		Including interest on deposits		1.52	x		1.28	x		1.27	x		1.14	x		1.20	x		1.15	x		1.18	x
		Excluding interest on deposits		2.74	x		2.01	x		1.97	x		1.49	x		1.65	x		1.43	x		1.56	x
Asset Quality Ratios:
	Allowance for loan losses to total loans			1.83	%		1.99	%		1.79	%		1.83	%		1.80	%		1.84	%		2.14	%
	Allowance for loan losses to nonperforming loans(6)			214.74			239.33			178.84			264.69			180.90			175.92			189.34
	Net loan charge-offs to average total loans(2)			0.36			0.15			0.49			0.27			0.31			0.50			0.27
	Nonperforming assets to total loans plus repossessed property(7)			0.86			0.84			1.03			0.71			1.06			1.29			1.25
Capital Ratios:
	Total stockholders’ equity to assets — end of period			4.80	%		7.04	%		7.15	%		6.95	%		7.22	%		7.60	%		7.60	%
	Average stockholders’ equity to average assets			7.28			6.89			7.09			6.79			7.41			7.69			7.06
	Leverage ratio			3.40			5.59			5.99			5.55			6.11			6.17			5.85
	Tier 1 risk-based capital ratio			4.31			7.56			7.70			7.25			7.77			7.76			7.95
	Total risk-based capital ratio			5.57			8.82			8.96			8.51			9.03			9.02			9.21
COLE TAYLOR BANK:
	Net income(8)		$	12,580		$	12,736		$	22,508		$	21,797		$	18,112		$	14,906		$	16,498
	Return on average assets(8)			1.05	%		1.10	%		0.96	%		0.98	%		0.92	%		0.80	%		0.89	%
	Stockholder’s equity to assets — end of period			8.63			8.38			8.41			8.35			8.46			8.85			9.09
	Leverage ratio			7.46			7.04			7.37			7.06			7.41			7.33			7.26
	Tier 1 risk-based capital ratio			9.46			9.52			9.46			9.22			9.41			9.42			9.90
	Total risk-based capital ratio			10.71			10.78			10.72			10.47			10.68			10.67			11.16


(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 will be effected as a dividend to stockholders of record as of October 2, 2002.

(2)	Selected earnings performance data and net loan charge-offs to average total loans are annualized for the six-month periods ended June 30, 2002 and 2001 and for 1997.

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

(4)	The efficiency ratio is determined by dividing noninterest expense, excluding the litigation settlement charge, by an amount equal to net interest income plus noninterest income, less investment securities gains.

(5)	For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before the litigation settlement charge, 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.

(6)	Nonperforming loans include loans contractually past due 90 days or more but still accruing interest.

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

(8)	Financial data for Cole Taylor Bank represents a full year for 1997.

RISK FACTORS

An investment in our common stock involves a number of risks. You should read carefully and consider the following risks as well as the other information contained in this prospectus, including our consolidated financial statements and the notes to those financial statements, before making an investment decision. Our business, financial condition and results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment.


	The Taylor family, which may have interests that differ from or conflict with those of other stockholders, owns a significant majority of our common stock and, after this offering, will continue to control all fundamental matters affecting our business.

The Taylor family, which includes Jeffrey W. Taylor, Bruce W. Taylor, Cindy Taylor Bleil and certain trusts for their benefit and the benefit of certain of their family members, in the aggregate, beneficially owns or controls in excess of 89% of our outstanding common stock. The Taylor family’s majority ownership interest in us stems from a series of split-off transactions in which we acquired the Bank from its former parent. These transactions are the subject of the litigation described in this prospectus under the caption “Litigation and Settlement.” Immediately after we complete this offering, the Taylor family will, in the aggregate, own or control more than 61% of our common stock. As a result, these stockholders, if they act together, will have the ability to control virtually all matters submitted to our stockholders for approval, including amending our charter, approving mergers or similar transactions and electing all of our directors (except that holders of our Series A preferred stock have the right to elect one director, or in some circumstances, two directors). If the Taylor family acted together, they could cause a result that is not in the best interests of all stockholders. In addition, the Taylor family may have interests that differ from or conflict with yours and those of other stockholders. The concentration of ownership of our common stock among the Taylor family may delay or discourage others from initiating potential merger, takeover or other change in control transactions. As a result, the market price of our common stock could be adversely affected.

Conversely, the death of one or more of our substantial stockholders, or the decision by the Taylor family to sell or liquidate their position in us for any reason, would have the effect of altering the balance of our effective stockholder control and, among other things, the composition of our Board of Directors. Jeffrey Taylor, Bruce Taylor and Cindy Taylor Bleil serve as members of our Board of Directors. Jeffrey Taylor and Bruce Taylor also serve as members of the Bank’s Board of Directors and as both our and the Bank’s highest ranking officers. Melvin Pearl, a member of the Board of Directors, serves as trustee of certain Taylor family trusts. These persons may experience conflicts of interest in the execution of their duties on our behalf and on behalf of the Bank. We cannot assure you that these conflicts would be resolved in a manner favorable to us or the Bank.


	Our common stock does not have a trading history and you may not be able to trade our common stock if an active trading market does not develop. Additionally, the price of our common stock may fluctuate significantly.

Prior to this offering, there has been no public market for our common stock. Keefe, Bruyette and Woods, Inc. and other representatives of the underwriters have advised us that they intend to make a market in the common stock as long as the volume of trading activity in the common stock and other market making conditions justify doing so. Nonetheless, we cannot predict the extent to which investor interest in us will lead to an active trading market in our common stock or how liquid that market might become. Making a market involves maintaining bid and ask quotations for the common stock and being available as principal to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of the common stock at any given time, which presence is dependent upon the individual decisions of investors over which neither we nor any market maker has any control.

The initial public offering price of our common stock will be determined through negotiations between us and representatives of the underwriters. This price may not indicate prices that will prevail in any future trading market. You may not be able to sell shares of our common stock at or above our initial public offering price.

Additionally, the market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including but not limited to the following:


	•	actual or anticipated fluctuations in our operating results;

	•	changes in interest rates;

	•	the public’s reaction to our press releases, announcements and filings with the SEC;

	•	changes in earnings estimates or recommendations by research analysts;

	•	future sales of our common stock;

	•	changes in general conditions in the U.S. economy, financial markets or the banking industry; and

	•	other developments affecting our competitors or us.

The stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of our common stock, regardless of our trading performance.

In the past, stockholders have often brought securities class action litigation against a company following periods of volatility in the market price of their securities. We may be the target of similar litigation in the future, which could result in substantial costs and divert management’s attention and resources.


	*We require a significant amount of cash to service our indebtedness, which reduces the cash available to finance our operations.*

We have a significant amount of indebtedness. At the holding company level, we have a $35.0 million credit facility consisting of a $23.0 million term loan and a $12.0 million revolving line of credit. As of June 30, 2002, we had $4.2 million outstanding under the revolving line of credit.

We intend to use a portion of our net proceeds from the concurrent offerings of our common stock and trust preferred securities to reduce our outstanding term loan. We also have received a commitment letter from our lender to replace our existing term loan with a $10.0 million subordinated term loan. Following the completion of the concurrent offerings of common stock and trust preferred securities, our total indebtedness at the holding company level is expected to be approximately $55.1 million. This will consist of the $40.0 million of debentures issued to TAYC Capital Trust I in connection with the concurrent offering of trust preferred securities, the $10.0 million subordinated term loan and $5.1 million outstanding under the $12.0 million revolving line of credit. At that time, we will have the ability to borrow an additional $6.9 million under our revolving line of credit. Our credit facility will continue to contain covenants that may limit our operating flexibility as well as our ability to pay any dividends on our capital stock.

Our ability to make payments on our indebtedness, as well as to fund our operations and any future growth, depends on our ability to generate cash. Our success in doing so depends primarily upon the results of the Bank and the ability of the Bank to dividend its earnings to us. Other determinants of our ability to generate cash include general economic, financial, regulatory and competitive conditions and other factors beyond our control.

Our indebtedness could, among other things:


	•	make us more vulnerable to unfavorable economic conditions;

	•	make it more difficult to pursue our strategic objectives;


	•	require us to dedicate or reserve a large portion of our cash flow from operations to making payments on our indebtedness, which would prevent us from using it for other purposes, including payment of any dividends on our capital stock; and

	•	make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings because a portion of our indebtedness is currently payable at variable rates.


	As a holding company, we are dependent on receiving dividends from the Bank in order to pay dividends and other obligations, and there are restrictions on the Bank’s ability to pay dividends to us.

We are a holding company, and we conduct no business operations. Our principal asset is the outstanding capital stock of the Bank. As a result, we must rely on payments from the Bank to meet our obligations. Dividend payments from the Bank are subject to Illinois law and to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by the various regulatory agencies with authority over the Bank. As of June 30, 2002, the Bank could declare and pay $24.4 million of dividends to us without the approval of regulatory authorities. The ability of the Bank to pay dividends, however, is always subject to regulatory restrictions if paying dividends would impair its profitability, financial condition or other cash flow requirements. Although the Bank is considered “well-capitalized” under Federal Reserve guidelines, we cannot assure you that the Bank will continue to meet the criteria under Illinois law or these regulatory guidelines, in which case it may stop paying or reduce the amount of dividends paid to us.


	*Our ability to pay dividends on our common stock may be limited by a number of restrictions.*

While we have historically paid cash dividends on our common stock, we cannot assure you that we will pay dividends on our common stock in the future. If we stop paying dividends, the price of our common stock could be adversely affected. The declaration and payment of dividends on our common stock will depend on our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to secure any equity or debt obligations senior to our common stock and other matters deemed relevant by our Board of Directors. The amount of net income (loss) available to our common stockholders after preferred dividend requirements totaled $(55.9) million for the six-month period ended June 30, 2002 and $14.2 million, $5.5 million and $7.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Our ability to pay dividends is currently limited by Federal Reserve guidelines, the terms of our existing loan agreement and the terms of our Series A preferred stock. These limitations are discussed in more detail below.

We are currently required to seek approval from the Federal Reserve before paying dividends. In the second quarter of 2002, we recorded a charge to earnings related to the likely settlement of pending litigation described in this prospectus. This charge has caused our capital to fall below minimum capital guidelines for bank holding companies set by the Federal Reserve. Thus, we are considered undercapitalized at the holding company level. As a result, the Federal Reserve has informed us that we must now seek its prior approval before we may pay any dividends on our common or preferred stock. The Federal Reserve has approved the payment of our scheduled quarterly dividends on our common stock and our Series A preferred stock in October 2002, prior to completion of this offering. Absent this approval, our ability to declare and pay dividends would be restricted.

Our existing loan agreement may limit our ability to pay dividends. Our existing loan agreement also restricts our ability to pay dividends if certain events of default exist or would result from paying the dividend. As a result of the litigation settlement charge, as of June 30, 2002, we were not in compliance with a financial covenant in our loan agreement relating to holding company leverage. After giving effect to the concurrent offerings of our common stock and trust preferred securities, we will be in compliance with this financial covenant. Our lender has waived compliance with this financial covenant as of June 30, 2002 and September 30, 2002 and has suspended compliance with it from June 30, 2002 through completion of this offering, but not later than December 1, 2002. Absent this waiver, our ability to declare and pay dividends would be restricted.

The terms of our Series A preferred stock and the trust preferred securities restrict our ability to pay dividends. Generally, unless we have paid all declared dividends on our Series A preferred stock or set apart payment for the current dividend period, no dividend may be declared and paid, or set aside for payment, on our common stock. As a result of the settlement charge and the restrictions relating to our loan agreement, as of June 30, 2002, we would not be able to pay dividends on our Series A preferred stock without the Federal Reserve’s consent and our lender’s waiver. Finally, 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 issued by the Trust. For further information about these restrictions, see the sections of this prospectus captioned “Description of Capital Stock” and “Description of the Trust Preferred Securities.”


	*Fluctuations in interest rates could reduce our profitability.*

We are subject to interest rate risk. We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-earning assets will be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will work against us, and our earnings may be negatively affected. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates are generally associated with a lower volume of originations. Accordingly, changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability.

As of June 30, 2002, our financial models indicated an exposure to declining rates. The net interest income at risk for year one in the falling rate scenario was calculated at $2.1 million, or 2.05%, lower than the net interest income in the rates unchanged scenario. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan and security prepayments, deposit decay and pricing and reinvestment strategies and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that we may take in response to changes in interest rates.

We principally manage interest rate risk by managing our mix of financial instruments. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed. For more information concerning our interest rate sensitivity, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosure About Market Risks.”


	*Our wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth.*

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which include Federal Home Loan Bank, or FHLB, advances, brokered deposits, out-of-market certificates of deposit, broker/dealer repurchase agreements and federal funds purchased. At June 30, 2002, we had $100.0 million of FHLB advances, $183.9 million of brokered deposits and $69.9 million of out-of-market certificates of deposit outstanding. At June 30, 2002, we had no broker/dealer repurchase agreements or federal funds purchased outstanding. Generally, we have paid a premium for brokered deposits. These premiums are included in interest expense and approximated 36 basis points as of June 30, 2002. Adverse operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability will be adversely affected.


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

Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and non-performance. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. Management’s estimates are used to determine an allowance for loan losses that we consider adequate to absorb probable losses inherent in our loan portfolio. In evaluating the adequacy of our allowance for loan losses, we consider historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio, trends in delinquency and criticized assets, general economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates that are subject to change over time. Estimating the risk of loss and amount of loss on any loan is necessarily subjective, and actual losses may vary from current estimates. Net charge-offs arising from loans totaled $3.2 million for the six months ended June 30, 2002, and $8.2 million, $4.1 million and $4.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. If the recent economic downturn continues or other adverse factors occur, our actual loan losses could increase significantly and could exceed our allowance estimates.

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


	Under Federal Reserve guidelines, we are currently considered “undercapitalized” at the holding company level as a result of a charge taken in the second quarter of 2002. This classification has increased our regulatory oversight and may limit our ability to expand, pending completion of the concurrent offerings of common stock and trust preferred securities.

Our accounting policies require that we recognize as a loss legal and other contingencies when, based on available information, it is probable that a liability has been incurred and the amount of the loss contingency or range of amounts can be reasonably estimated. In the second quarter of 2002, we recorded a charge of $64.5 million related to a likely settlement of pending litigation against us that will be funded with a portion of the net proceeds from the concurrent offerings of our common stock and trust preferred securities. The recognition of the charge resulted in our reporting a consolidated net loss of $54.2 million for the first six months of 2002 and reduced total stockholders’ equity to $118.3 million. As a result, under Federal Reserve guidelines, we are considered undercapitalized at the holding company level. After giving effect to the concurrent offerings of common stock and trust preferred securities, we will comply with the Federal Reserve’s capital adequacy guidelines. Our status as an undercapitalized bank holding company has affected the amount of supervision and oversight we receive from regulatory authorities and may affect our ability to expand. As a result of our capital classification, we have been advised by the Federal Reserve that we must receive its prior approval before we can pay dividends. The Federal Reserve has approved the payment of our scheduled quarterly dividends on our common stock and Series A preferred stock in October 2002, prior to completion of this offering. For additional information, please see the section of this prospectus captioned “Supervision and Regulation.”


	*Future sales of common stock by existing stockholders may have an adverse impact on the market price of our common stock.*

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. After completion of this offering, there will be 9,091,779 shares of our common stock outstanding. All of the shares of common stock sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our “affiliates” within the meaning of Rule 144 under the Securities Act. 6,104,804

of the remaining shares of outstanding common stock, representing approximately 67.15% of the outstanding common stock upon completion of this offering, will be “restricted securities” under the Securities Act, subject to restrictions on the timing, manner and volume of sales of those shares. Our directors, officers and substantially all of our existing stockholders, including the selling stockholder, have agreed for a period of 180 days after the date of this prospectus, to not, without the prior written consent of Keefe, Bruyette & Woods, Inc., directly or indirectly, offer to sell, sell or otherwise dispose of any shares of our common stock, other than shares acquired in this offering. Following the closing of this offering, we also intend to file a registration statement on Form S-8 under the Securities Act covering 1,285,226 shares reserved for issuance under our incentive compensation plan as of August 31, 2002. Accordingly, subject to applicable vesting requirements and exercise with respect to options, shares registered under that registration statement will be available for sale in the open market immediately after the 180-day lock-up agreements expire. For a more detailed description of additional shares that may be sold in the future, see the sections of this prospectus captioned “Shares Eligible for Future Sale” and “Underwriting.”


	*As a new investor, you will incur immediate and substantial dilution.*

If you purchase shares of our common stock in this offering, you will experience an immediate and substantial dilution of $8.54 net tangible book value per share of your investment. This means that the price you pay for the shares you acquire in this offering will be significantly higher than their net tangible book value per share. If we issue additional shares of common stock in the future, you may experience further dilution in the net tangible book value of your shares. You will incur additional dilution if the holders of outstanding options to purchase shares of our common stock at prices below our net tangible book value per share after this offering exercise their options.


	*We may experience difficulties in relocating and consolidating our administrative and operational functions.*

In an effort to improve our service levels, risk profile and efficiency, we have initiated a plan to review the consolidation of our administrative and operational functions. Our plan includes process and operational restructuring, and may expand to include the repositioning of branches, all designed to improve service levels, create operational efficiencies and promote profitability. We may experience difficulties in executing this plan. Further, we cannot assure you that we will be able to implement our plan or that, if implemented, our plan will help us achieve our desired objectives.


	*If we do not successfully implement our business strategy and manage our growth effectively, our business, financial condition and results of operations could be adversely affected.*

We have adopted a new business strategy that involves an enhanced focus on commercial banking and wealth management activities. To implement our strategy, we have begun to discontinue offering some products and services in order to deploy additional resources to our commercial banking activities. Specifically, we have decided to discontinue non-customer conforming first mortgage loan originations, some fiduciary trust services and the funding of broker-originated auto and manufactured housing loans. As a result, the risks associated with our commercial banking activities will have a greater impact on our overall performance as our operations become less diversified.

Our business strategy also involves increasing our small- to middle-market business customer base and expanding the range of financial products and services we offer these customers. This growth may place a significant strain on our management, personnel, systems and resources. We must continue to improve our operational and financial systems and managerial controls and procedures to accommodate this growth, and we will need to continue to expand, train and manage our workforce. For example, the expansion of our commercial banking business may increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales organizations. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed. Further, unless our expansion of commercial banking and wealth management activities

results in an increase in our revenues that is proportionate to the increase in our costs associated with this expansion, our operating margins and profitability will be adversely affected.


	*We rely heavily on our management team and key personnel, and the unexpected loss of key managers and personnel may adversely affect our operations.*

Our future success depends largely upon the continued service of our executive officers and other key management personnel who are experienced in banking and financial services. In addition to the services of Jeffrey and Bruce Taylor, the two most senior officers of both the holding company and the Bank, and Christopher Alstrin, the Chief Financial Officer of both the holding company and the Bank, we depend on the services of our lending officers and our operational and staff officers. Our lending officers maintain strong community ties and personal banking relationships with our customer base, which is a key aspect of our business and our strategy to increase our market presence. Their skills, years of experience and relationships in the communities we serve are among our competitive strengths. Our operational and staff officers maintain our systems and processes in an effort to deliver to our customers the highest possible quality products and services. This is another key aspect of our business and strategy. We rely on these officers to ensure customer satisfaction. We do not have employment agreements with any of our key personnel. The unexpected loss of the services of any one of these key people would materially harm our business. Furthermore, our future success depends upon the ability of our key personnel, including several recently recruited individuals, to function effectively as a team.

Our future success and growth will also depend upon our ability to recruit and retain highly skilled employees with strong community relationships and specialized knowledge in the financial services industry. The level of competition in our industry for people with these skills is intense, and from time to time we have experienced losses of key employees. Significant losses of key personnel, particularly to our competitors, could have a material adverse effect on our business, financial condition and results of operations.


	*Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.*

The banking business is highly competitive. We encounter substantial competition in attracting and retaining deposits and in obtaining loan customers. Our principal competitors are numerous and include other commercial banks, savings and loan associations, mutual funds, money market funds, finance companies, credit unions, mortgage companies, the United States Government, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms. In recent years, several major multi-bank holding companies have entered the Chicago metropolitan market. Many of our competitors are significantly larger than us and have access to greater financial and other resources. As a result of these and other factors, our future growth opportunities may be limited. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks and state regulations governing state chartered banks. As a result, our non-bank competitors may have advantages over us in providing some services.

We expect that competition will intensify in the future, particularly as a result of the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act has expanded the permissible activities of a bank holding company and allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature, or are incidental or complementary to financial activities. The Gramm-Leach-Bliley Act also eliminated restrictions imposed by the Glass-Steagall Act, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other’s business. While it is uncertain what the full impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these restrictions will likely increase the number of entities providing banking services and thereby create additional competition.


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

Our business is directly affected by domestic and international factors that are beyond our control, including economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, competition, changes in government monetary and fiscal policies, consolidation within our customer base and within our industry and inflation. For example, a significant decline in general economic conditions, such as recession, unemployment and other factors beyond our control, would significantly impact our business. A deterioration in economic conditions may result in a decrease in demand for consumer and commercial credit and a decline in real estate and other asset values. Delinquencies, foreclosures and losses generally increase during economic slowdowns or recessions, and we therefore expect that our servicing costs and credit losses would increase during such periods.

Our success is dependent to a significant extent upon economic conditions in the Chicago metropolitan area, where virtually all of our loans are originated. For example, our small- and middle-market business and commercial real estate customers in the Chicago metropolitan area could be significantly affected by a local recession or economic downturn, which may result in an increase of defaults on outstanding loans and reduced demand for future loans, both of which could adversely affect us. Adverse changes in the economy of the Chicago metropolitan area could also impair our ability to gather deposits and could otherwise have a negative effect on our business, including the demand for new loans, the ability of customers to repay loans and the value of the collateral securing loans. Furthermore, a substantial portion of our loan portfolio involves loans that are to some degree secured by real estate properties located primarily within the Chicago metropolitan area. In the event that real estate values in the Chicago metropolitan area decline, the value of this collateral would be impaired.


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

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

Our operations are also subject to a wide variety of state and federal consumer protection and similar statutes and regulations. For example, consumer loan originations are highly regulated and recent regulatory initiatives have focused on the mortgage and home equity lending markets. Federal, state and local government agencies and legislators have begun to consider, and in some instances have adopted, legislation to restrict lenders’ ability to charge rates and fees in connection with residential mortgage loans. In general, these proposals involve lowering the existing federal Home Ownership and Equity Protection Act thresholds for defining a “high-cost” loan and establishing enhanced protections and remedies for borrowers who receive these loans. The proposed legislation has also included various loan term restrictions, such as limits on balloon loan features. Frequently referred to as “predatory lending” legislation, many of these laws and rules extend beyond curbing predatory lending practices to restrict commonly accepted lending activities, including some of our activities. For example, some of these laws and rules prohibit any form of prepayment charge and severely restrict a borrower’s ability to finance the points and fees charged in connection with his or her loan. It is possible that passage of these laws could limit our ability to impose various fees and charge what we believe

are risk-based interest rates on various types of consumer loans and may impose additional regulatory restrictions on our business in some states.


	*Following this offering, we may need additional capital, and adequate financing may not be available to us on acceptable terms, or at all.*

We may seek additional capital in the future to fund the growth of our operations and to enhance further our regulatory capital levels. We may not be able to obtain additional debt or equity financing, or if available, it may not be in amounts or on terms acceptable to us, or it may impose conditions on our ability to pay dividends or grow our business. If we are unable to obtain the funding we need, we may be unable to continue to implement our business strategy, enhance our financial products and services, take advantage of future opportunities or respond to competitive pressures, which could have a material adverse effect on our financial condition and our ability to grow our business. If we raise additional capital through the sale of equity securities, your ownership interest in us will be diluted.

In the second quarter of 2002, we recorded a charge of $64.5 million related to a likely settlement of pending litigation against us. The recognition of the charge resulted in our reporting a consolidated net loss of $54.2 million for the first six months of 2002 and reduced total stockholders’ equity to $118.3 million. As a result, under Federal Reserve guidelines, we are considered undercapitalized at the holding company level. After giving effect to the concurrent offerings of common stock and trust preferred securities, we will comply with the Federal Reserve’s capital adequacy guidelines.

If we are able to complete the concurrent offerings of common stock and trust preferred securities as described in this prospectus, as well as replace the current $23.0 million term loan with a $10.0 million subordinated term loan, we believe we will be considered “well capitalized” at the holding company level. If we are not able to reduce our existing term loan or complete the subordinated debt financing described above, we will nonetheless comply with the Federal Reserve’s capital adequacy guidelines, but we will not qualify as a “well-capitalized” bank holding company. In this case, we will remain subject, at a minimum, to regulatory scrutiny by the Federal Reserve if we seek to engage in transactions that might be beneficial to us, such as new activities, acquisitions or redemptions of securities. If the Federal Reserve were to conclude that we did not have adequate capital to support the proposed transaction, it might deny our requests or condition approval on our raising additional capital.


	*We rely on third party professionals to provide certain financial services to our customers.*

We rely on selected outside investment managers to provide specialized investment advice and asset management services to our customers. We cannot assure you that any of these providers will be able to continue to provide these services to our customers or that they will be able to adequately meet our customers’ or our needs. Further, we cannot be sure that our customers will continue to utilize the services of these investment managers through us, rather than directly from the investment management firms themselves. The loss of any of these outside investment managers may impact our ability to provide customers with quality service or some types of portfolio management without incurring the cost of replacing them.


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

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

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal

controls fail to prevent or detect an occurrence, or if it is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition or results of operations. Our losses relating to these operational risks were $213,000, $1.6 million, $388,000 and $251,000 for the six months ended June 30, 2002, and the years ended December 31, 2001, 2000 and 1999, respectively. These losses related primarily to non-employee initiated fraud involving either loan or deposit accounts.


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

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


	Provisions of our amended and restated certificate of incorporation, by-laws and Delaware law, as well as state and federal banking regulations, could delay or prevent a takeover of us by a third party.

Our amended and restated certificate of incorporation and by-laws and Delaware law could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock. For example, our charter contains advance notice requirements for nominations for election to our Board of Directors and for proposing matters that shareholders may act on at shareholder meetings. We also have a staggered board, which means that only one-third of our Board can be replaced by stockholders at any annual meeting. In addition, we are subject to Delaware laws, including one that prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our Board.

Any individual, acting alone or with other individuals, who is seeking to acquire, directly or indirectly, 10% or more of our outstanding common stock must comply with the Change in Bank Control Act, which requires prior notice to the Federal Reserve for any acquisition. Any entity that wants to acquire 5% or more of our outstanding common stock, or otherwise to control us, may need to obtain the prior approval of the Federal Reserve under the Bank Holding Company Act of 1956, as amended. As a result, prospective investors in our common stock need to be aware of and to comply with those requirements, to the extent applicable. Approval may also be required by the Illinois Commissioner of Banks.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “The Company” and elsewhere in this prospectus constitute forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the negative of these terms, and similar expressions. These forward-looking statements may include, among other things:


	•	statements and assumptions relating to projected growth, earnings, earnings per share and other financial performance measures, as well as management’s short-term and long-term performance goals;

	•	statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events;

	•	statements relating to our business and growth strategies; and

	•	any other statements, projections or assumptions that are not historical facts.

We believe that our expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these and other uncertainties in the “Risk Factors” section of this prospectus.

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

THE COMPANY

Overview

We are a bank holding company headquartered in Wheeling, Illinois, a suburb of Chicago. We derive virtually all of our revenue from our subsidiary, Cole Taylor Bank. As of December 31, 2001, the Bank was the tenth largest commercial bank headquartered in the Chicago metropolitan area based on assets. We provide a range of products and services concentrating in four primary banking areas: middle-market business banking, small business banking, commercial real estate lending and wealth management. We currently operate 11 bank branches throughout the Chicago metropolitan area with approximately $2.5 billion of assets as of June 30, 2002.

We were formed in 1996 in connection with the split-off of the Bank from Cole Taylor Financial Group, Inc., also referred to as Cole Taylor Financial and later renamed Reliance Acceptance Group, Inc. The Taylor family acquired a majority interest in the Bank when they exchanged all of their common stock of Cole Taylor Financial for the outstanding stock of Taylor Capital. In connection with the split-off transaction, we issued noncumulative perpetual preferred stock and commenced voluntary filing as a public company. We ceased voluntary filing in 2000 because our preferred stock was not widely held, listed on a securities exchange or actively traded.

Subsequent to the split-off of Taylor Capital from Reliance, Reliance filed for bankruptcy. Thereafter, numerous lawsuits were filed that named as defendants Taylor Capital, the Bank, some of our directors and officers and members of the Taylor family. A significant portion of the proceeds from the concurrent common stock and trust preferred securities offerings will be used to satisfy our obligations relating to the settlement of these lawsuits.

Our Strategy

Our primary business objectives are to enhance our profitability and be a premier Chicago business bank for small- and mid-sized businesses and the people who own and manage them. We believe the Chicago market, with over 58,000 small-and mid-sized businesses, is receptive to a locally owned and managed banking institution that provides responsive, personalized service, customized products and local decision making. We believe that our opportunities for expansion in this market are favorable and will increase as the Chicago banking market continues to experience significant consolidation.


	•	Expand Our Core Customer Base. We will continue to focus on expanding our core customer base by increasing the number of businesses we serve in the Chicago metropolitan area. We intend to increase our market share by providing a high level of customer service, competitive products and delivery systems and competing for customers of recently acquired banks in our market area. We believe our growth objectives can be achieved while maintaining our historical risk standards and effectively managing credit risk.

	•	Capitalize On Our Relationship Banking Approach. We intend to leverage our business banking relationships in order to capture more personal wealth management business. Closely held business owners often have complex needs for the management of personal and family wealth. We believe our existing relationships with their businesses provide a natural opportunity to assist with their personal financial needs. We also believe that providing personal wealth management services will strengthen our commercial banking relationships. We deliver our products and services through relationship managers who lead a team of banking professionals. Collectively, the team is responsible for providing for our customer’s banking needs. With this relationship banking approach, we believe we are able to


		quickly address the critical needs for both the customer’s business as well as personal financial goals. We have only recently begun to implement this strategy and have not yet achieved any meaningful results.

	•	Focus On Our Targeted Customers. We focus our time and resources on targeted customer segments: small- and mid-size businesses, as well as the individuals who own and manage them. As part of our effort to increase resources available to invest in serving these targeted customers, we have reduced or eliminated other activities. We have stopped originating non-customer conforming first mortgage loans for sale into the secondary market, the offering of some fiduciary trust services and the funding of broker-originated auto and manufactured housing loans. We intend to reallocate these resources to expand our commercial banking business and develop our wealth management business.

	•	Enhance Our Operational Efficiency. We plan to further centralize and automate important operational functions to enhance operating leverage as well as service quality. We intend to realign our people, processes and systems in support of the high quality sales and service requirements that our customers desire. We anticipate that this realignment will involve the relocation and consolidation of currently dispersed facilities, processes and personnel.

Our Targeted Customers

We deliver financial services built around the customers we serve rather than the products we offer. Our targeted customers are middle-market companies, small companies, real estate developers and investors and owners and executives of our business customers. Our relationship managers lead teams of bank professionals who are responsible for providing for the banking needs of a large portion of these customers. Through their relationship managers, these customers have a single point of access to all of our services.

Middle-Market Companies. Our middle-market business customers characteristically have annual sales ranging from $5 million to $50 million. We offer products and services to a wide variety of middle-market businesses involved with manufacturing, wholesale and retail distribution, construction contracting, transportation and professional services. We believe these customers value our executive management access and attention as well as experienced and responsive relationship managers. We work to provide these customers with products customized to fit their needs and seamless execution, from sales to delivery to ongoing servicing. Loans to middle-market businesses comprised approximately 42% of our commercial loan portfolio as of June 30, 2002.

Small Companies. Our small business customers typically have annual sales of $500,000 to $5 million. We believe our success with small businesses is based on the fast and convenient offering of standard products specifically designed for businesses in this category. Many of these customers reside in the neighborhoods around our branch offices. Another important segment of our small business customer base includes health care service businesses, such as medical, dental and veterinary practices, and their owners, for which we believe we have developed financial services expertise. We provide professional practice financing as well as equipment and capital expansion credit facilities to these businesses. Loans to small businesses and professionals comprised approximately 26% of our commercial loan portfolio as of June 30, 2002.

Real Estate Developers and Investors. Our real estate development and investment customers seek acquisition, development and construction loans and stand-by letters of credit for terms from 18 to 36 months. Approximately 60% of our development and construction lending is for residential single-family home development, primarily in the suburban communities of Chicago. We also finance condominium developers within the city of Chicago. Our real estate investment customers also seek term financing on selected income producing properties, including multi-family, retail, office and industrial properties. Our real estate banking relationship managers have an average of 20 years of specialized real estate lending experience. Loans to real estate developers and investors comprised approximately 32% of our commercial loan portfolio as of June 30, 2002.

Owners and Executives of Our Business Customers. We cross-sell products and services to the owners and executives of our business customers designed to help them meet their personal financial goals. We focus

on facilitating the cycle of wealth creation, preservation and transfer for the owner-operators of small- and middle-market businesses in Chicago. These products and services include personal customized credit and cash management, personal financial planning, investments, investment management and insurance products. While we directly provide credit and cash management products, we also offer brokerage, insurance and most investment management products and services with the assistance of third-party providers. We believe these arrangements with third-party providers allow us the flexibility to select and sell non-proprietary products that may provide an optimal solution for our customers’ needs.

Other Customers. We also provide services and offer banking products to community-based customers located near our branch locations. These customers, typically individuals and municipalities, seek credit and depository products from a convenient, reliable and stable institution with reasonably competitive products and automated delivery channels such as automated teller machines, or ATMs, and telephone and internet banking.

Our Business

Our primary business is commercial banking. As of June 30, 2002, approximately 72% of our loan portfolio was comprised of commercial loans. We also offer wealth management, community banking, home equity lending, mortgage banking and trust services.


	*Commercial Banking*

Our commercial banking business is comprised of commercial lending and real estate construction lending activities. Our commercial lending activities consist of providing loans for the following customer needs: working capital, business expansion or acquisition, owner-occupied commercial real estate financing, revolving lines of credit and stand-by and commercial letters of credit. Additionally, we offer asset-based credit facilities, including, in some cases, where strong asset values and financial controls support businesses with otherwise minimally acceptable operating performance or experience. Our real estate construction lending activities consist of providing loans to professional home builders, condominium and commercial real estate developers and investors.

We offer collateralized as well as unsecured commercial banking loans. Typical collateral includes accounts receivable, inventory, equipment and real estate. Commercial real estate loans are generally collateralized by owner-occupied properties used for business purposes or property to be developed or acquired for investment. Commercial real estate construction loans are structured primarily to fund construction of pre-sold homes or units. Under our commercial lending policies, as of June 30, 2002, our internal management-designated lending limit was $12 million, with some limited exceptions.

We also offer our commercial banking customers deposit products such as checking, savings and money market accounts, time deposits and repurchase agreements. We offer corporate cash management options, including internet balance reporting, automated clearing house products, lock-box processing, controlled disbursement accounts and an account reconciliation and positive pay feature to help them meet their cash management needs.


	*Wealth Management*

As part of our strategy, we plan to increase our penetration of the market representing owner-operators and executives of our targeted business customers. We intend to offer enhanced wealth management services by expanding our product offerings and adding relationship managers with wealth management experience. Our product offerings currently include personal wealth management loans, customized residential real estate loans and home equity lines of credit and specially designed deposit products. Our relationship managers provide personal financial planning and investment management services. Through third-party providers, we also offer insurance products and brokerage services. We believe that our increased emphasis on wealth management will be further aided by transferring some asset management accounts and a few individual managers from our trust department to our wealth management area, which we intend to do during 2002. To

date, revenues associated with personal financial planning, insurance and brokerage services have not been material.


	*Community Banking*

Our community banking approach relies on personal service and the delivery of an array of financial products, including checking, savings and money market accounts, certificates of deposit, personal lines of credit and vehicle loans. We offer convenient account access through our ATM network, internet banking, internet bill payment, telephone banking, direct deposit service and debit cards. We provide portfolio management expertise, offering stocks, bonds, mutual funds, annuities and insurance products through a third party broker-dealer with representatives located in our branches.


	*Home Equity Lending*

We originate home equity loans and lines of credit through our branches as well as through mortgage brokers. The majority of our outstanding home equity assets were sourced through mortgage brokers, but underwritten by us. Our underwriting guidelines do not allow home equity credits in excess of 100% of appraised value. As of June 30, 2002, approximately 38% of these credits on our books exceeded 80% of appraised value after giving effect to any outstanding first mortgage. As of June 30, 2002, we held $327.5 million of home equity loans, which comprised approximately 18% of our total loan portfolio.


	*Mortgage Banking*

We offer mortgages to our core customers and our community banking customers. We also act as a broker for our customers needing reverse or sub-prime mortgage products that are not funded or retained by us. Until the fall of 2001, we were active in the conforming first mortgage loan origination market. We offered both conforming and selected non-conforming mortgage products to our existing customers as well as through mortgage brokers. The majority of the loans originated were sold into the secondary market with servicing released. We subsequently elected to discontinue origination of non-customer conforming first mortgage loans for sale into the secondary market. As of June 30, 2002, we held $136.4 million of mortgage loans.


	*Trust Services*

Trust services offered by our trust professionals have historically included corporate trust, asset management, land trust and tax-deferred exchange services, as well as fiduciary services for personal and employee benefit trusts. As a result of our strategic focus on targeted customers, we have elected to discontinue offering fiduciary services for personal and employee benefit trusts. We are negotiating the transfer of certain accounts in these categories to other providers who will maintain these accounts and handle future customer inquiries for similar services. Revenue from the accounts targeted for transfer totaled $1.6 million during 2001. In addition, some asset management accounts and a few individual managers will be transferred from our trust department to our wealth management department.

We anticipate that in the future the services offered by our trust professionals will relate primarily to corporate trust, land trust and tax-deferred exchange activities.

Competition

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

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

We expect that competition will intensify in the future, particularly as a result of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act has expanded the permissible activities of a bank holding company and it allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature or are incidental or complementary to financial activities. The Gramm-Leach-Bliley Act also eliminated restrictions imposed by the Glass-Steagall Act, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other’s business. While it is uncertain what the full impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these restrictions will likely increase the number of entities providing banking services and thereby create additional competition. For more information on the Gramm-Leach-Bliley Act, see the section of this prospectus captioned “Supervision and Regulation — The Bank — Gramm-Leach-Bliley Act.”

Properties

Our principal offices, including the principal offices of the Bank, are located in our main office building at 350 East Dundee Road, Suite 300, Wheeling, Illinois 60090. We lease our main office under a lease that commenced on January 1, 1995 and expires on March 31, 2010, with options to purchase the property or to extend the lease until March 31, 2025.

We own seven of the buildings from which bank branches are operated, including Ashland, Skokie, Burbank, Yorktown, Broadview, Old Orchard and Milwaukee. We lease the land under the buildings at Yorktown, Old Orchard and Milwaukee. We lease the buildings for our Woodlawn, Jackson and West Washington branches, which in accordance with the current lease terms expire in, or may be extended to, May 2013, February 2004 and December 2007, respectively. In January 2002, we closed the Cicero branch when the lease expired. Our Cicero customers are now directed to our Burbank branch.

The following is a list of our eleven operating branch locations:


		Square
Facility	Address	Feet

Wheeling	350 East Dundee Road, Wheeling, Illinois		58,310
West Washington	111 West Washington, Chicago, Illinois		40,662
Jackson	850 West Jackson, Chicago, Illinois		3,995
Ashland	47th Street and Ashland, Chicago, Illinois		79,260
Milwaukee	1965 North Milwaukee, Chicago, Illinois		27,394
Woodlawn	824 E. 63rd Street, Chicago, Illinois		2,100
Broadview	Cermak and 17th Street, Broadview, Illinois		5,550
Burbank	5501 West 79th Street, Burbank, Illinois		37,500
Yorktown	One Yorktown Center, Lombard, Illinois		12,400
Skokie	4400 West Oakton, Skokie, Illinois		15,800
Old Orchard	Golf Road and Skokie Boulevard, Skokie, Illinois		10,000

Legal Proceedings

We are from time to time a party to litigation arising in the normal course of business. As of the date of this prospectus, except for the proceedings described in the section of this prospectus captioned “Litigation and Settlement,” management knows of no threatened or pending legal actions against us that are likely to have a material adverse effect on our business, financial condition or results of operations. For further information about our pending litigation, see the section of this prospectus captioned “Litigation and Settlement.”

Employees

Together with the Bank, we had a total of approximately 552 full-time equivalent employees as of August 31, 2002. None of our employees is subject to a collective bargaining agreement. We consider our relationships with our employees to be good.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of our common stock in this offering, assuming an initial public offering price of $19.00 per share, the midpoint of the range shown on the cover of this prospectus, will be approximately $39.0 million. If the underwriters exercise their over-allotment option, we estimate our net proceeds will be $44.9 million. Net proceeds are what we expect to receive after paying the underwriters’ discount and other expenses of the offering. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder.

We intend to use the net proceeds from this offering of our common stock to satisfy a portion of our obligations under the settlement agreements described more fully in the section of this prospectus captioned “Litigation and Settlement.” Assuming an initial public offering price of $19.00 per share in this offering, the midpoint of the range shown on the cover of this prospectus, we estimate our obligation under the settlement agreements to be approximately $64.5 million. The remainder of our obligations under the settlement agreements will be satisfied by our proceeds from the concurrent offering of trust preferred securities. We estimate the net proceeds from the concurrent offering of trust preferred securities will be approximately $37.7 million. For a detailed description of the terms of the settlement agreements, see the section of this prospectus captioned “Litigation and Settlement.”

We intend to use the remaining aggregate net proceeds from this offering and the concurrent offering of trust preferred securities to reduce our outstanding term loan. We estimate that the remaining net proceeds from the offerings available to reduce our outstanding term loan will be $12.1 million. As of June 30, 2002, we had approximately $27.2 million of outstanding indebtedness at the holding company level, consisting of a $23.0 million term loan and $4.2 million outstanding under our $12 million revolving line of credit. Our term loan bears interest, at our option, at either the lender’s prime rate or the London Interbank Offering Rate, or LIBOR, plus 1.15% with a minimum interest rate of 3.50%. The interest rate was 3.50% at June 30, 2002. The term loan is currently scheduled to mature on April 30, 2003.

We have also received a commitment letter from our lender for a $10.0 million subordinated term loan. We will use the proceeds of this subordinated loan and, if necessary, our available revolving line of credit, to repay in full any remaining amounts outstanding under our existing term loan. Assuming completion of the concurrent offerings of common stock and trust preferred securities and the application of the net proceeds from these offerings as described above, and the replacement of the current $23.0 million term loan with a $10.0 million subordinated term loan, our total indebtedness at the holding company level will be approximately $55.1 million. This will consist of the $40.0 million of debentures issued to TAYC Capital Trust I in connection with the concurrent offering of trust preferred securities, the $10.0 million subordinated term loan and $5.1 million outstanding under the $12.0 million revolving line of credit. The subordinated term loan will require that we make interest only payments until 2009 with a balloon payment at maturity. We believe that these transactions will result in our being considered “well capitalized” at the holding company level under Federal Reserve guidelines.

Pending these uses, we intend to invest the net proceeds of the concurrent offerings of common stock and trust preferred securities in short-term, interest-bearing investment grade securities, certificates of deposit or guaranteed obligations of the United States of America.

DIVIDEND POLICY

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. For further information, see the section of this prospectus captioned “Description of Capital Stock — Common Stock.”

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 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 and the terms of our Series A preferred stock also limit our ability to pay dividends on our common stock.

As a result of the $64.5 million charge we recognized in connection with the settlement agreements described in this prospectus, we are not in compliance with the Federal Reserve’s capital adequacy guidelines. As a consequence, we have been informed by the Federal Reserve that we must receive its permission before paying dividends on our common or preferred stock. The Federal Reserve has approved the payment of our scheduled quarterly dividends on our common stock and our Series A preferred stock in October 2002, prior to completion of this offering. For further information concerning these restrictions, see the sections of this prospectus captioned “Risk Factors,” “Use of Proceeds,” “Supervision and Regulation” and “Description of the Trust Preferred Securities.”

The following table sets forth, for each quarter in 2001 and 2000, and the first, second and third quarters of 2002, the dividends declared on our common stock:


	2002 Dividends			2001 Dividends		2000 Dividends
	Per Share of			Per Share of		Per Share of
	Common Stock			Common Stock		Common Stock

First quarter	$	0.06		$	0.06	$	0.06
Second quarter		0.06			0.06		0.06
Third quarter		0.06	*		0.06		0.06
Fourth quarter		—			0.06		0.06


*	The record date and payment date for the scheduled third quarter dividend on our common stock are September 27, 2002 and October 11, 2002, respectively. This offering will be completed after the record date for this dividend. As a result, investors in this offering will not be entitled to receive this dividend.

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of our common stock to be sold in this offering exceeds the net tangible book value per share of our common stock after this offering. Net tangible book value per share is determined at any date by subtracting our total liabilities and preferred stock from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding as of that date.

Our net tangible book value, as of June 30, 2002, was approximately $55.8 million, or $8.19 per share of common stock. After giving effect to adjustments relating to this offering, our pro forma net tangible book value as of June 30, 2002 would have been approximately $94.8 million, or $10.46 per share. This represents an immediate increase in pro forma net tangible book value of $2.27 per share of common stock to existing stockholders and an immediate dilution of $8.54 per share to new investors purchasing shares of common stock in this offering. The adjustments made to determine pro forma net tangible book value per share are:


	•	increasing total assets and equity to reflect the estimated net proceeds of this offering as described under “Use of Proceeds,” assuming that the public offering price will be $19.00 per share, the midpoint of the range shown on the cover of this prospectus; and

	•	adding the number of shares offered by this prospectus to the number of shares outstanding.

The following table illustrates the pro forma increase in net tangible book value of $2.27 per share and the dilution to new investors:


Assumed initial public offering price per share				$	19.00
	Net tangible book value per common share before this offering	$	8.19
	Increase in pro forma net tangible book value per common share resulting from this offering		2.27

Pro forma net tangible book value per common share after giving effect to this offering					10.46

Dilution per share to new investors				$	8.54

The following table summarizes, on a pro forma basis as of June 30, 2002, the differences between existing stockholders and new investors with respect to:


	•	the number of shares of common stock purchased from us;

	•	the total consideration paid to us, assuming an initial public offering price of $19.00 per share of common stock, the midpoint of the range shown on the cover of this prospectus (before deducting the estimated underwriting discount and offering expenses payable by us in connection with this offering); and

	•	the average price per share paid by existing stockholders and by new investors purchasing common stock in this offering. The effect of treasury stock purchased by us has been excluded from this calculation.



		Shares Purchased					Total Consideration					Average
												Price Per
		Number		Percent			Amount		Percent			Share

Existing stockholders			7,095,125		76	%	$	102,997,000		71	%	$	14.52
New investors			2,250,000		24			42,750,000		29			19.00

	Total		9,345,125		100	%	$	145,747,000		100	%	$	15.60

The tables and calculations above, dated as of June 30, 2002, do not take into account (1) 846,867 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $18.91 per share, and (2) 178,850 shares of common stock reserved for issuance pursuant to future grants under our incentive compensation plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

CAPITALIZATION

Set forth below is our capitalization as of June 30, 2002:


	•	on an actual basis;

	•	on an adjusted basis to give effect to the following events, as if each event had occurred on June 30, 2002:


	•	the issuance and sale of the 2,250,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $19.00 per share, the midpoint of the range shown on the cover of this prospectus, and the application of the net proceeds therefrom; and

	•	the issuance and sale of 1,600,000 shares of trust preferred securities in the concurrent offering at an assumed offering price of $25.00 per trust preferred security and the application of the net proceeds therefrom; and


	•	on a pro forma as adjusted basis to give effect to the application of $12.1 million of the net proceeds from the concurrent offerings of common stock and trust preferred securities and $900,000 of revolving credit to repay $13.0 million outstanding under our existing term loan and the replacement of the remaining term loan with $10.0 million of subordinated debt, as if each of these events had occurred on June 30, 2002.

In the second quarter of 2002, we recorded a charge of $64.5 million related to a likely settlement of pending litigation against Taylor Capital that will be funded with a portion of the net proceeds from the concurrent offerings of common stock and trust preferred securities. The recognition of the charge resulted in our reporting a consolidated net loss of $54.2 million for the first six months of 2002. The loss reduced total stockholders’ equity to $118.3 million. For additional information on this charge, see the sections of this prospectus captioned “Litigation and Settlement” and “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 prospectus.

The outstanding share information as of June 30, 2002 excludes (1) 846,867 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $18.91 per share, and (2) 178,850 shares of common stock reserved for issuance pursuant to future grants under our incentive compensation plan.

The information presented below should be read 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 prospectus.



				June 30, 2002

										Pro Forma

				Actual			As Adjusted			As Adjusted


				(in thousands)
Indebtedness:
	Notes payable:
		Senior		$	27,200		$	15,052		$	5,052
		Subordinated			—			—			10,000
	Guaranteed preferred beneficial interest in the % junior subordinated debentures due 2032 of Taylor Capital Group, Inc.				—			40,000			40,000
Stockholders’ Equity:
	Preferred stock, $0.01 par value, Series A 9% noncumulative perpetual, $25 stated and redemption value; 5,000,000 shares authorized; 1,530,000 shares issued and outstanding, actual, as adjusted and pro forma as adjusted				38,250			38,250			38,250
	Common stock, $0.01 par value; 25,000,000 shares authorized; 7,095,125 shares issued and 6,813,588 shares outstanding, actual; 9,345,125 shares issued and 9,063,588 shares outstanding as adjusted and pro forma as adjusted				71			94			94
	Surplus				102,926			141,886			141,886
	Unearned compensation — stock grants				(863	)		(863	)		(863	)
	Retained earnings (deficit)				(25,248	)		(25,248	)		(25,248	)
	Accumulated other comprehensive income				9,456			9,456			9,456
	Treasury stock, at cost, 281,537 shares, actual, as adjusted and pro forma as adjusted				(6,308	)		(6,308	)		(6,308	)

			Total stockholders’ equity		118,284			157,267			157,267

Total capitalization				$	145,484		$	212,319		$	212,319

Capital Ratios:
	Leverage ratio(1)				3.40%			6.81%			6.81%
	Tier 1 risk-based capital ratio				4.31%			8.64%			8.64%
	Total risk-based capital ratio(2)				5.57%			9.89%			10.42%
	Total stockholders’ equity to assets				4.80%			6.38%			6.38%
	Tangible total stockholders’ equity to tangible assets				3.86%			5.45%			5.45%


(1)	The leverage ratio is Tier 1 capital divided by average quarterly assets, after deducting goodwill, intangible assets and net deferred assets in excess of regulatory maximum limits.

(2)	Subordinated notes payable with maturities greater than five years are included in Tier 2 capital under regulatory guidelines.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below under the caption “Taylor Capital Group, Inc.” as of and for the six months ended June 30, 2002 and 2001 and as of and for the four years ended December 31, 2001, and for the period from February 12, 1997 to December 31, 1997, is derived from our historical financial statements. Our consolidated financial statements for each of the four years ended December 31, 2001, and for the period from February 12, 1997 to December 31, 1997, have been audited by KPMG LLP, independent accountants. The financial data as of and for the six months ended June 30, 2002 and 2001 is derived from unaudited financial information. The selected financial information presented below under the caption of “Cole Taylor Bank” is derived from unaudited financial statements of the Bank or from our audited consolidated financial statements. 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 prospectus. Results from past periods are not necessarily indicative of results that may be expected for any future period.

In the second quarter of 2002, we recorded a charge of $64.5 million related to a likely settlement of pending litigation against Taylor Capital that will be funded with the net proceeds from the concurrent common stock and trust preferred securities offerings. The recognition of the charge resulted in our reporting a consolidated net loss of $54.2 million for the first six months of 2002. The loss reduced total stockholders’ equity to $118.3 million. For additional information on this charge, see the sections of this prospectus captioned “Litigation and Settlement” and “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 prospectus.


																						Period from
				For the Six Months																		February 12,
				Ended June 30,						Year Ended December 31,												1997 to
																						December 31,
				2002			2001			2001			2000			1999			1998			1997


				(in thousands, except share and per share data)
TAYLOR CAPITAL GROUP, INC. (consolidated):
Income Statement Data:
	Net interest income			$	50,349		$	44,667		$	91,718		$	87,322		$	78,834		$	70,736		$	62,156
	Provision for loan losses				4,950			4,250			9,700			7,454			6,000			5,135			4,061

		Net interest income after provision for loan loss			45,399			40,417			82,018			79,868			72,834			65,601			58,095
	Noninterest income:
		Service charges			5,864			5,672			11,513			10,346			9,609			8,997			8,279
		Trust fees			2,810			3,234			6,425			4,654			4,563			3,971			3,331
		Mortgage-banking revenues			275			1,118			2,122			1,534			2,682			5,083			2,598
		Gain on sale of investment securities, net			8			2,241			2,333			750			108			11			401
		Other noninterest income			1,351			1,076			1,880			1,989			2,228			2,559			3,264

			Total noninterest income		10,308			13,341			24,273			19,273			19,190			20,621			17,873
	Noninterest expense:
		Salaries and benefits			22,971			19,976			43,207			39,383			38,205			37,303			31,683
		Legal expense, net			1,846			2,369			2,504			12,053			6,226			4,364			2,227
		Goodwill amortization			—			1,158			2,316			2,326			2,393			2,431			2,230
		Litigation settlement charge			64,509			—			—			—			—			—			—
		Other noninterest expense			14,778			14,652			31,105			26,821			25,720			26,330			23,394

			Total noninterest expense		104,104			38,155			79,132			80,583			72,544			70,428			59,534

	Income (loss) before income taxes and cumulative effect of change in accounting principle				(48,397	)		15,603			27,159			18,558			19,480			15,794			16,434
	Income taxes				5,822			5,532			9,528			9,604			7,973			6,353			6,321
	Cumulative effect of change in accounting principle, net of income taxes				—			—			—			—			(214	)		—			—

	Net income (loss)				(54,219	)		10,071			17,631			8,954			11,293			9,441			10,113
	Preferred dividend requirements				(1,721	)		(1,721	)		(3,443	)		(3,443	)		(3,442	)		(3,442	)		(3,052	)

	Net income (loss) applicable to common stockholders			$	(55,940	)	$	8,350		$	14,188		$	5,511		$	7,851		$	5,999		$	7,061


																					Period from
			For the Six Months																		February 12,
			Ended June 30,						Year Ended December 31,												1997 to
																					December 31,
			2002			2001			2001			2000			1999			1998			1997


			(in thousands, except share and per share data)
Common Share Data(1):
	Basic earnings (loss) per share		$	(8.18	)	$	1.21		$	2.07		$	0.80		$	1.13		$	0.86		$	1.04
	Diluted earnings (loss) per share			(8.18	)		1.20			2.05			0.79			1.12			0.86			1.04
	Cash dividends per share			0.12			0.12			0.24			0.24			0.24			0.24			0.24
	Book value per share			11.75			18.83			19.41			17.25			15.76			15.29			14.77
	Dividend payout ratio			(1.47	)%		9.89	%		11.61	%		30.13	%		21.30	%		27.93	%		23.15	%
	Weighted average shares — basic earnings per share			6,838,856			6,881,706			6,862,761			6,919,751			6,967,028			6,981,047			6,810,194
	Weighted average shares — diluted earnings per share			6,838,856			6,959,393			6,908,070			6,960,494			6,991,478			6,995,766			6,810,194
	Shares outstanding — end of period			6,813,588			6,848,526			6,836,028			6,902,289			6,939,240			6,987,800			6,960,680
Balance Sheet Data (at end of period):
	Total assets		$	2,462,869		$	2,376,506		$	2,390,670		$	2,263,323		$	2,044,370		$	1,910,330		$	1,855,711
	Investment securities			506,699			514,322			494,208			510,187			433,412			426,732			463,821
	Total loans			1,801,676			1,642,069			1,741,637			1,611,692			1,456,805			1,335,981			1,204,437
	Allowance for loan losses			32,918			32,623			31,118			29,568			26,261			24,599			25,813
	Goodwill			23,354			24,512			23,354			25,671			28,860			31,903			34,334
	Total deposits			1,901,100			1,824,124			1,833,689			1,742,830			1,607,550			1,439,737			1,377,957
	Short-term borrowings			224,847			227,100			244,993			249,819			147,129			171,718			186,053
	Notes payable and FHLB advances			127,200			129,000			111,000			77,000			114,500			131,500			112,000
	Preferred stock			38,250			38,250			38,250			38,250			38,250			38,250			38,250
	Common stockholders’ equity			80,034			128,959			132,666			119,061			109,347			106,883			102,820
	Total stockholders’ equity			118,284			167,209			170,916			157,311			147,597			145,133			141,070
Earnings Performance Data(2):
	Return on average assets			(4.50	)%		0.86	%		0.75	%		0.40	%		0.57	%		0.51	%		0.61	%
	Return on average stockholders’ equity			(61.84	)		12.48			10.62			5.93			7.70			6.57			8.64
	Net interest margin (tax-equivalent)(3)			4.50			4.14			4.22			4.25			4.39			4.22			4.23
	Noninterest income to revenues			12.39			13.15			12.72			9.84			11.82			13.15			12.72
	Efficiency ratio(4)			65.29			68.42			69.62			76.13			74.09			77.10			74.77
	Loans to deposits			94.77			90.02			94.98			92.48			90.62			92.79			87.41
	Average interest-earning assets to average interest bearing liabilities			123.40			121.52			122.48			122.58			124.09			124.49			122.80
	Ratio of earnings to fixed charges(5):
		Including interest on deposits		1.52	x		1.28	x		1.27	x		1.14	x		1.20	x		1.15	x		1.18	x
		Excluding interest on deposits		2.74	x		2.01	x		1.97	x		1.49	x		1.65	x		1.43	x		1.56	x
Asset Quality Ratios:
	Allowance for loan losses to total loans			1.83	%		1.99	%		1.79	%		1.83	%		1.80	%		1.84	%		2.14	%
	Allowance for loan losses to nonperforming loans(6)			214.74			239.33			178.84			264.69			180.90			175.92			189.34
	Net loan charge-offs to average total loans(2)			0.36			0.15			0.49			0.27			0.31			0.50			0.27
	Nonperforming assets to total loans plus repossessed property(7)			0.86			0.84			1.03			0.71			1.06			1.29			1.25
Capital Ratios:
	Total stockholders’ equity to assets — end of period			4.80	%		7.04	%		7.15	%		6.95	%		7.22	%		7.60	%		7.60	%
	Average stockholders’ equity to average assets			7.28			6.89			7.09			6.79			7.41			7.69			7.06
	Leverage ratio			3.40			5.59			5.99			5.55			6.11			6.17			5.85
	Tier 1 risk-based capital ratio			4.31			7.56			7.70			7.25			7.77			7.76			7.95
	Total risk-based capital ratio			5.57			8.82			8.96			8.51			9.03			9.02			9.21
COLE TAYLOR BANK:
	Net income(8)		$	12,580		$	12,736		$	22,508		$	21,797		$	18,112		$	14,906		$	16,498
	Return on average assets(8)			1.05	%		1.10	%		0.96	%		0.98	%		0.92	%		0.80	%		0.89	%
	Stockholder’s equity to assets — end of period			8.63			8.38			8.41			8.35			8.46			8.85			9.09
	Leverage ratio			7.46			7.04			7.37			7.06			7.41			7.33			7.26
	Tier 1 risk-based capital ratio			9.46			952			9.46			9.22			9.41			9.42			9.90
	Total risk-based capital ratio			10.71			10.78			10.72			10.47			10.68			10.67			11.16


(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 will be effected as a dividend to stockholders of record as of October 2, 2002.

(2)	Selected earnings performance data and net loan charge-offs to average total loans are annualized for the six month periods ended June 30, 2002 and 2001 and for 1997.


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

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

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

(6)	Nonperforming loans include loans contractually past due 90 days or more but still accruing interest.

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

(8)	Financial data for Cole Taylor Bank represents a full year for 1997.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents our consolidated financial condition and results of operations for the six months ended June 30, 2002 and 2001, as well as for the years ended December 31, 2001, 2000 and 1999. This discussion should be read together with the “Selected Consolidated Financial Data,” our financial statements and the notes thereto and other financial data included in this prospectus. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this prospectus. All share and per share information for all periods presented has been adjusted for a three-for-two split of our common stock that will be effected as a dividend to stockholders of record as of October 2, 2002.

Overview

We are a bank holding company headquartered in Wheeling, Illinois, a suburb of Chicago. We derive virtually all of our revenue from our subsidiary, Cole Taylor Bank. As of December 31, 2001, the Bank was the tenth largest commercial bank headquartered in the Chicago metropolitan area based on assets. We provide a range of products and services to our commercial and consumer customers. We currently operate 11 branches throughout the Chicago metropolitan area.

The Taylor family entered the banking business in 1929 to provide credit and depository services to local businesses. Over the course of our 73-year history, we have worked to build solid foundations in the Chicago metropolitan area business community by providing our customers with highly personalized, professional and experienced service.

We recorded a net loss of $54.2 million, or $8.18 per common share, for the first six months of 2002 due to a $64.5 million charge recorded in the second quarter. This charge related to a likely settlement of pending litigation against the holding company that will be funded with the net proceeds from the concurrent offerings of common stock and trust preferred securities.

As a result of the settlement litigation charge, as of June 30, 2002, total stockholders’ equity was reduced to $118.3 million. Consequently, we were not in compliance with a financial covenant in our loan agreement relating to holding company leverage, and our capital fell below minimum capital guidelines for bank holding companies set by the Federal Reserve. We expect to return to compliance with all covenants under our credit facility and to adequately capitalized status upon completion of the concurrent offerings of common stock and trust preferred securities. For additional information on this charge, see the section of this prospectus captioned “Litigation and Settlement” and our consolidated financial statements. For additional information on the impact of the loan covenant violation and our regulatory capital adequacy, see the section of this discussion and analysis captioned “Financial Condition — Notes Payable and Federal Home Loan Bank Advances” and “Capital Resources.”

Additionally, a number of other matters arising in 2002 and 2001 impact the comparability of net income between the two periods. Net income in 2002 was positively impacted by the adoption of a new accounting standard on January 1, 2002, that eliminated the amortization expense on our goodwill. Goodwill amortization for the first six months of 2001 was $1.2 million. See the section of this discussion and analysis captioned “New Accounting Pronouncements” for additional details. Net income in 2002 was also impacted by the execution to date of our strategic plan adopted in the fall of 2001. Non-interest income in 2002 declined $1.3 million as a result of the reduced revenues from mortgage banking activities and fiduciary trust services. Moreover, non-interest income in 2001 included $2.2 million from gains on the sale of investment securities. Non-interest expense in 2002 was negatively impacted by the recognition of $1.7 million of severance and outplacement costs relating to our internal reorganization. The impact of these matters is described in more detail below. Net income for the first half of 2001 was $10.1 million, or $1.20 per diluted common share.

We recorded net income of $17.6 million, or $2.05 per diluted common share, for the year ended December 31, 2001, an increase of $8.6 million, or 96.9%, as compared to 2000 net income of $9.0 million, or

$0.79 per diluted common share. This increase was primarily a result of higher net interest income and noninterest income and slightly lower noninterest expense, partially offset by a higher provision for loan losses. Net income in 2000 was $9.0 million, a decrease of $2.3 million, or 20.7%, as compared to net income of $11.3 million in 1999, or $1.12 per diluted common share outstanding. This decrease was primarily attributable to an $8.0 million increase in noninterest expense, which was partially offset by higher net interest income. We have incurred significant expenses in connection with litigation discussed in this prospectus under the caption “Litigation and Settlement” and Note 1 to our consolidated financial statements. At the holding company level, we have incurred legal fees, net of reimbursements, related to this litigation of $580,000 and $1.5 million during the first half of 2002 and 2001, respectively. These legal expenses, net of reimbursements, approximated $195,000, $10.1 million, and $4.9 million during the years of 2001, 2000, and 1999, respectively.

Total assets were $2.46 billion at June 30, 2002, an increase of $72.2 million, or 3.0%, over year-end 2001. During the first six months of 2002, total gross loans were $1.80 billion, an increase of $60.0 million, or 3.4%, compared to total gross loans of $1.74 billion at December 31, 2001. Total deposits were $1.90 billion, an increase of $67.4 million, or 3.7%, compared to total deposits of $1.83 billion at December 31, 2001. Stockholders’ equity was $118.3 million at June 30, 2002, a decrease of $52.6 million compared to $171.0 million at December 31, 2001. Our total assets were $2.39 billion at December 31, 2001, an increase of $127.3 million, or 5.6%, over total assets of $2.26 billion at December 31, 2000. Total gross loans at December 31, 2001 were $1.74 billion, an increase of $130.0 million, or 8.1%, as compared to December 31, 2000. Total deposits were $1.83 billion at December 31, 2001, an increase of $90.9 million, or 5.2%, as compared to December 31, 2000. Total stockholders’ equity was $170.9 million at December 31, 2001, an increase of $13.6 million, or 8.6%, as compared to total stockholders’ equity of $157.3 million at the previous year-end.

During the first six months of 2002, excluding the charge related to a likely settlement of pending litigation, our annualized return on average assets and return on average equity was 0.85% and 11.71%, respectively, as compared to an annualized return on average assets and return on average equity of 0.86% and 12.48%, respectively, during the first six months of 2001. In comparison, return on average assets was 0.75%, 0.40% and 0.57% for the years ended December 31, 2001, 2000 and 1999, respectively, while our return on average equity was 10.62%, 5.93% and 7.70% over the same periods, respectively.

Critical Accounting Policies

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 periodically increased by provisions for loan losses charged to expense and decreased by charge-offs, net of recoveries. Although we charge-off a loan when we deem it uncollectable, collection efforts may continue and future recoveries may occur.

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 historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio, trends in delinquency and criticized assets, general economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time. Estimating the risk of loss and amount of loss on any loan is necessarily subjective and actual losses may vary from current estimates. We review our estimates on a quarterly basis and we identify changes in estimates in income through the provision for loan losses in the appropriate period.

A portion of our total allowance for loan losses is related to impaired loans. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due in accordance with the contractual terms of the loan agreement. Certain homogenous loans, including residential mortgage and consumer loans, are collectively evaluated for

impairment and, therefore, excluded from impaired loans. Commercial loans exceeding established size thresholds are individually evaluated for impairment. The amount included for impaired loans in our allowance for loan losses 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.


	*Loss Contingency*

We recognize as a loss legal and other contingencies when, based upon available information, it is probable that a liability has been incurred and the amount of the loss contingency or range of amounts can be reasonably estimated. We have entered into settlement agreements with respect to the litigation described in the section of this prospectus captioned “Litigation and Settlement.” As of the time of the issuance of our financial statements for 2001, several conditions relating to the settlement agreements, the issuance and listing of the securities to be tendered pursuant to the settlement agreements and the entry of required dismissal orders remained unresolved. Because of the continued protracted negotiations and unresolved conditions that were not within our control or subject to our influence, we determined that the loss contingency represented by the settlement agreements was not probable.

Subsequent to the issuance of the December 31, 2001 financial statements, we entered into new agreements with the Estate Representative and the class plaintiffs. Based on the terms and conditions of these agreements, in the second quarter, we determined the settlement to be probable, and therefore have recorded a charge to earnings as of June 30, 2002, and recorded a corresponding liability. To date, the settlement has not occurred, but will be completed upon completion of the concurrent common stock and trust preferred securities offerings. See the section of this prospectus captioned “Litigation and Settlement” for further details.


	*Goodwill Impairment*

In June 2001, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets.” Under the provisions of SFAS 142, goodwill will no longer be amortized against earnings. Instead, goodwill and intangible assets deemed to have an indefinite life would be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful life. We adopted this standard on January 1, 2002.

In accordance with SFAS 142, the goodwill we recognized in connection with our acquisition of the Bank will be tested periodically for impairment. Although guidance exists with respect to evaluating impairment, the process will involve critical judgments. Our goodwill was tested for impairment as of January 1, 2002 and no impairment charge was necessary. The amount of goodwill subject to future impairment testing totaled $23.4 million at June 30, 2002. Amortization expense associated with goodwill was $1.2 million during the first six months of 2001 and $2.3 million for year ended December 31, 2001.

Results of Operations as of and for the Six Months Ended June 30, 2002 and 2001 and as of and for the Years Ended December 31, 2001, 2000 and 1999


	*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.

Six Months Ended June 30, 2002 as Compared to Six Months Ended June 30, 2001. Net interest income was $50.3 million during the six month period ended June 30, 2002, as compared to $44.7 million during the same six month period in 2001, an increase of $5.7 million, or 12.7%. With an adjustment for tax-

exempt income, our consolidated net interest income was $51.3 million, an increase of $5.5 million, or 12.1%, as compared to $45.7 million during the same six month period in 2001. An increase in average interest-earning assets as well as a higher net interest margin produced the increase in both net interest income and tax-exempt income adjusted net interest income. Net interest margin, which is determined by dividing taxable equivalent net interest income by average interest-earning assets, increased to 4.50% during the first six months of 2002 as compared to 4.14% during the same period in 2001. The significant decline in market interest rates between the two periods caused both the yield on interest-earning assets and the cost of interest-bearing liabilities to fall. However, the decline in the cost of interest-bearing liabilities was larger, resulting in an overall increase in the net interest margin. Between the two periods, the cost of interest-bearing liabilities declined 235 basis points, while the yield on interest-earning assets declined by 161 basis points. The larger decline in the cost of interest-bearing liabilities also caused the net interest spread, which is the difference between the weighted average yield on interest-earning assets and the rate paid on interest-bearing liabilities, to increase to 4.03% in the first six months of 2002 as compared to 3.29% during the first six months of 2001.

Average interest-earning assets during the first six months of 2002 totaled $2.29 billion, an increase of $70.1 million, or 3.2%, as compared to average interest-earning assets of $2.22 billion during the first six months of 2001. In the first half of 2002, our average loans totaled $1.77 billion, an increase of $124.6 million, or 7.6%, as compared to average total loans of $1.64 billion during the same period in 2001. Higher average commercial and commercial real estate loans of $78.5 million and home equity and consumer loans of $93.8 million produced the growth in total loans. The yield on interest-earning assets declined 161 basis points to 6.48% during the first half of 2002 as compared to the first half of 2001. Declining market interest rates, including a 475 basis point decline in the Bank’s prime lending rate during 2001, caused the decline in the yield because much of the commercial loan and home equity line portfolios are indexed to the Bank’s prime lending rate. On the funding side, the rapidly declining interest rate environment also lowered our cost of funds. The cost of interest-bearing liabilities decreased 235 basis points to 2.45% during the six months ended June 30, 2002 as compared to the same period in 2001. Our cost of deposits declined 231 basis points while our cost of borrowings declined by 247 basis points. As interest rates declined, the Bank was able to lower interest rates on deposit products and replace some maturing higher cost certificates of deposit and our borrowings with lower cost funds.

Year Ended December 31, 2001 as Compared to Year Ended December 31, 2000. Net interest income was $91.7 million during the year ended December 31, 2001, as compared to $87.3 million during the year ended December 31, 2000, an increase of $4.4 million, or 5.0%. With an adjustment for tax-exempt income, our consolidated net interest income was $93.8 million, an increase of $4.2 million, or 4.6%, as compared to $89.6 million in 2000. These increases resulted from higher interest-earning assets and were partially offset by a decline in our net interest margin. Net interest margin decreased to 4.22% for the year ended December 31, 2001 as compared to 4.25% during 2000. The net interest spread increased to 3.47% during 2001 as compared to 3.29% in 2000 as funding costs declined more than asset yields between the two periods. Despite the increase in the our net interest spread, our net interest margin contracted as a result of a larger volume of interest-earning assets re-pricing downward, as compared to interest-bearing liabilities, during the falling interest rate environment in 2001.

Average interest-earning assets during 2001 totaled $2.22 billion, an increase of $112.9 million, or 5.4%, as compared to average interest-earning assets in 2000. In 2001, our average loans totaled $1.66 billion, an increase of $109.7 million, or 7.1%, as compared to 2000. This increase is primarily attributable to increases occurring in commercial and commercial real estate loans of $78.1 million and home equity and consumer loans of $41.5 million. The yield earned on assets declined 87 basis points to 7.60% during 2001 as compared to 2000. Declining market interest rates, including the decrease in the Bank’s prime lending rate during 2001, caused the decline in the yield on interest earning assets. On the funding side, the rapidly declining interest rate environment also lowered our cost of funds by 105 basis points, to 4.13%, during 2001. Our cost of deposits declined 88 basis points while our cost of borrowings declined by 172 basis points. As interest rates declined, the Bank was able to lower interest rates on deposit products and replace some maturing higher costing certificates of deposit and our borrowings with lower costing funding sources. In addition, funding from

customers in 2001 not only supported loan growth, but also allowed for reductions in our wholesale funding. During 2001, the level of average brokered certificates of deposit declined by $59.5 million. The cost of our wholesale funds is generally higher than the rate we pay on our customer funds.

Year Ended December 31, 2000 as Compared to Year Ended December 31, 1999. Net interest income was $87.3 million during the year ended December 31, 2000, as compared to $78.8 million during the year ended December 31, 1999, an increase of $8.5 million, or 10.8%. With an adjustment for tax-exempt income, our consolidated net interest income was $89.6 million for the year ended December 31, 2000, an increase of $8.4 million, or 10.3%, over net interest income in 1999. The higher levels of net interest income and tax-exempt income adjusted net interest income in 2000 were due to an increase in interest-earning assets and were partly offset by a 14 basis point decline in our net interest margin.

Average interest-earning assets were $2.11 billion in 2000, an increase of $256.2 million, or 13.9%, as compared to $1.85 billion in 1999. During 2000, average loan balances totaled $1.55 billion, an increase of $156.2 million, or 11.2%, as compared to 1999. This increase is primarily attributable to increases occurring in commercial and commercial real estate loans of $101.2 million and home equity and consumer loans of $45.3 million. Because the asset growth in 2000 outpaced our ability to generate deposits, we also relied on short-term borrowings and wholesale funds, primarily brokered certificates of deposit. During 2000, average short-term borrowings rose by $35.5 million while brokered certificates of deposit rose by $96.8 million. Our net interest margin was 4.25% in 2000 as compared to 4.39% in 1999. Market interest rates generally increased during 2000, with the Bank’s prime lending rate rising 100 basis points during the year. Our cost of funds increased faster than the yield on interest-earning assets. Our yield on interest-earning assets rose by 60 basis points from 7.87% in 1999 to 8.47% in 2000 while our cost of funds rose by 86 basis points from 4.32% in 1999 to 5.18% in 2000. The increase in brokered certificates of deposit, which tend to pay a higher interest rate as compared to customer funds, negatively impacted our net interest margin.

The following table presents, for the periods indicated, certain information relating to our consolidated average balances and reflects our yield on average interest-earning assets and costs of average interest-bearing liabilities. These yields and costs are derived by dividing income or expense by the average balance of assets or liabilities. Interest income is measured on a tax-equivalent basis using a 35% tax rate.



					For Six Months Ended June 30,


					2002								2001

										Yield/								Yield/
					Average					Rate			Average					Rate
					Balance			Interest		(%)(6)			Balance			Interest		(%)(6)


					(in thousands)
INTEREST-EARNING ASSETS:
Investment securities(1):
	Taxable				$	443,625		$	12,485		5.63	%	$	454,657		$	14,408		6.35	%
	Tax-exempt (tax equivalent)(2)					59,683			2,271		7.61			67,266			2,650		7.88

			Total investment securities			503,308			14,756		5.86			521,923			17,058		6.54

Cash equivalents						21,121			184		1.73			57,062			1,265		4.41

Loans(3):
	Commercial and commercial real estate					1,267,043			41,621		6.53			1,188,509			51,331		8.59
	Residential real estate mortgages					147,095			5,327		7.24			194,821			7,343		7.54
	Home equity and consumer					351,082			10,293		5.91			257,247			10,918		8.56
	Fees on loans								1,612								1,285

			Net loans (tax equivalent)			1,765,220			58,853		6.72			1,640,577			70,877		8.70

				Total interest earning assets		2,289,649			73,793		6.48			2,219,562			89,200		8.09

NON-EARNING ASSETS:
	Allowance for loan losses					(32,558	)							(31,003	)
	Cash and due from banks					58,480								57,496
	Accrued interest and other assets					93,719								94,431

TOTAL ASSETS					$	2,409,290							$	2,340,486

INTEREST-BEARING LIABILITIES:
	Interest-bearing deposits:
			Interest-bearing demand deposits		$	649,503			4,862		1.51		$	449,784			7,208		3.23
			Savings deposits			89,536			400		0.90			88,669			672		1.53
			Time deposits			751,079			12,893		3.46			896,573			26,065		5.86

				Total interest-bearing deposits		1,490,118			18,155		2.46			1,435,026			33,945		4.77

Short-term borrowings						240,698			1,868		1.57			265,979			5,991		4.54
Notes payable and FHLB advances						124,641			2,517		4.02			125,514			3,525		5.59

		Total interest-bearing liabilities				1,855,457			22,540		2.45			1,826,519			43,461		4.80

NONINTEREST-BEARING LIABILITIES:
	Noninterest-bearing deposits					351,010								320,098
				Accrued interest and other liabilities		27,471								32,505

				Total noninterest-bearing liabilities		378,481								352,603

STOCKHOLDERS’ EQUITY						175,352								161,364

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY					$	2,409,290							$	2,340,486

Net interest income (tax equivalent)								$	51,253							$	45,739

Net interest spread(4)											4.03	%							3.29	%

Net interest margin(5)											4.50	%							4.14	%


(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.
(6)	Yield/ Rates are annualized.



				Year Ended December 31,


				2001								2000								1999

									Yield/								Yield/								Yield/
				Average					Rate			Average					Rate			Average					Rate
				Balance			Interest		(%)			Balance			Interest		(%)			Balance			Interest		(%)


				(in thousands)
INTEREST-EARNING ASSETS:
Investment securities(1):
	Taxable			$	438,469		$	27,318		6.23	%	$	453,512		$	28,821		6.35	%	$	366,018		$	20,631		5.64	%
	Tax-exempt (tax equivalent)(2)				67,253			5,212		7.75			69,517			5,391		7.76			70,941			5,439		7.67

		Total investment securities			505,722			32,530		6.43			523,029			34,212		6.54			436,959			26,070		5.97

Cash equivalents					53,612			1,993		3.67			33,071			2,105		6.26			19,180			973		5.07

Loans(3):
	Commercial and commercial real estate				1,206,629			96,484		7.89			1,128,567			105,046		9.16			1,027,353			88,765		8.64
	Residential real estate mortgages				186,356			14,023		7.52			196,275			14,910		7.60			186,509			13,459		7.22
	Home equity and consumer				267,097			20,886		7.82			225,561			20,267		8.96			180,296			14,801		8.21
	Fees on loans							2,665								2,280								1,583

		Net loans (tax equivalent)			1,660,082			134,058		8.08			1,550,403			142,503		9.17			1,394,158			118,608		8.51

			Total interest earning assets		2,219,416			168,581		7.60			2,106,503			178,820		8.47			1,850,297			145,651		7.87

NON-EARNING ASSETS:
	Allowance for loan losses				(31,407	)							(28,457	)							(25,959	)
	Cash and due from banks				58,655								60,741								69,389
	Accrued interest and other assets				95,823								82,947								86,699

TOTAL ASSETS				$	2,342,487							$	2,221,734							$	1,980,426

INTEREST-BEARING LIABILITIES:
	Interest-bearing deposits:
		Interest-bearing demand deposits		$	527,905			14,231		2.70		$	413,515			14,927		3.60		$	371,020			11,498		3.10
		Savings deposits			88,531			1,181		1.33			95,182			1,465		1.53			105,215			1,775		1.69
		Time deposits			823,889			43,763		5.31			863,816			52,217		6.03			705,308			35,859		5.08

			Total interest-bearing deposits		1,440,325			59,175		4.11			1,372,513			68,609		4.99			1,181,543			49,132		4.16

Short-term borrowings					247,393			9,010		3.64			224,778			12,526		5.56			189,250			8,665		4.58
Notes payable and FHLB advances					124,352			6,631		5.26			121,198			8,065		6.55			120,241			6,593		5.48

		Total interest-bearing liabilities			1,812,070			74,816		4.13			1,718,489			89,200		5.18			1,491,034			64,390		4.32

NONINTEREST-BEARING LIABILITIES:
	Noninterest-bearing deposits				333,000								322,073								318,287
		Accrued interest and other liabilities			31,365								30,241								24,428

		Total noninterest-bearing liabilities			364,365								352,314								342,715

STOCKHOLDERS’ EQUITY					166,052								150,931								146,677

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	2,342,487							$	2,221,734							$	1,980,426

Net interest income (tax equivalent)							$	93,765							$	89,620							$	81,261

Net interest spread(4)										3.47	%							3.29	%							3.55	%

Net interest margin(5)										4.22	%							4.25	%							4.39	%


(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.

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:



			For the Six Months Ended
			June 30,									Year Ended December 31,


			2002 over 2001									2001 over 2000									2000 over 1999
			Increase/(Decrease)									Increase/(Decrease)									Increase/(Decrease)

			Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net


			(in thousands)
INTEREST EARNED ON:
	Investment securities:
		Taxable	$	(339	)	$	(1,584	)	$	(1,923	)	$	(944	)	$	(559	)	$	(1,503	)	$	5,342		$	2,848		$	8,190
		Tax-exempt		(291	)		(88	)		(379	)		(175	)		(4	)		(179	)		(110	)		62			(48	)
	Cash equivalents			(550	)		(531	)		(1,081	)		982			(1,094	)		(112	)		837			295			1,132
	Loans			13,250			(25,274	)		(12,024	)		9,630			(18,075	)		(8,445	)		13,915			9,980			23,895

Total interest-earning assets										(15,407	)								(10,239	)								33,169

INTEREST PAID ON:
	Interest-bearing demand deposits			5,969			(8,315	)		(2,346	)		3,583			(4,279	)		(696	)		1,406			2,023			3,429
	Savings deposits			20			(292	)		(272	)		(98	)		(186	)		(284	)		(162	)		(148	)		(310	)
	Time deposits			(3,738	)		(9,434	)		(13,172	)		(2,333	)		(6,121	)		(8,454	)		8,887			7,471			16,358
	Short-term borrowings			(523	)		(3,600	)		(4,123	)		1,162			(4,678	)		(3,516	)		1,790			2,071			3,861
	Notes payable and FHLB advances			(24	)		(984	)		(1,008	)		205			(1,639	)		(1,434	)		53			1,419			1,472

Total interest-bearing liabilities										(20,921	)								(14,384	)								24,810

Net interest income			$	2,094		$	3,420		$	5,514		$	4,461		$	(316	)	$	4,145		$	10,501		$	(2,142	)	$	8,359


	*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 section of this discussion and analysis captioned “Critical Accounting Policies — Allowance for Loan Losses.”

Our provision for loan losses was $5.0 million during the first six months of 2002, an increase of $700,000, or 16.5%, as compared to $4.3 million during the first six months of 2001. In addition, our provision for loan losses increased to $9.7 million during 2001, as compared to $7.5 million and $6.0 million for the years ended December 31, 2000 and 1999, respectively. These increases resulted from the growth in our loan portfolio and increased net charge-offs. We expect that our provision for loan losses will increase with continued growth in our loan portfolio and, if the recent economic downturn continues, an increase in the future level of our net charge-offs. For additional details concerning nonaccrual loans, net charge-offs and the factors that we consider in determining our allowance for loan losses, see the sections of this discussion and analysis captioned “Nonperforming Loans and Assets” and “Allowance for Loan Losses.”


	*Noninterest Income*

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



		For the Six
		Months Ended
		June 30,				Year Ended December 31,

		2002		2001		2001		2000		1999


		(in thousands)
Service charges		$	5,864	$	5,672	$	11,513	$	10,346	$	9,609
Trust fees			2,810		3,234		6,425		4,654		4,563
Mortgage-banking activities			275		1,118		2,122		1,534		2,478
Gain on sale of mortgage servicing rights			—		—		—		—		204
ATM fees			506		560		1,111		1,068		1,026
Gain on sale of investment securities, net			8		2,241		2,333		750		108
Other noninterest income			845		516		769		921		1,202

	Total noninterest income	$	10,308	$	13,341	$	24,273	$	19,273	$	19,190

Our noninterest income was $10.3 million during the first six months of 2002, compared to $13.3 million during the same period in 2001. The decline in 2002 was primarily a result of lower mortgage banking revenues, trust fees and gains on the sale of available- for- sale investment securities. Noninterest income was $24.3 million during the year ended December 31, 2001, an increase of $5.0 million, or 25.9%, as compared to $19.3 million during the year ended December 31, 2000. The increase in noninterest income during 2001, as compared to 2000, was largely due to higher deposit service charges, an increase in trust fees and $2.3 million in gains on the sale of available-for-sale investment securities. Our noninterest income was relatively flat in 2000 as compared to 1999 as higher deposit service charges and gains on the sale of available-for-sale securities were partially offset by declines in our mortgage banking revenues.

Service charges, principally on deposit accounts, were $5.9 million during the first six months of 2002, an increase of $192,000, or 3.4%, as compared to $5.7 million during the first six months of 2001. Service charges totaled $11.5 million during 2001, an increase of $1.2 million, or 11.3%, as compared to $10.3 million during 2000. These increases resulted from increased sales of corporate cash management products and higher fees received on business deposit accounts as a result of a declining earnings credit rate in 2001. The earnings credit rate determines the amount of credit given to customers for their collected balances and is available to offset account service charges incurred. Service charges in 2000 were $737,000 higher than the $9.6 million of service charges in 1999. Increased service charge schedules/ rates implemented in 2000 and increased sales of corporate cash management products principally contributed to the increase in our deposit service charges.

Trust fees totaled $2.8 million during the six months ended June 30, 2002, a decrease of $424,000, or 13.1%, as compared to the $3.2 million of trust fees during the same period in 2001. Approximately 70% of the decline in fees was a result of significant run-off of the trust business we acquired in October 2000. The decrease in revenue related to the acquired trust business has exceeded our initial expectations and resulted in our prospective acceleration of the amortization of the intangible assets recorded at the acquisition of that business. Our trust fees during 2001 were $6.4 million, an increase of $1.8 million, or 38.1%, as compared to $4.7 million during 2000. This increase primarily resulted from our acquisition of a trust and asset management business of another financial institution in October 2000. Our trust fees were $4.7 million during 2000, a slight increase as compared to the $4.6 million of fees in 1999. The level of our trust fees in the future is expected to be further impacted by management’s decision to focus primarily on the corporate trust, land trust and tax deferred exchange lines of trust business while de-emphasizing and exiting personal and employee benefit trust services. We are currently in final negotiations for the sale of selected fiduciary personal and employee benefit retirement accounts currently managed by our trust department. We expect to consummate the sales before the end of 2002. Personal and employee benefit trust services contributed approximately $2 million annually in trust fees in 2001, 2000 and 1999.

Our mortgage banking revenue consists primarily of net gains on sales of loans and mortgage brokerage fees. Mortgage brokerage fees relate primarily to the reverse mortgage and sub-prime mortgage products that are funded and retained by third parties. The level of mortgage banking revenues has been impacted by our management’s decision, announced in September 2001, to discontinue origination of mortgages for sale into the secondary market. We have also discontinued originating first mortgage loans for non-bank customers. The volume of first mortgage loans originated in the first six months of 2002 was $18.7 million compared to $108.1 million in the same period in 2001.

During 2002, mortgage banking revenues consisted primarily of mortgage brokerage fees because the origination of mortgages for sale into the secondary market was discontinued in late 2001. Mortgage banking revenues were $275,000 for the first six months of 2002 as compared to $1.1 million for the first six months of 2001. Our reduced focus on mortgage originations in 2002 resulted in a decline in mortgage brokerage income and gains on mortgage sales from $526,000 and $607,000, respectively, in the first six months of 2001 to $288,000 and a loss of $14,000 in the same period in 2002.

Our mortgage banking revenues were $2.1 million for the year ended December 31, 2001, an increase of $588,000, or 38.3%, as compared to $1.5 million during 2000. This increase resulted from higher volumes of loans sold. The volume of loans sold increased approximately 67% to $109 million in 2001 while the average gain expressed as a percentage of principal sold declined 34 basis points to 116 basis points. Declining mortgage interest rates in 2001 produced a higher volume of loan originations and corresponding loan sales. An increase in mortgage brokerage fees also contributed to the higher revenue. Our mortgage banking revenues were $1.5 million in 2000, a $944,000 decline, as compared to the $2.5 million of revenue in 1999. Loan sale volume declined 66% between 2000 and 1999, causing the decline in revenues. The Bank also sold servicing rights relating to approximately $74 million of mortgage loans in 1999, resulting in a gain of $204,000. These servicing rights were generated from loans that were originated by the Bank and subsequently sold.

ATM fee income was $506,000 during the first half of 2002 and $560,000 during the first half of 2001. Lower surcharge revenue caused the decline in income. In the yearly comparisons, ATM fee income was $1.1 million during both 2001 and 2000 and $1.0 million during 1999. The slight increase in income over 1999 was due to an increase in ATM fees charged to customers for use of non-Bank owned ATMs. In February 2001, the Bank announced that it had joined an alliance of more than 80 other financial institutions in Illinois and now waives the surcharges for customers of the other financial institutions in the alliance who use a Bank-owned ATM.

Net gains on the sale of available-for-sale investment securities totaled $8,000 and $2.2 million during the first six months of 2002 and 2001, respectively. These gains were $2.3 million, $750,000 and $108,000 during the years ended December 31, 2001, 2000, and 1999, respectively. The securities sales in 2001 resulted from a restructuring of a portion of the investment portfolio in which U.S. government agency securities that were maturing within the next two years were sold at a gain and replaced with longer-term mortgage related securities. The $750,000 gain on the sale of investment securities in 2000 resulted from the Bank’s sale of an investment in an organization that operated the ATM network.

Other non-interest income, which principally includes standby letters of credit fees, fees from financial services (i.e., the sale of insurance and other financial services products) and safe deposit rental fees, totaled $845,000 and $516,000 during the first six months of 2002 and 2001, respectively. The increase in other non-interest income during the first half of 2002 was primarily due to $590,000 of proceeds received from key man life insurance policies. For the yearly comparisons, other non-interest income was $769,000, $921,000, and $1.2 million for 2001, 2000, and 1999, respectively. The sequential decline in other non-interest income is primarily related to a decline in import/ export letters of credit as these services were outsourced to a third party.


	*Noninterest Expense*

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



	For the Six Months
	Ended June 30,				For the Year Ended December 31,

	2002		2001		2001		2000		1999


			(in thousands)
Salaries and employee benefits	$	22,971	$	19,976	$	43,207	$	39,383	$	38,205
Occupancy of premises		3,167		3,315		6,940		6,440		6,472
Furniture and equipment		1,865		2,067		4,421		4,126		4,291
Computer processing		1,154		1,123		2,254		2,234		2,411
Holding company legal fees, net		995		1,689		674		10,650		5,355
Bank legal fees, net		851		680		1,830		1,403		871
Consulting		520		1,016		2,422		1,704		936
Advertising and public relations		885		300		1,069		1,028		1,275
Goodwill amortization		—		1,158		2,316		2,326		2,393
Other intangible assets amortization		132		118		251		68		18
Other real estate and repossessed asset expense		243		—		602		104		229
Litigation settlement charge		64,509		—		—		—		—
Other noninterest expense		6,812		6,713		13,146		11,117		10,088

Total noninterest expense	$	104,104	$	38,155	$	79,132	$	80,583	$	72,544

Noninterest expense was $104.1 million for the first half of 2002. Excluding the $64.5 million litigation settlement charge, noninterest expense would have been $39.6 million for the six months ended June 30, 2002. For the same six month period in 2001, noninterest expense was $38.2 million. Without the amortization expense of goodwill, noninterest expense during the first six months of 2001 would have been $37.0 million, which was $2.6 million, or 7.0%, less than noninterest expense without the litigation charge in the first half of 2002. The increase between the two periods was mainly produced by higher salaries and benefits and advertising expense. Our noninterest expense was $79.1 million during the year of 2001, a decrease of $1.5 million, or 1.8%, as compared to noninterest expense in 2000. A $9.5 million decline in net legal fees was partially offset by higher salaries and employee benefits, consulting, and other noninterest expense. Total noninterest expense was $80.6 million, an increase of $8.0 million, or 11.1%, in 2000 as compared to $72.5 million for the year ended December 31, 1999. This increase was attributable primarily to a $5.8 million increase in legal fees, as well as higher salaries and benefits. In 1999 and 2000, the higher legal fees were primarily associated with the defense of litigation described in the section of this prospectus captioned “Litigation and Settlement.”

Salaries and employee benefits represent the largest category of our noninterest expense. For the first six months of 2002, salaries and employee benefits totaled $23.0 million, an increase of $3.0 million, or 15.0%, as compared to $20.0 million during the same period in 2001. Included in this expense for 2002 was $1.6 million for severance related to the decision to exit some trust lines of business and other executive management level changes. In addition, an increase in base salaries and higher costs associated with employee benefit plans contributed to the increase. At June 30, 2002, we had 533 full-time equivalent employees as compared to 553 full-time equivalent employees at June 30, 2001. For the year ended December 31, 2001, salaries and employee benefits totaled $43.2 million, an increase of $3.8 million, or 9.7%, as compared to $39.4 million during 2000. This increase primarily resulted from the $2.0 million of additional expense related to our employee stock ownership plan, or ESOP, annual merit increases and the new employees that were added when the Bank purchased the trust and asset management business of another financial institution in October 2000.

In the fourth quarter of 2001 and during the first quarter of 2002, we recorded $2.0 million and $115,000, respectively, of additional expense related to the ESOP. In connection with the acquisition of the Bank, we

and the ESOP trustee entered into an agreement that required us to value the shares that were in the ESOP at the time of acquisition (control-value shares) at the same value that the shares of the controlling owners are valued. The appraisal computes a value for minority shareholders and a separate value, with a premium, for the control-value shares. At December 31, 2001, the ESOP held 262,311 control-value shares entitled to this control-value premium. We and the ESOP trustee agreed to terminate the original agreement and, in consideration for the termination, pay into the ESOP a control-value cash premium of $2.1 million for those participants in the ESOP with control-value shares. The amount paid was allocated to the profit sharing portion of the ESOP for those participants with control-value shares. An estimate of the control value premium was recorded during the fourth quarter of 2001 when the agreement between us and the ESOP Trustee was signed, which was adjusted during the first quarter of 2002 when the third-party appraisal was completed and the actual control value premium was calculated.

Salaries and employee benefits totaled $39.4 million in 2000, an increase of $1.2 million, or 3.1%, as compared to $38.2 million of expense in 1999. Annual merit and long-term incentive increases mainly produced the increase. This increase was partially offset by a modest decline in full-time equivalent employees to 592 at December 31, 2000 as compared to 612 at December 31, 1999.

Our occupancy of premises expense was $3.2 million during the first six months of 2002, a slight decrease from the $3.3 million of expense during the same period in 2001. We closed our Cicero branch facility in January 2002 when the lease expired, and our customers are directed to another of our branches located less than one mile from the Cicero facility. Occupancy of premises expense was $6.9 million during 2001, a $500,000 or 7.8% increase over the $6.4 million of expense during 2000. This increase was largely due to additional space leased at our West Washington Street location to consolidate certain of our lending and trust operations. Our occupancy expense in 2000 was slightly lower than the $6.5 million of expense during 1999. In 1999, we significantly reduced the number of square feet leased at our West Jackson Street facility, resulting in reduced rent and related leasehold expense.

Furniture and equipment expense was $1.9 million during the six months ended June 30, 2002, a decrease of $202,000 over the expense of $2.1 million during the same period in 2001. Lower depreciation expense produced most of the decrease. Our furniture and equipment expense for 2001 was $4.4 million as compared to $4.1 million and $4.3 million during 2000 and 1999, respectively. During 2001, higher depreciation and maintenance charges, associated with furniture and equipment for the additional leased space and certain technology projects, produced the increase in expense in 2001. Costs associated with technology readiness for 2000 increased equipment expense in 1999.

Our computer processing expense is comprised of payments to third party processors, primarily for our “mission critical” data processing applications, including loans, deposits, general ledger and ATM operations. Our computer processing expense was $1.2 million and $1.1 million during the first half of 2002 and 2001, respectively. For the years of 2001, 2000, and 1999, computer processing expense was $2.3 million, $2.2 million, and $2.4 million, respectively.

The holding company’s legal fees include defense costs relating to the split-off transactions litigation described in the section of this prospectus captioned “Litigation and Settlement,” as well as general corporate matters. During the first six months of 2002, legal fees, net of reimbursements, were $995,000, a decline of $694,000 as compared to the legal fees of $1.7 million during the first six months of 2001. In the yearly comparison, legal fees, net of reimbursements, during 2001 declined $10.0 million to total $674,000 for the year. Legal fees for the years ended December 31, 2000 and 1999 were $10.7 million and $5.4 million, respectively. During 1999 and 2000, the majority of the holding company’s legal fees were for defense of lawsuits associated with the split-off transactions as the number of lawsuits increased and the cases progressed. Legal fees declined in 2001 and into 2002 as we began to discuss a possible settlement of this litigation. We expect to continue to incur legal expenses in connection with the litigation, which may continue to adversely affect our overall profitability, until the settlement becomes effective or the litigation is otherwise resolved. A portion of our defense costs and a portion of the settlement have been submitted to insurance carriers for reimbursement. However, we cannot predict to what extent these amounts will be reimbursed. During the first six months of 2001, we received $136,000 in reimbursements that reduced our overall legal fee expense. We

received no such reimbursements in the first six months of 2002. For the year of 2001, we received $2.9 million in reimbursements as compared to reimbursements of $3.4 million and $5,000 in 2000 and 1999, respectively.

Bank legal fees relate to collection activities as well as general corporate operations. During the first six months of 2002, legal fees, net of reimbursements, were $851,000, as compared to $680,000 for the first six months of 2001. Bank legal fees were $1.8 million, $1.4 million and $871,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The higher legal fees in 2001 and 2000 as compared to 1999 were primarily caused by increased collection activity.

Consulting expense was $520,000 during the first six months of 2002 as compared to $1.0 million during the first six months of 2001. Consulting expense increased in 2001 to $2.4 million as compared to $1.7 million and $936,000 during the years of 2000 and 1999, respectively. The higher expense during 2001 was largely due to higher expense for information technology projects, strategic and facilities planning, and marketing consultation. The increase in expense between 2000 and 1999 was largely due to the engagement of consultants in 2000 to perform an operational review of the Bank designed to identify cost savings through process improvements and revenue enhancement opportunities.

Advertising and public relations expense was $885,000 during the first half of 2002 as compared to $300,000 during the same period in 2001. Advertising and public relations expense was $1.1 million, $1.0 million, and $1.3 million for the years ended December 31, 2001, 2000, and 1999, respectively. Our advertising expense in 2002 and in the future is expected to increase as a result of a new program to increase the visibility of the Bank and the public awareness and understanding of our extensive business and product capabilities. Our new marketing program also includes a new corporate identity and a more contemporary logo.

Goodwill amortization expense relates to the goodwill created when we acquired the Bank in 1997. A new accounting standard adopted on January 1, 2002 eliminated the amortization expense on goodwill. At June 30, 2002, we had $23.4 million of goodwill that will no longer be subject to amortization, but will be subject to possible write-downs based upon annual impairment testing. Amortization expense on goodwill was $1.2 million during the first six months of 2001 and $2.3 million during the year ending December 31, 2001. See the section captioned “New Accounting Pronouncements” for additional information.

At June 30, 2002, we had $899,000 of intangible assets related to the purchase of certain trust lines of business. The intangible assets are amortized over their estimated useful life, which is periodically reevaluated. Other intangible assets amortization expense was $132,000 during the first six months of 2002 as compared to $118,000 during the first six months of 2001. Other intangible assets amortization expense was $251,000 in 2001 as compared to $68,000 and $18,000 during 2000 and 1999, respectively. The increase in 2001 was primarily due to the additional amortization expense from our trust business acquisition in 2000.

Other real estate and repossessed asset expense was $243,000 during the first six months of 2002 as compared to no net expense during the same period of 2001. In the annual periods, other real estate and repossessed asset expense increased to $602,000 in 2001 as compared to $104,000 in 2000 and $229,000 during 1999. This expense is net of gains on sales of, or rental income from, such properties. This net expense is influenced to a large degree by the number and complexity of properties being maintained pending their sale.

We recorded a $64.5 million charge during the first six months of 2002 related to the likely settlement of pending litigation against Taylor Capital that will be funded with a portion of the net proceeds from the concurrent offerings of common stock and trust preferred securities. See the section of this prospectus captioned “Litigation and Settlement” for additional details. The amount of the settlement payment was estimated based upon the amount payable under the settlement agreement at an assumed initial public offering price of our common stock of $19.00 per share. The actual amount of the settlement payment will be determined upon completion of the common stock offering and an adjustment to this charge will be recorded at that time.

Other noninterest expense, which principally includes certain professional fees, Federal Deposit Insurance Corporation, or FDIC, insurance, corporate insurance, outside services, operating losses, and other operating expenses such as telephone, postage, office supplies and printing, totaled $6.8 million and

$6.7 million during the first six months of 2002 and 2001, respectively. Other noninterest expense was $13.1 million during 2001, a $2.0 million, or 18.3%, increase over the other noninterest expense in 2000 of $11.1 million. An increase in operating losses, which primarily relates to non-employee initiated fraud involving either loan or deposit accounts, and miscellaneous expenses contributed to the increase in expense in 2001. Other noninterest expense totaled $10.1 million for 1999.

In the third quarter of 2002, we made a fixed payment of $1.0 million to terminate a trust revenue sharing agreement. The trust revenue sharing agreement had been entered into in connection with the trust business we acquired in October 2000.

We also expect our noninterest expense to increase as a result of us becoming a publicly-traded company. Specifically, we expect increases in audit fees, legal fees associated with public reporting, printing costs, proxy solicitation costs, additional directors and officers’ insurance cost and other expenses generally associated with publicly-traded companies.


	*Income Taxes*

Despite a net loss during the period due to the settlement of litigation, we had income tax expense of $5.8 million during the first six months of 2002. No income tax benefit was recorded with respect to the litigation settlement charge. During the first six months of 2001, we had income tax expense of $5.5 million, or a 35% effective income tax rate. Income taxes totaled $9.5 million for 2001, resulting in an effective income tax rate of 35% for the year. In comparison, during 2000 and 1999, our income tax expense was $9.6 million and $8.0 million, respectively. Our effective income tax rate was approximately 52% and 41% for the years ended December 31, 2000, and 1999, respectively. The higher effective tax rate during 2000 and 1999, as compared to 2001, was primarily due to certain legal fees that were not fully deductible for tax purposes. In connection with the acquisition of the Bank, we acquired state tax net operating loss carryforwards and deductible temporary differences totaling approximately $60 million. In accordance with accounting principles generally accepted in the United States of America, the state income tax benefit of these items was applied against goodwill when recognized, rather than as a reduction of income tax expense. We utilized all of the acquired net operating loss carryforwards of approximately $34 million by the end of 1999.


	*Cumulative Effect of Change in Accounting Principle*

On January 1, 1999, we adopted Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-Up Activities,” which requires that the cost of start-up activities and organization costs be expensed as incurred. The initial adoption of SOP 98-5 resulted in a charge of $214,000, net of a tax benefit of $146,000, and is reported in our Consolidated Statements of Income as a cumulative effect of change in accounting principle. The charge represents remaining organization costs associated with the acquisition of the Bank that had not yet been fully amortized.


	*Impact of Inflation and Changing Prices*

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

Financial Condition

Our total assets increased $72.2 million, or 3.0%, during the first six months of 2002 to reach $2.46 billion at June 30, 2002. An increase in loans accounted for most of the increase. Total stockholders’ equity decreased $52.6 million during the first six months of 2002 to $118.3 million at June 30, 2002. Total assets were

$2.39 billion at December 31, 2001, an increase of $127.3 million, or 5.6%, over total assets of $2.26 billion at December 31, 2000. Loan growth of $128.4 million produced the majority of the increase. During 2001, the growth in our total assets was primarily funded with a $90.9 million increase in deposits and higher FHLB advances of $35.0 million. Stockholders’ equity rose to $170.9 million at December 31, 2001 as compared to $157.3 million at December 31, 2000.

For the first six months of 2002, average interest-earning assets increased $70.1 million, or 3.2% to total $2.29 billion, as compared to $2.22 billion during the first six months of 2001. A $124.6 million increase in average loan balances produced the increase in average interest-earning assets. Average interest-earning assets totaled $2.22 billion in 2001, an increase of 5.4%, or $112.9 million, as compared to $2.11 billion of average interest-earning assets in 2000. Loan growth of $109.7 million accounted for most of the increase between the two periods. Average interest-earning assets in 2000 increased $256.2 million, or 13.9%, over average interest-earning assets of $1.85 billion during 1999. Loan growth was also the primary contributor to the expanded level of average interest-earning assets during 2000.


	*Interest-bearing Cash Equivalents*

Interest-bearing cash equivalents consist of federal funds sold, deposits with the Federal Home Loan Bank and investments in money market mutual funds managed by other financial institutions. These balances are overnight or over weekend investments and are maintained primarily for liquidity management purposes.


	*Investment Securities*

Our investment portfolio primarily serves as a source of income and secondarily as a source of liquidity and for interest rate risk management purposes. In managing our investment portfolio within the composition of the entire balance sheet, we balance our earnings, credit and interest rate risk and liquidity considerations, with a goal of maximizing longer-term overall profitability.

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		Estimated		Amortized		Estimated		Amortized		Estimated
		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value


		(in thousands)
June 30, 2002:
U.S. government agency securities		$	150,641	$	155,135	$	—	$	—	$	150,641	$	155,135
Collateralized mortgage obligations			217,572		223,398		—		—		217,572		223,398
Mortgage-backed securities			66,394		69,337		—		—		66,394		69,337
State and municipal obligations			56,694		57,979		—		—		56,694		57,979
Other debt securities			—		—		850		901		850		901

	Total	$	491,301	$	505,849	$	850	$	901	$	492,151	$	506,750

December 31, 2001:
U.S. Treasury securities		$	10,013	$	10,078	$	—	$	—	$	10,013	$	10,078
U.S. government agency securities			140,710		144,011		—		—		140,710		144,011
Collateralized mortgage obligations			192,073		193,985		—		—		192,073		193,985
Mortgage-backed securities			80,820		82,647		—		—		80,820		82,647
State and municipal obligations			62,317		62,637		—		—		62,317		62,637
Other debt securities			—		—		850		900		850		900

	Total	$	485,933	$	493,358	$	850	$	900	$	486,783	$	494,258



		Available-for-Sale				Held-to-Maturity				Total

		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value


		(in thousands)
December 31, 2000:
U.S. Treasury securities		$	55,101	$	55,295	$	—	$	—	$	55,101	$	55,295
U.S. government agency securities			173,526		176,753		—		—		173,526		176,753
Collateralized mortgage obligations			123,442		124,105		—		—		123,442		124,105
Mortgage-backed securities			83,545		84,076		—		—		83,545		84,076
State and municipal obligations			—		—		69,108		69,962		69,108		69,962
Other debt securities			—		—		850		868		850		868

	Total	$	435,614	$	440,229	$	69,958	$	70,830	$	505,572	$	511,059

December 31, 1999:
U.S. Treasury securities		$	55,182	$	54,884	$	—	$	—	$	55,182	$	54,884
U.S. government agency securities			111,491		110,324		—		—		111,491		110,324
Collateralized mortgage obligations			109,344		106,928		—		—		109,344		106,928
Mortgage-backed securities			94,529		92,184		—		—		94,529		92,184
State and municipal obligations			—		—		68,242		67,669		68,242		67,669
Other debt securities			—		—		850		839		850		839

	Total	$	370,546	$	364,320	$	69,092	$	68,508	$	439,638	$	432,828

Investment securities do not include investments in Federal Home Loan Bank and Federal Reserve Bank stock of $10.8 million, $10.6 million, $10.2 million, and $14.0 million, at June 30, 2002 and December 31, 2001, 2000, and 1999, respectively. These investments are stated at cost.

At June 30, 2002, our investment portfolio totaled $506.7 million, an increase of $12.5 million over year-end 2001. Most of the growth in investments during the first six months of 2002 occurred in collateralized mortgage obligations. As of December 31, 2001, our investment portfolio was $494.2 million, a decrease of $16.0 million as compared to the $510.2 million investment portfolio at December 31, 2000. During 2001, we used a portion of the proceeds from maturing securities and principal repayments on mortgage related securities to reduce our wholesale funding. We restructured a portion of our portfolio by selling approximately $77 million of available-for-sale government agency securities that were scheduled to mature over the next two years, and reinvested the proceeds from those sales in longer-term mortgage related securities. This restructuring lengthened the duration of our portfolio. The sales generated a pre-tax gain of approximately $2.2 million. In addition, on January 1, 2001, upon adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” we made a one-time transfer of our state and municipal obligations, with a carrying value of $69.1 million, from the held-to-maturity classification to the available-for-sale classification. Upon reclassification, we recorded a gross unrealized gain of $854,000, a deferred tax liability of $299,000, and a net increase to stockholders’ equity of $555,000.

In 2000, our investment portfolio increased $76.8 million as compared to the $433.4 million portfolio at year-end 1999. Most of this increase occurred in government agency securities and collateralized mortgage obligations. We increased our portfolio primarily to support higher levels of collateralized deposits and borrowings.

In March 1999, we executed a modest restructuring of our portfolio. Approximately $50 million of short-maturity U.S. Treasury securities were sold, and the proceeds were reinvested in longer-term Treasury, government agency and mortgage-backed securities, thereby lengthening the duration of the portfolio.


	*Investment Portfolio — Maturity and Yields*

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



				As of June 30, 2002


									After One but					After Five but
				Within					Within Five					Within Ten					After
				One Year					Years					Years					Ten Years					Total

				Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Total		Yield


				(in thousands)
Available-for-sale securities(1):
	U.S. government agency securities			$	—		—	%	$	155,135		4.79	%	$	—		—	%	$	—		—	%	$	155,135		4.79	%
	Mortgage-backed securities(2)				17,263		6.20			37,482		6.21			14,372		6.19			220		8.39			69,337		6.21
	Collateralized mortgage obligations(2)				18,406		5.12			190,094		6.13			14,898		5.78			—		—			223,398		6.02
	States and political subdivisions(3)				7,531		7.97			18,563		7.43			7,415		7.05			24,470		7.72			57,979		7.57

		Total available-for-sale			43,200		6.05			401,274		5.68			36,685		6.20			24,690		7.73			505,849		5.85
Held-to-maturity securities(4):
Other debt securities					25		6.00			800		7.83			25		3.00			—		—			850		7.63

		Total held-to-maturity			25		6.00			800		7.83			25		3.00			—		—			850		7.63

			Total securities	$	43,225		6.05	%	$	402,074		5.68	%	$	36,710		6.19	%	$	24,690		7.73	%	$	506,699		5.85	%


(1)	Based on estimated fair value.

(2)	Maturities of mortgage-backed securities and collateralized mortgage obligations, or 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 Federal National Mortgage Association, or FNMA, and the Federal Home Loan Mortgage Corporation, or FHLMC. 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 CMO holdings consist of (1) planned amortization class securities and (2) high-coupon, sequential-paying securities (also known as synthetic premiums because the coupons on these securities exceed those on the underlying mortgage loans), both of which are backed by fixed-rate, single-family mortgage loans. Although CMOs are guaranteed as to principal and interest by certain agencies, primarily FNMA and FHLMC, they possess market risk due to the prepayment risk associated with the underlying collateral.

We generally invest in state and municipal investment securities that are rated investment grade by nationally recognized rating organizations. Some municipal issues, however, 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 June 30, 2002, the Bank held no securities of any single issuer, other than the U.S. government agency securities, that exceeded 10% of the Bank’s 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.

Approximately 57% of our investment securities portfolio at June 30, 2002 is used as collateral for public funds deposits and securities sold under agreements to repurchase.


	*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,
		As of June 30,
		2002			2001			2000			1999			1998			1997


		(in thousands)
Commercial and industrial		$	552,808		$	521,592		$	481,812		$	453,170		$	462,447		$	436,325
Commercial real estate			426,802			354,214			353,043			348,592			287,537			235,181
Real estate — construction			317,878			380,674			328,856			260,972			232,018			179,855
Residential real estate — mortgages			136,359			160,699			188,766			183,427			150,930			165,258
Mortgage loans held-for-sale			—			1,147			7,004			8,917			42,257			31,771
Home equity loans and lines of credit			327,543			273,133			209,870			172,009			142,170			127,068
Consumer			40,235			47,572			40,414			27,317			18,102			27,610
Other loans			742			3,461			2,836			3,272			1,806			2,448

Gross loans			1,802,367			1,742,492			1,612,601			1,457,676			1,337,267			1,205,516
Less: Unearned discount			(691	)		(855	)		(909	)		(871	)		(1,286	)		(1,079	)

	Total loans		1,801,676			1,741,637			1,611,692			1,456,805			1,335,981			1,204,437
Less: Allowance for loan losses			(32,918	)		(31,118	)		(29,568	)		(26,261	)		(24,599	)		(25,813	)

	Loans, net	$	1,768,758		$	1,710,519		$	1,582,124		$	1,430,544		$	1,311,382		$	1,178,624

At June 30, 2002 and December 31, 2001, 2000, and 1999, our gross loans totaled $1.80 billion, $1.74 billion, $1.61 billion, and $1.46 billion, respectively. The increase in loans during these periods was primarily due to growth in the commercial and industrial, real estate-construction, home equity loans and lines of credit, and consumer loan portfolios.

Commercial and industrial loans, the largest component of our loan portfolio, were $552.8 million, $521.6 million, $481.8 million, and $453.2 million, at June 30, 2002 and December 31, 2001, 2000, and 1999, respectively. These loans represented 31% of our portfolio at June 30, 2002 and 30% of our loan portfolio at December 31, 2001 and 2000, and 31% of the loan portfolio at December 31, 1999. Commercial and industrial loans are one of our core products and the continued growth in these loans is a result of our marketing efforts that emphasize the Bank’s commercial banking capabilities.

Loans secured by commercial real estate totaled $426.8 million, $354.2 million, $353.0 million, and $348.6 million at June 30, 2002 and December 31, 2001, 2000, and 1999, respectively. Our commercial real estate loans as a percentage of total loans was 24% at June 30, 2002, as compared to 20%, 22% and 24% at December 31, 2001, 2000 and 1999, respectively. Our commercial real estate loans are primarily collateralized by commercial owner-occupied properties and, to a lesser degree, investment properties.

Our real estate-construction loans totaled $317.9 million at June 30, 2002 as compared to $380.7 million, $328.9 million and $261.0 million at December 31, 2001, 2000 and 1999, respectively. The portfolio, as a percentage of gross loans, was 17%, 22%, 20%, and 18% at June 30, 2002 and December 31, 2001, 2000, and 1999, respectively. These loans consist primarily of loans to professional home builders and developers and have increased in recent years primarily because of increased home building in the Chicago metropolitan area. The recent weak economic conditions, however, could lead to reduced residential home building, possibly limiting future growth in this portfolio.

At June 30, 2002, residential real estate-mortgages totaled $136.4 million or 8% of our total loan portfolio. This portfolio totaled $160.7 million, $188.8 million and $183.4 million at December 31, 2001, 2000

and 1999, respectively, representing 9%, 12% and 13% of the total loan portfolio at these dates, respectively. Historically, we have retained only nonconforming adjustable-rate mortgage products, or ARMs, for our portfolio. Mortgage loan origination for the portfolio was $18.7 million for the first six months of 2002 as compared to $30.1 million for the same period in 2001.

We had no mortgage loans held-for-sale at June 30, 2002. Mortgage loans held-for-sale in prior years are stated at the lower of aggregate cost or aggregate fair value as determined by outstanding commitments from investors or current market prices for loans with no sale commitments. Historically, we have used forward commitments to sell mortgage loans to manage our interest rate risk exposure. In September 2001, we decided to discontinue origination of mortgages for sale into the secondary market.

Home equity loans and lines of credit outstanding totaled $327.5 million, $273.1 million, $209.9 million and $172.0 million, as of June 30, 2002 and December 31, 2001, 2000 and 1999, respectively. The continued growth has resulted in an increase as a percentage of the total loan portfolio to 18%, 16%, 13% and 12%, of gross loans at June 30, 2002 and December 31, 2001, 2000 and 1999, respectively. At June 30, 2002, approximately 38% of our home equity loans and lines, after giving effect to any outstanding first mortgage loans, exceeded 80% of the appraised value of the underlying real estate collateral. The Bank’s general underwriting guidelines do not allow lines in excess of 100% of appraised value. Approximately 60% of our outstanding home equity loans and lines were sourced through mortgage brokers, but were still subject to the Bank’s underwriting standards.

Consumer loans were $40.2 million at June 30, 2002. This portfolio was $47.6 million, $40.4 million and $27.3 million at December 31, 2001, 2000 and 1999, respectively. At June 30, 2002, of consumer loans, 54% were indirect manufactured home loans, 23% were indirect auto and boat loans, 10% were direct auto loans, 4% were credit card loans, and the remaining 9% were other personal secured and unsecured loans. In mid-2001, we decided to discontinue the origination of indirect auto and manufactured homes. Consequently, we expect our indirect consumer loan portfolio to continue to decline in 2002. The increase in consumer loans during 2001 and prior was primarily due to higher indirect loans, including auto and manufactured home loans. Our consumer loan portfolio represented 2%, 3%, 3% and 2%, of gross loans at June 30, 2002 and December 31, 2001, 2000 and 1999, respectively.

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



		As of June 30, 2002


		One Year		Over 1 Year Through
		or Less		5 Years				Over 5 Years

						Floating or				Floating or
				Fixed		Adjustable		Fixed		Adjustable
				Rate		Rate		Rate		Rate		Total


		(in thousands)
Commercial and commercial real estate		$	426,296	$	333,779	$	134,783	$	80,096	$	4,656	$	979,610
Real estate — construction			197,361		29,070		84,377		7,070		—		317,878
Residential real estate — mortgages			4,164		10,741		6,259		32,869		82,326		136,359
Home equity loans and lines of credit			7,564		104,558		18,586		22,447		174,388		327,543
Consumer			8,880		11,126		24		19,646		559		40,235
Other loans			742		—		—		—		—		742

	Total	$	645,007	$	489,274	$	244,029	$	162,128	$	261,929	$	1,802,367


(1)	Maturities are based upon contractual dates. Demand loans are included in the one year or less category and totaled $1.4 million as of June 30, 2002.


	*Nonperforming Loans and Assets*

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. Delinquency reports are reviewed continuously by responsible officers. In addition, on a quarterly basis, loans graded below a designated level are reviewed by the responsible officer with the oversight of an independent loan review function. During such reviews, consideration is given to placing the loan on a nonaccrual status, the need for an additional allowance for loan loss, and, if appropriate, a partial or full charge-off. Loans are generally placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest. The nonrecognition of interest income on an accrual basis does not constitute forgiveness of the interest. After a loan is placed on nonaccrual status, any current period interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date the loan is placed on nonaccrual status only as interest is received and so long as management is satisfied that there is a high probability that principal will be collected in full. If management is not satisfied that there is a high probability that principal will be collected in full, any interest collected will be applied to reduce the principal balance on the Bank’s books. The loan is returned to accrual status only when the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.

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



					As of December 31,
		As of June 30,
		2002			2001			2000			1999			1998			1997


		(in thousands)
Loans contractually past due 90 days or more but still accruing interest		$	3,864		$	3,744		$	4,487		$	3,717		$	2,618		$	2,009
Nonaccrual loans			11,465			13,656			6,684			10,800			11,365			11,624

	Total nonperforming loans		15,329			17,400			11,171			14,517			13,983			13,633
Other real estate			54			322			153			828			3,185			1,391
Other repossessed assets			131			247			132			136			83			72

	Total nonperforming assets	$	15,514		$	17,969		$	11,456		$	15,481		$	17,251		$	15,096

Nonperforming loans to total loans			0.85	%		1.00	%		0.69	%		1.00	%		1.05	%		1.13	%
Nonperforming assets to total loans plus repossessed property			0.86	%		1.03	%		0.71	%		1.06	%		1.29	%		1.25	%
Nonperforming assets to total assets			0.63	%		0.75	%		0.51	%		0.76	%		0.90	%		0.81	%


	*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:


	(1)	categories of loans outstanding in the portfolio;

	(2)	concentrations of credit, currently defined as industry exposures in excess of 5% of the portfolio;


	(3)	concentrations by borrower, currently defined as exposure of $5 million and over; and

	(4)	trends in criticized loans.

For commercial, commercial real estate and real estate construction loans, we divide our portfolio into credits that are risk graded equivalent to “pass” by our regulators and those that are risk graded as “criticized.” A difference in risk grades affects the amount of the loss factor applied. We use historic loss rates determined over the preceding four years and the most current interim period, weighted toward the most recent history. The resulting loss factors are then multiplied against the current period loans outstanding to derive an estimated loss. For residential mortgages and consumer loans, which are ungraded, we use historic loss rates for the homogeneous pools of mortgage and consumer loans. We calculate the weighted average loss of the current period and the two prior year ends to determine that segment’s allocated portion of the reserve.

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate a high probability that a loss will be incurred. This amount may be determined either by a method prescribed by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” or by a method which identifies certain qualitative factors.

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 conditions evaluated in connection with the unallocated portion of the allowance include the following:


	•	general economic and business conditions affecting our key lending areas;

	•	credit quality trends, including trends in nonperforming loans expected to result from existing conditions;

	•	loan concentrations by collateral and by obligor;

	•	specific industry conditions within portfolio segments;

	•	recent loss experience in particular segments of the portfolio;

	•	duration of the current business cycle;

	•	bank regulatory examination results; and

	•	findings of our internal loan review examiners.

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 a specific 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 uncollectable, there can be no assurance that our allowance will prove sufficient to cover actual loan losses in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance for loan losses. Such agencies may require us to make additional provisions to the allowance based upon their judgments about information available to them at the time of their examinations.

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


			For the Six															Period from
			Months Ended			Year Ended December 31,												February 12, 1997
			June 30,															to
			2002			2001			2000			1999			1998			December 31, 1997


			(in thousands)
Average total loans			$	1,765,041		$	1,660,082		$	1,550,403		$	1,394,158		$	1,260,533		$	1,211,559

Total loans at end of period			$	1,801,676		$	1,741,637		$	1,611,692		$	1,456,805		$	1,335,981		$	1,204,437

Allowance for loan losses:
Allowance at beginning of period			$	31,118		$	29,568		$	26,261		$	24,599		$	25,813		$	24,607

Charge-Offs:
	Commercial and commercial real estate			(3,504	)		(7,987	)		(3,862	)		(4,649	)		(6,157	)		(2,201	)
	Real estate — construction			—			—			—			—			—			—
	Residential real estate — mortgages			(5	)		(96	)		(136	)		(122	)		(289	)		(178	)
	Consumer and other(1)			(509	)		(914	)		(952	)		(1,394	)		(1,141	)		(1,151	)

		Total charge-offs		(4,018	)		(8,997	)		(4,950	)		(6,165	)		(7,587	)		(3,530	)

Recoveries:
	Commercial and commercial real estate			787			615			661			1,591			947			394
	Real estate — construction			—			—			—			—			—			—
	Residential real estate — mortgages			3			—			8			38			70			27
	Consumer and other(1)			78			232			134			198			221			254

		Total recoveries		868			847			803			1,827			1,238			675

Net charge-offs				(3,150	)		(8,150	)		(4,147	)		(4,338	)		(6,349	)		(2,855	)

Provision for loan losses				4,950			9,700			7,454			6,000			5,135			4,061

Allowance at end of period			$	32,918		$	31,118		$	29,568		$	26,261		$	24,599		$	25,813

Net charge-offs to average total loans(2)				0.36	%		0.49	%		0.27	%		0.31	%		0.50	%		0.27	%
Allowance to total loans at end of period				1.83	%		1.79	%		1.83	%		1.80	%		1.84	%		2.14	%
Allowance to non-performing loans				214.74	%		178.84	%		264.69	%		180.90	%		175.92	%		189.34	%


(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.

(2)	This ratio is annualized for the six month period ended June 30, 2002 and for the period of February 12, 1997 to December 31, 1997.

Net charge-offs for the first six months of 2002 were $3.2 million, or 0.36% of average loans. These charge-offs related primarily to loans extended in prior years to companies we believe were adversely impacted by a weakened economy. We recorded a provision for loan losses of $5.0 million during the six months ended June 30, 2002. As a result, the allowance for loan losses increased $1.8 million, or 5.8%, during this period. This increase was primarily a result of the 3.4% increase in loans. Consistent with our strategic focus on business banking, approximately 70% of the increase was in commercial loans. In arriving at our allowance, we assign a higher loss reserve factor to commercial loans than to residential and consumer loans because we have

experienced higher losses on commercial loans historically. We modestly increased the unallocated portion of the allowance because we believe that net charge-offs may be negatively affected by lower consumer confidence and continuing uncertainties stemming from recently publicized accounting crises. We believe these factors slightly outweigh the favorable portfolio impacts resulting from a slowing level of risk downgrades and the proactive defensive measures we have already taken on deteriorating credits, such as enhanced monitoring and obtaining additional collateral and personal guarantees. If the recent economic downturn continues, we may experience a higher level of net charge-offs in the future.

Net charge-offs during 2001 were $8.2 million, or 0.49% of average loans. We recorded a provision for loan losses of $9.7 million during 2001. As a result, the allowance for loan losses increased by $1.6 million, or 5.2%. While charge-offs and nonaccrual loans increased during the period, we determined it was unnecessary to increase the allowance more sharply for three principal reasons. First, some of the more significant charge-offs taken during 2001 were not reflective of expected portfolio trends going forward. In particular, of the total charge-offs, $3.2 million related to a single loan to a company providing services to the technology sector. Since we do not have a concentration to that sector, no continuing loss trend is expected. Another $1.2 million of net charge-offs related to loans granted under a nationwide program to finance the acquisition of dental practices. Consistent with our strategic focus on business banking in the Chicago metropolitan area, we discontinued offering that product on a national basis in the fall of 2001. Second, nonaccrual loans often evidence a liquidity problem on the part of the borrower, but not necessarily an impairment of underlying value. Because the vast majority of our loans are secured and guaranteed, our experience is that we frequently collect high percentages of loans that are placed on nonaccrual due to liquidity problems. For example, three large loans (each in excess of $1.0 million) reported as nonaccruals at December 31, 2001 were paid down or off during 2002. Finally, while nonaccrual loans increased, impaired loans decreased during the period. Taking all of the above factors into account, we increased our loan loss provision during the last four months of the year in recognition of the higher charge-offs and to maintain an unallocated portion of the allowance against a still uncertain economic outlook.

Net charge-offs during 2000 were $4.1 million, or 0.27% of average loan balances. None of the charge-offs was over $1.0 million in amount. We recorded a provision for loan losses of $7.4 million during 2000. As a result, the allowance for loan losses increased $3.3 million, or 12.6%. The increase was partially driven by an increase in loans of 10.6%, with approximately 60% of the increase in commercial loans. We reduced the loss reserve factor, and therefore the amount of the allowance allocated to residential mortgages and home equity lines and loans, due to a sustained period of improved credit performance. In the same period, we also modified the method by which we calculated the concentrations within the real estate portfolio. Prior to March 31, 2000, we utilized the standard industrial classification nomenclature for determining concentrations within the real estate portfolio. Commencing with the first quarter of 2000, we began using more precise codes to better match risks within the commercial real estate portfolio by type of underlying real estate collateral. The net result was to increase the allocated loss factor on commercial real estate by approximately $1.0 million. Due to concerns about the economy’s ability to continue its already long expansion, a decline in equipment values and adverse trends in risk grades, we increased the unallocated portion of the allowance by $2.4 million.

Net charge-offs during 1999 were $4.3 million, or 0.31% of average loans. Of the total commercial charge-offs, $2.0 million related to a loan granted in 1999 that became uncollectible as a result of fraud perpetrated by the borrower and other professionals. We recorded a provision for loan losses of $6.0 million during 1999. As a result, the allowance for loan losses increased $1.7 million, or 6.8%. The economic environment in 1999 was characterized by economic growth and relative stability, resulting in stable performance within the loan portfolio. While total loans grew 9.0% during the year, we reduced the unallocated portion of the reserve based on economic growth, stability and portfolio performance.

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,

		As of June 30,
		2002					2001					2000					1999					1998					1997

				Loan					Loan					Loan					Loan					Loan					Loan
				Category					Category					Category					Category					Category					Category
				to Gross					to Gross					to Gross					to Gross					to Gross					to Gross
		Amount		Loans(1)			Amount		Loans(1)			Amount		Loans(1)			Amount		Loans(1)			Amount		Loans(1)			Amount		Loans(1)


		(in thousands)
Allocated:
	Commercial and commercial real estate	$	19,592		54.4	%	$	17,516		50.3	%	$	16,697		51.9	%	$	14,031		55.3	%	$	13,115		57.9	%	$	11,741		57.1	%
Real estate — construction			4,768		17.6			5,710		21.9			4,933		20.5			4,567		18.0			4,060		17.9			3,147		15.3
Residential real estate — mortgages			341		7.6			402		9.2			472		11.8			1,834		12.7			1,509		11.8			1,661		14.2
Consumer and other			2,253		20.4			2,131		18.6			1,698		15.8			2,479		14.0			1,868		12.4			1,817		13.4
Unallocated			5,964		—			5,359		—			5,768		—			3,350		—			4,047		—			7,447		—

Total allowance for loan losses		$	32,918		100.0	%	$	31,118		100.0	%	$	29,568		100.0	%	$	26,261		100.0	%	$	24,599		100.0	%	$	25,813		100.0	%


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


	*Nonearning Assets*

We had goodwill and other intangible assets of $24.3 million at June 30, 2002, as compared to $24.4 million at December 31, 2001 and $26.8 million at December 31, 2000. Of the total balance at June 30, 2002, $23.4 million relates to goodwill from our acquisition of the Bank that is no longer subject to amortization beginning on January 1, 2002. Instead, this goodwill will be tested annually for impairment. Amortization expense on goodwill was $1.2 million during the first six months of 2001 and $2.3 million during the year ended December 31, 2001. We also have intangible assets of $899,000, mainly associated with our purchase of the trust and asset management business of another financial institution in October 2000. These intangible assets are amortized over the expected useful life of the assets.

Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $20.1 million at June 30, 2002 as compared to $20.8 million at December 31, 2001 and $21.4 million at December 31, 2000. We expect that our current occupancy expenses can be utilized in a more effective manner and we have engaged a national real estate consulting firm to evaluate the efficiency of our current facilities. We have no definitive agreements regarding acquisition or disposition of owned or leased facilities and, for the near-term future, we do not expect significant changes in our total occupancy expense. However, the timing and amount of capital expenditures and recoveries will likely be asynchronous. We expect total net capital investment to be less than $5.0 million over the next two years.


	*Deposits*

Our core deposits consist of noninterest and interest-bearing demand deposits, savings deposits, certificates of deposit, 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-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:

TAYC CAPITAL TRUST I S-1/A