Table of Contents





UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

|                                                             |  |           
|------------------------------------------------------------ |  | ----------
|                                                            
|                                                            
|FORM 10-K                                                   
|                                                            
|                                                            
|                                                             |  | (Mark One)
|xANNUAL REPORT
  PURSUANT TO SECTION 13 OR 15(d) OF THE     
|SECURITIES EXCHANGE ACT OF 1934                             
|                                                             |  |           
|For the fiscal year ended December 31, 2009                 
|or                                                          
|o TRANSITION REPORT
  PURSUANT TO SECTION 13 OR 15(d) OF THE
|SECURITIES EXCHANGE ACT OF 1934                             

For the transition period from _________________ to _________________

Commission file number 001-16339


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BAYLAKE CORP.


(Exact name of registrant as specified in its charter)


|                                                                     |  |                    
|-------------------------------------------------------------------- |  | -------------------
|Wisconsin                                                            |  | 39-1268055         
|(State or other jurisdiction of                                      |  | (I.R.S. Employer   
|incorporation or organization)                                       |  | Identification No.)
|                                                                     |  |                    
|217 North Fourth Avenue, Sturgeon Bay, WI                            |  | 54235              
|(Address of principal executive offices)                             |  | (Zip Code)         
|                                                                     |  |                    
|Registrants
  telephone number, including area code: (920)-743-5551
|                                                                     |  |                    
|Securities
  registered pursuant to Section 12(b) of the Act: None  

Securities
registered pursuant to Section 12(g) of the Act: Common Stock $5.00 Par Value Per Share

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Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes o   No x


Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes o   No x

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

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

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

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.  (Check one):

|                                                |                     |                         |                            
|----------------------------------------------- | ------------------- | ----------------------- | ---------------------------
|Large accelerated filer o                       | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x
|(Do
  not check if a smaller reporting company)

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

As of June 30, 2009, (the last business day of the Registrants most recently completed second fiscal quarter),
the aggregate market value of the Common Stock (based upon the $3.40 reported bid price on that date) held by
non-affiliates (excludes a total of 600,043 shares reported as beneficially owned by directors and executive
officers-does not constitute an admission as to affiliate status) was approximately $24,859,083. As of March 12,
2010, 7,911,538 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                                                                          |  |                                       
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------
|                                                                                                                                          |  | Part of Form 10-K Into Which          
|Document                                                                                                                                  |  | Portions of Documents are Incorporated
|                                                                                                                                          |  |                                       
|Definitive Proxy Statement for 2010 Annual Meeting of Shareholders to be
filed within 120 days of the fiscal year ended December 31, 2009 |  | Part III                              

2







2009 FORM 10-K
TABLE OF CONTENTS

|         |            |                                                                                                                |         
|-------- | ---------- | -------------------------------------------------------------------------------------------------------------- | --------
|         |            | DESCRIPTION                                                                                                    | PAGE NO.
|         |            |                                                                                                                |         
|PART I   |            |                                                                                                                |         
|         | ITEM 1.    | Business                                                                                                       | 4       
|         | ITEM 1A.   | Risk Factors                                                                                                   | 8       
|         | ITEM 1B.   | Unresolved Staff Comments                                                                                      | 14      
|         | ITEM 2.    | Properties                                                                                                     | 14      
|         | ITEM 3.    | Legal Proceedings                                                                                              | 14      
|         | ITEM 4.    | [Reserved]                                                                                                     | 14      
|         |            |                                                                                                                |         
|PART II  |            |                                                                                                                |         
|         | ITEM 5.    | Market for Registrants Common Equity,
  Related Stockholder Matters and Issuer Purchases of Equity Securities | 15      
|         | ITEM 6.    | Selected Financial Data                                                                                        | 17      
|         | ITEM 7.    | Managements Discussion and Analysis of
  Financial Condition and Results of Operation                         | 18      
|         | ITEM 7A.   | Quantitative and Qualitative Disclosures
  about Market Risk                                                   | 43      
|         | ITEM 8.    | Financial Statements and Supplementary
Data                                                                    | 43      
|         | ITEM 9.    | Changes in and Disagreements with Accountants
  on Accounting and Financial Disclosure                         | 79      
|         | ITEM 9A(T) | Controls and Procedures                                                                                        | 79      
|         | ITEM 9B    | Other Information                                                                                              | 79      
|         |            |                                                                                                                |         
|PART III |            |                                                                                                                |         
|         | ITEM 10.   | Directors,  Executive Officers and Corporate Governance                                                        | 79      
|         | ITEM 11.   | Executive Compensation                                                                                         | 79      
|         | ITEM 12.   | Security Ownership of Certain Beneficial
  Owners and Management And Related Stockholder Matters               | 79      
|         | ITEM 13.   | Certain Relationships and Related
  Transactions, and Director independence                                    | 80      
|         | ITEM 14.   | Principal Accountant Fees and
Services                                                                         | 80      
|         |            |                                                                                                                |         
|PART IV  |            |                                                                                                                |         
|         | ITEM 15.   | Exhibits and Financial Statement
Schedules                                                                     | 81      
|         |            |                                                                                                                |         
|         |            | Signatures                                                                                                     | 81      

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Table of Contents

PART I

ITEM 1. BUSINESS

General

Baylake Corp. is a Wisconsin corporation organized in 1976 and is
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended (the BHCA). Our primary activities consist of holding the
stock of our wholly-owned subsidiary bank, Baylake Bank, and providing a wide
range of banking and related business activities through our bank and our other
subsidiaries. At December 31, 2009, we had total assets of approximately $1.0
billion. For additional financial information, see our Consolidated Financial
Statements and Notes at Part II, Item 8 of this Form 10-K.

Baylake Bank

Baylake Bank is a Wisconsin state bank originally chartered in 1876.
Our bank is an independent community bank offering a full range of financial
services primarily to small businesses and individuals located in our market
area. We conduct our community banking business through 28 full-service
financial centers located throughout Northeast Wisconsin, in Brown, Door, Green
Lake, Kewaunee, Manitowoc, Outagamie, Waupaca, and Waushara Counties. We have
eight financial centers in Door County, which is known for its tourism-related
services. We have eight financial centers in Brown County, which includes the
city of Green Bay. We serve a broader range of service, manufacturing and
retail job segments in the Brown County market. The rest of our financial
centers are located in smaller cities and smaller communities. Other principal
industries in our market area include industry and manufacturing, agriculture
and food related products..

Non-Bank Subsidiaries

In addition to our banking operations, our bank owns three non-bank
subsidiaries: Baylake Investments, Inc., located in Las Vegas, Nevada, which
holds and manages an investment portfolio; Baylake City Center LLC, which owns
10.9% of a commercial building condominium in Green Bay; and Baylake Insurance
Agency, Inc., which offers various types of insurance products to the general
public as an independent agent. Our bank also owns a minority interest (49.8%
of the outstanding common stock) in United Financial Services, Inc. (UFS), a
data processing services company located in Grafton, Wisconsin, that provides
data processing services to approximately 40 banks (including Baylake Bank) as
well as electronic banking processing to four banks.

Corporate Governance Matters

We maintain a website at www.baylake.com. We make available
through that website, free of charge, copies of our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports, as soon as reasonably practicable after Baylake
electronically files those materials with, or furnishes them to, the Securities
and Exchange Commission (SEC). Our SEC reports can be accessed through the
Baylake Corp. link on our website. The SEC also maintains a website at www.sec.gov
that contains reports, proxy statements and other information regarding SEC
registrants.

Lending

We offer short-term and long-term loans on a secured and unsecured
basis for business and personal purposes. We make real estate,
commercial/industrial, agricultural and consumer loans in accordance with the
basic lending policies established by our board of directors. We focus lending
activities on individuals and small businesses in our market area. Our lending
activity has been historically concentrated primarily within the State of Wisconsin. We do
not conduct any substantial business with foreign obligors. We serve a wide
variety of industries including, on a limited basis, a concentration on
businesses directly and indirectly related to the tourism/recreation related
industries. Loans to customers in the tourism/recreation industry, including
restaurants and lodging businesses, totaled approximately $120.8 million at
December 31, 2009, or 18.5% of our aggregate loans outstanding at that date.
Although competitive and economic pressures exist in this market segment,
business remains relatively steady in the markets we serve. However, any
deterioration in the economy of Northeastern Wisconsin (as a result, for
example, of a decline in its manufacturing or tourism/recreation industries or
otherwise) could have a material adverse effect on our business and operations.
In particular, a decline in the Door County tourism business would not only
affect our customers in the restaurant and lodging business, and therefore
loans to them as described above, but could also affect loans and other
business relationships with persons employed in that industry and real estate
values (including collateral values) in the area.

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Our expansion into other market areas has reduced our concentration
level in tourism/recreation-related businesses over the last thirty-six months,
but these types of businesses still remain an important element of the customer
base that we serve.

Our total outstanding loans as of December 31, 2009 were approximately
$651.9 million, consisting of 54.2% commercial real estate loans, 19.1%
residential real estate loans, 9.6% construction and land development real
estate loans, 12.8% commercial and industrial loans, 1.8% consumer and 2.5% tax
exempt loans.

Investments

We maintain a portfolio of investments, primarily consisting of U.S.
Treasury securities, U.S. Government sponsored agency securities,
mortgage-backed securities, obligations of states and their political
subdivisions, and private placement and corporate bonds. We attempt to balance
our portfolio to manage interest rate risks, maximize tax advantages and meet
liquidity needs while endeavoring to maximize investment income.

Deposits

We offer a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits are insured by the
Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) up
to statutory limits. At December 31, 2009, our total deposits were
approximately $831.6 million, including interest-bearing deposits of $750.3
million and non-interest bearing deposits of $81.3 million. Deposits of $41.7
million were covered under the FDICs Transaction Account Guarantee Program.

Other Customer Services and Products

Other services and products we offer include transfer agency, safe deposit
box services, personal and corporate trust services, conference center
facilities, insurance agency and brokerage services, cash management, private
banking, financial planning and electronic banking services, including mobile
banking, and ebanc, an Internet banking product for our customers.

Seasonality

The tourism/recreation industry, particularly in the Door County
market, substantially affects our business with our customers, particularly
those customers in the restaurant and lodging businesses. The tourist business
of Door County is largely seasonal, with the vast majority of tourists
vacationing beginning in early spring and continuing until late fall. Although
businesses and customers involved in the delivery of tourism-related services
have financial needs throughout the entire year, the seasonal nature of the
tourist business tends to result in increased demands for loans shortly before
and during the tourist season and causes reduced deposits shortly before and
during the early part of the tourist season.

Competition

The financial services industry is highly competitive. We compete with
other financial institutions and businesses in both attracting and retaining
deposits and making loans in all of our principal markets. The primary factors
in competing for deposits are interest rates, personalized services, the
quality and range of financial services, convenience of office locations and
office hours. Competition for deposit products comes primarily from other
commercial banks, savings banks, credit unions and non-bank competitors,
including insurance companies, money market and mutual funds, and other
investment alternatives. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized services. Competition for loans comes primarily from other
commercial banks, savings banks, mortgage banking firms, credit unions, finance
companies, leasing companies and other financial intermediaries. Some of our
competitors are not subject to the same degree of regulation as that imposed on
bank holding companies or federally insured state-chartered banks, and may be
able to price loans and deposits more aggressively. We also face direct
competition from other banks and bank holding companies that have greater
assets and resources than ours.

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Regulation and Supervision

Baylake Corp.As a
bank holding company, we are subject to regulation by the Board of Governors of
the Federal Reserve (FRB) and examination by the Federal Reserve Bank of
Chicago (Reserve Bank) under the BHCA and are required to file reports of our
operations and such additional information as the FRB may require. Under FRB
policy, we are expected to act as a source of financial strength to our
subsidiary bank and to commit resources to support the bank in circumstances
where we might not deem it appropriate to do so, absent such policy.

With certain limited exceptions, the BHCA prohibits bank holding
companies from acquiring direct or indirect ownership or control of voting
shares or assets of any company other than a bank, unless the company involved
is engaged solely in one or more activities which the FRB has determined to be
financial in nature or incidental to such financial activity. In 1999, Congress
enacted the Gramm-Leach-Bliley Act (GLB Act), which eliminated certain
barriers to and restrictions on affiliations between banks and securities
firms, insurance companies and other financial services organizations. Among
other things, the GLB Act amended the BHCA to permit bank holding companies
that qualify as financial holding companies to engage in a broad list of
financial activities, and any non-financial activity that the FRB, in
consultation with the Secretary of the Treasury, determines is complementary
to a financial activity and poses no substantial risk to the safety and
soundness of depository institutions or the financial system. The GLB Act
treats various lending, insurance underwriting, insurance company, portfolio
investment, financial advisory, securities underwriting, dealing and
market-making, and merchant banking activities as financial in nature for this
purpose.

Under the GLB Act, a bank holding company may become certified as a
financial holding company by filing a notice with the FRB, together with a
certification that the bank holding company meets certain criteria, including
capital, management and Community Reinvestment Act requirements. We have not
elected to be certified as a financial holding company.

The FRB uses capital adequacy guidelines in its regulation of bank
holding companies. If capital falls below minimum guidelines, a bank holding
company may, among other things, be denied approval to acquire or establish
banks, non-bank businesses or other bank holding companies.

The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the FRBs view that a bank holding
company should pay cash dividends only to the extent that its net income for the
past year is sufficient to cover both the cash dividend and a rate of retention
consistent with its needs. The FRB policy statement also indicates that it
would be inappropriate for a bank holding company experiencing serious
financial problems to borrow money to pay dividends. In addition, compliance
with capital adequacy guidelines at both a bank subsidiary and a bank holding
company could affect such entitys ability to pay dividends, if its capital
levels were to decrease.

The Sarbanes-Oxley Act of 2002 (SOX) addresses, among other issues,
director and officer responsibilities for proper corporate governance of
publicly traded companies, including the establishment of audit committees,
certification of financial statements, auditor independence and accounting
standards, executive compensation, insider loans, whistleblower protection, and
enhanced and timely disclosure of corporate information. In general, SOX is
intended to allow stockholders to monitor more effectively the performance of
publicly traded companies and their management. The SEC has enacted rules to
implement various provisions of SOX, which affect us as a publicly-held entity.
The federal banking regulators also have adopted generally similar requirements
concerning the certification of financial statements. Among these requirements
is the adoption of company-wide codes of conduct by banks. SOX also imposes
additional corporate governance requirements on publicly-held companies,
particularly relating to the functioning of audit committees. We are subject to
the requirement of annual attestation and review of our internal control on
financial reporting.

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Baylake Bank.As a
FRB member Wisconsin state-chartered bank, we are subject to supervision and
regulation by the Wisconsin Department of Financial Institutions, Division of
Banking (WDFI), the FRB and the FDIC. Federal law and regulations establish
supervisory standards applicable to the lending activities of our bank,
including internal controls, credit underwriting, loan documentation and
loan-to-value ratios for loans secured by real property.

Our bank is subject to federal and state statutory and regulatory
restrictions on any extension of credit to us or our subsidiaries, on
investments in our stock or other securities of our subsidiaries, on the
payment of dividends to us, and on the acceptance of the stock or other
securities of our subsidiaries as collateral for loans to any person.
Limitations and reporting requirements are also placed on extensions of credit
by our bank to our directors and officers, to the directors and officers of our
subsidiaries, to our principal shareholders, and to related interests of such
directors, officers and principal shareholders.

In addition to general requirements that banks retain specified levels
of capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks be paid out of current
earnings or, no more than once within the immediate preceding two years, out of
undivided profits. Any other dividends require the prior written consent of the
WDFI.

Under the Community Reinvestment Act (CRA) and the implementing
regulations, our bank has a continuing and affirmative obligation to help meet
the credit needs of our local community including low and moderate-income
neighborhoods, consistent with the safe and sound operation of the institution.
The CRA requires the boards of directors of financial institutions, such as our
bank, to adopt a CRA statement for each assessment area that, among other
things, describes its efforts to help meet community credit needs and the
specific types of credit that the institution is willing to extend. Our banks
service area is designated and comprises the eight counties within the
geographic area of Central and Northeast Wisconsin. Our banks board of
directors is required to review the appropriateness of this delineation at
least annually.

Our banks business includes making a variety of types of loans to
individuals. In making these loans, we are subject to state usury and
regulatory laws and to various federal statutes, such as the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, and
the regulations promulgated thereunder, which prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs and
regulate the mortgage loan servicing activities of our bank, including the maintenance
and operation of escrow accounts and the transfer of mortgage loan servicing.
In receiving deposits, we are subject to extensive regulation under state and
federal law and regulations, including the Truth in Savings Act, the Expedited
Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act
and the Federal Deposit Insurance Act. Violation of these laws could result in
the imposition of significant damages and fines upon us, our directors and
officers.

Under the GLB Act, all financial institutions are required to adopt
privacy policies, restrict the sharing of non public customer data with
nonaffiliated parties at the customers request and establish procedures and
practices to protect customer data from unauthorized access.

Under Title III of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (PATRIOT
Act), also known as the International Money Laundering Abatement and
Anti-Terrorism Financing Act of 2001, all financial institutions are required
to take certain measures to identify customers, prevent money laundering,
monitor certain customer transactions and report suspicious activity to U.S.
law enforcement agencies, and to scrutinize or prohibit altogether certain
transactions of special concern. Financial institutions are also required to
respond to requests for information from federal banking regulatory agencies
and law enforcement agencies concerning their customers and their transactions.

Federal law provides that adequately managed bank holding companies
from any state may acquire banks and bank holding companies located in any
other state, subject to certain conditions.

Financial institution regulatory agencies are given substantial powers
to take corrective actions, which may include restrictions on methods of doing
business and the prohibition of certain actions.

Employees

At December 31, 2009, we had 306 full-time equivalent employees
company-wide. We consider our relationship with our employees to be good.

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ITEM 1A. RISK FACTORS

Forward-Looking Statements

This report contains statements that may constitute forward-looking
statements within the meaning of the safe-harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
such as statements other than historical facts contained or incorporated by
reference in this report. These forward-looking statements include statements
with respect to our financial condition, results of operations, plans,
objectives, future performance and business, including statements preceded by,
followed by or that include the words believes, expects, or anticipates,
references to estimates or similar expressions. Future filings by us with the
Securities and Exchange Commission (SEC), and future statements other than
historical facts contained in written material, press releases and oral
statements issued by us, or on our behalf, may also constitute forward-looking
statements.

Forward-looking statements are subject to significant risks and
uncertainties, and our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause actual
results to differ from the results discussed above include, but are not limited
to, the Risk Factors set forth below and any other risks identified in this
report or in other filings we may make with the SEC. All forward-looking
statements contained in this report or which may be contained in future statements
made for or on our behalf are based upon information available at the time the
statement is made and we assume no obligation to update any forward-looking
statements.

Risk Factors

Our business may be adversely affected by
conditions in the financial markets and economic conditions generally.

The United States economy has been in a downward cycle since the end of
2007, which has been marked by reduced business activity across a wide range of
industries and regions. Many businesses are experiencing serious difficulties
due to the lack of consumer spending and the lack of liquidity in the credit
markets. In addition, unemployment has increased significantly and continues to
grow.

The financial services industry and the securities markets generally have
been materially and adversely affected by significant declines in the values of
nearly all asset classes and by a serious lack of liquidity. This was initially
triggered by declines in home prices and the resulting impact on sub-prime
mortgages but has since spread to all mortgage and real estate asset classes,
as well as equity securities.

The economic downturn has also resulted in the failure of a number of
prominent financial institutions, resulting in further losses as a consequence
of defaults on securities issued by them and defaults under contracts with such
entities as counterparties. In addition, declining asset values, defaults on
mortgages and consumer loans, the lack of market and investor confidence and
other factors have all combined to cause rating agencies to lower credit
ratings and to otherwise increase the cost and decrease the availability of
liquidity. Some banks and other lenders have suffered significant losses and
have become reluctant to lend, even on a secured basis, due to the increased
risk of default, and the impact of declining collateral values and greater
regulatory scrutiny. In 2008 and 2009, the U.S. government, the FRB and other
regulators took numerous steps to increase liquidity and to restore investor
confidence, including investing in the equity of other banking organizations
through the Capital Purchase Program under the Troubled Asset Relief Program.
In spite of this, asset values have continued to decline, and access to
liquidity continues to be very limited. If these measures are unsuccessful or
if the economic downturn continues, our earnings and, consequently, our
financial condition could be depressed.

Our operations are geographically limited and
are more at risk for downturns in those areas.

Our financial performance generally is highly dependent upon the
business environment in Northeastern Wisconsin, particularly in Door and Brown
Counties. As a result of this geographical concentration, we are more
vulnerable to downturns or other factors that affect the local economy or
decrease demand for our services than if our operations were conducted over a
wider area. Other local factors, such as natural disasters and the local
regulatory climate, could also significantly affect our results because of our
lack of geographical diversity.

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In our market area, especially in Door County, a significant percentage
of our customer base is in the tourism industry, particularly lodging and
restaurants. Many of our customers depend indirectly on the tourism industry.
This concentration in a single industry could cause any downturn or other
issues affecting local tourism to reduce the demand for our services, increase
problem loans and thus disproportionately affect our results of operations.

The overall business environment during 2009 has been adverse for many
households and businesses in Northeast Wisconsin. The business environment in
the markets in which we operate has been adversely affected and continues to
deteriorate, albeit at a moderating pace. It is possible that the business
environment in Northeastern Wisconsin will continue to deteriorate for the
foreseeable future. Such conditions could have a material adverse effect on the
credit quality of our loans, and therefore, our financial condition and results
of operations.

Weakness in the markets for residential or
commercial real estate, including the secondary residential mortgage loan
markets, could reduce our net income and profitability.

Since 2007, softening residential housing markets, increasing
delinquency and default rates, and increasingly volatile and constrained
secondary credit markets have been negatively impacting the mortgage industry.
Our financial results have been adversely affected by changes in real estate
values, primarily in Northeastern Wisconsin. Decreases in real estate values
have adversely affected the value of property used as collateral for loans and
investments in our portfolio. The poor economic condition experienced in 2007
through 2009 resulted in decreased demand for commercial real estate loans, and our net
income and profits have suffered as a result.

The declines in home prices in many markets across the U.S., including
Northeastern Wisconsin, along with the reduced availability of mortgage credit,
also has resulted in increases in delinquencies and losses in our portfolio of
loans related to residential real estate. Further declines in home prices
within Northeastern Wisconsin coupled with the continued impact of the economic
recession and high unemployment levels, could drive losses beyond the levels
provided for in our allowance for loan losses. In that event, our future
earnings would be adversely affected.

Significant ongoing disruption in the secondary market for residential
mortgage loans has limited the market for and liquidity of most mortgage loans
other than conforming Fannie Mae, Freddie Mac and Ginnie Mae loans. The effects
of ongoing mortgage market challenges, combined with the ongoing correction in
residential real estate market prices and reduced levels of home sales has
resulted in price reductions in single family home values, adversely impacting
the value securing mortgage loans held.
Continued declines in real estate values and home sales volumes within
Northeastern Wisconsin, and financial stress on borrowers as a result of job
losses, or other factors, could have further adverse effects on borrowers that
result in higher delinquencies and greater charge-offs in future periods, which
would adversely affect our financial condition and results of operations.

We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest
income, which is the difference between interest income on interest-earning
assets such as loans and securities and interest expense paid on
interest-bearing liabilities such as deposits and borrowed funds. There are
many factors which influence interest rates that are beyond our control,
including but not limited to general economic conditions and governmental policy,
in particular, the policies of the FRB. Any changes in such policies, including
changes in interest rates, could influence the amount of interest we receive on
loans and securities and the amount of interest we pay on deposits and
borrowings. Such changes could also affect (i) our ability to originate loans
and obtain deposits, (ii) the value of our financial assets and liabilities,
and (iii) the average maturity of our securities portfolio. In addition, an
increase in the general level of interest rates may also adversely affect the
ability of certain of our borrowers to repay their obligations. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, our net interest
income, and therefore our earnings, would be adversely affected. Earnings would
also be adversely affected if the interest rates received on loans and other
investments fall more quickly than the interest rates paid on deposits and
other borrowings.

Management uses various methods to monitor interest rate risk and
believes it has implemented effective asset and liability strategies to reduce
the potential effects of changes in interest rates on our results of
operations. Management also periodically adjusts our mix of assets and
liabilities to manage interest rate risk. However, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect
on our consolidated financial condition and results of operations.

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We are subject to lending risk.

There are inherent risks associated with our lending activities. These
risks include the impact of changes in interest rates and change in the
economic conditions in the markets we serve, as well as those across the United
States. An increase in interest rates and/or continuing weakening economic
conditions could adversely impact the ability of our borrowers to repay
outstanding loans, or could substantially weaken the value of the collateral
securing those loans. Continuing economic weakness on real estate and related
markets could further increase our lending risk as it relates to our commercial
real estate loan portfolio and the value of the underlying collateral.
Approximately 54.2% of our loans are concentrated in commercial real estate as
well as 19.1% in residential real estate lending as of December 31 2009,
compared to 52.4% and 19.4% as of December 31, 2008, respectively. Continued
downward pressure on real estate values could increase the potential for
problem loans and thus have a direct impact on our consolidated results of
operations.

We are also subject to various laws and regulations that affect our
lending activities. Failure to comply with applicable laws and regulations
could subject us to regulatory enforcement action that could result in the
assessment of significant civil monetary penalties against us.

Our allowance for loan losses may be
insufficient.

To address risks inherent in our loan portfolio, we maintain an
allowance for loan losses that represents managements best estimate of
probable losses that may occur within our existing loan portfolio. The level of
the allowance reflects managements continuing evaluation of various factors,
including industry concentrations, specific credit risks, loan loss experience,
current loan portfolio quality, present economic, political and regulatory
conditions, and unidentified losses inherent in the current loan portfolio.
Determining the appropriate level of the allowance for loan losses involves a
high degree of subjectivity and requires us to make estimates of significant
credit risks and future trends, all of which may undergo material changes. In
evaluating our impaired loans, we assess repayment expectations and determine
collateral values based on all information that is available to us. However, we
must often make subjective decisions based on our assumptions about the
creditworthiness of the borrowers and the value of the collateral.

Continuing deterioration in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem
loans, and other factors, both within and outside of our control, may require
an increase in our allowance for loan losses. In addition, bank regulatory agencies
periodically examine our allowance for loan losses and may require an increase
in the allowance or the recognition of further loan charge-offs, based on
judgments different from those of management.

If charge-offs in future periods exceed our allowance for loan losses,
we will need to take additional loan loss provisions to increase our allowance
for loan losses. Any additional loan loss provisions will reduce our net income
or increase our net loss, which would have a material adverse effect on our
financial condition and results of operations.

Uncertainty in the financial markets could
result in lower fair values for our investment securities, which fair values
may not be realizable if we were to sell those securities today.

The upheaval in the financial markets over the past two years has
adversely impacted investor demand for all classes of securities and has
resulted in volatility in the fair values of our investment securities.
Significant prolonged reduction in investor demand could result in lower fair
values for these securities and may result in recognition of an
other-than-temporary impairment charge, which would have a direct adverse
impact on our consolidated results of operations.

We are subject to environmental liability
risk associated with collateral securing our real estate lending.

Because a significant portion of our loan portfolio is secured by real
property, from time to time we may find it necessary to foreclose on and take
title to properties securing such loans. In doing so, there is a risk that
hazardous or toxic substances could be found on those properties. If such
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. We may also be required to incur substantial
expenses that could materially reduce the affected propertys value or limit
our ability to use or sell the affected property. In addition, future
environmental laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase our exposure to environmental
liability. Although we are careful to perform environmental reviews on
properties prior to foreclosure, our reviews may not detect all environmental
hazards.

We may be adversely affected by the soundness
of other financial institutions.

Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships. We routinely execute
transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investments banks, and other
institutional clients. Many of these transactions expose us to credit risk in
the event of default by a counterparty. In addition, our credit risk may be
heightened when the collateral we hold cannot be realized upon liquidation or
is liquidated at prices not sufficient to recover the full amount of the credit
or derivative exposure due to us. Any such losses could have a material adverse
effect on our consolidated financial condition and results of operations.

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Competition may affect our results.

We face strong competition in originating loans, in seeking deposits
and in offering our other services. We must compete with commercial banks,
savings associations, trust companies, mortgage banking firms, credit unions,
finance companies, mutual funds, insurance companies and brokerage and
investment banking firms. Our market area is also served by several commercial
banks and savings associations that are substantially larger than us in terms
of deposits and loans and have greater human and financial resources.

This competitive climate can make it more difficult to establish and
maintain relationships with new and existing customers and can lower the rate
we are able to charge on loans, increase the rates we must offer on deposits,
and affect our charges for other services. Those factors can, in turn,
adversely affect our results of operations and profitability.

Maintaining or increasing our market share
may depend on lowering prices and market acceptance of new products and
services.

Our success depends, in part, on our ability to adapt our products and
services to evolving industry standards. There is increasing pressure to
provide products and services at lower prices. Lower prices can reduce our net
interest margin and revenues from our fee-based products and services. In
addition, the widespread adoption of new technologies, including internet
services, could require us to make substantial expenditures to modify or adapt
our existing products and services. Also, these and other capital investments
in our business may not produce expected growth in earnings anticipated at the
time of the expenditure. We may not be successful in introducing new products
and services, achieving market acceptance of our products and services, or
developing and maintaining loyal customers.

Acts or threats of terrorism and political or
military actions by the United States or other governments could adversely
affect general economic industry conditions.

Geopolitical conditions may affect our earnings. Acts or threats of
terrorism and political actions taken by the United States or other governments
in response to terrorism, or similar activity, could adversely affect general
economic or industry conditions and, as a result, our consolidated financial
condition and results of operations.

We operate in a highly regulated environment,
which could increase our cost structure or have other negative impacts on our
operations.

We are highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, permissible investments and lines of business, dividend
limitations, limitations on products and services offered, loan limits,
geographical limits, consumer credit regulations, community reinvestment
requirements and restrictions on transactions with affiliated parties. The
system of supervision and regulation applicable to us establishes a
comprehensive framework for our operations and is intended primarily for the
protection of the Deposit Insurance Fund, our depositors and the public, rather
than our stockholders. We are also subject to regulation by the SEC. Failure to
comply with applicable laws, regulations or policies could result in sanction
by regulatory agencies, civil monetary penalties, and/or damage to our
reputation, which could have a material adverse effect on our business,
consolidated financial condition and results of operations. In addition, any
change in government regulation could have a material adverse effect on our
business.

Recent legislative and regulatory actions
taken to stabilize the United States banking system and additional actions
being considered may not succeed or may disadvantage us.

In response to the recent financial crisis, the United States
government, specifically the Department of Treasury, FRB and FDIC, working in
cooperation with foreign governments and other central banks, has taken a
variety of extraordinary measures designed to restore confidence in the
financial markets and to strengthen financial institutions, including measures
available under the Emergency Economic Stabilization Act (EESA). The EESA
followed, and has been followed by, numerous actions by the FRB, United States
Congress, Department of Treasury, FDIC, SEC and others to address the current
liquidity and credit crisis. These measures included homeowner relief that
encourages loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international efforts to
address illiquidity and other weaknesses in the financial sector. The purpose
of these legislative and regulatory actions is to stabilize the U.S. banking
system. However, there can be no assurance as to the actual impact the EESA
will have on the financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced by some
institutions, and they may not have the desired effects. If the volatility in
the markets continues and economic conditions fail to improve or continue to
worsen, our business and consolidated financial condition and results of
operations could be materially adversely affected.

The Department of Treasury is currently developing additional programs
to further alleviate the ongoing financial crisis. There can be no assurance
that we will be able to participate in any such future programs. If we are
unable to participate or choose not to participate, it may have a material
adverse effect on our competitive position and consolidated financial condition
and results of operations.

We are subject to increases in FDIC insurance
premiums and special assessments by the FDIC.

During 2008 and continuing in 2009, higher levels of bank failures have
dramatically increased resolution costs of the FDIC and depleted the deposit
insurance fund. In addition, the FDIC instituted two temporary programs to
further insure customer deposits at FDIC insured banks: deposit accounts now
are insured up to $250,000 per customer (up from $100,000) and
noninterest-bearing transactional accounts are currently fully insured
(unlimited coverage). These programs have placed additional stress on the
Deposit Insurance Fund. In order to maintain a strong funding position and
restore reserve ratios of the Deposit Insurance Fund, the FDIC has increased
assessment rates of the insured institutions. In addition, on November 12,
2009, the FDIC adopted a rule requiring banks to prepay three years worth of
estimated deposit insurance premiums by December 31, 2009. We are generally
unable to control the amount of premiums that we are required to pay for FDIC
insurance. If there are additional bank or financial institution failures, or
the cost of resolving prior failures exceeds expectations, we may be required
to pay even higher FDIC premiums than the recently increased levels. These
announced increases and any future increases or required prepayments of FDIC
insurance premiums may adversely impact our earnings and financial condition.

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Unauthorized disclosure of sensitive or
confidential client or customer information, whether through a breach of our
computer system or otherwise, could severely harm our business.

As part of our financial and data processing products and services, we
collect, process and retain sensitive and confidential client and customer
information. Despite the security measures we have in place, our facilities and
systems, and those of third party service providers, may be vulnerable to
security breaches, acts of vandalism, computer viruses, misplaced or lost data,
programming and/or human error, or other similar events. Any security breach
involving the misappropriation, loss or other unauthorized disclosure of
confidential information, whether by us or our vendors, could severely damage
our reputation, expose us to the risks of litigation and liability, disrupt our
operations and harm our business.

Customers may decide not to use banks to
complete their financial transactions, which could result in a loss of income
to us.

Technology and other changes are allowing customers to complete
financial transactions that historically have involved banks at one or both
ends of the transaction. For example, customers can now pay bills and transfer
funds directly without going through a bank. The process of eliminating banks
as intermediaries, known as disintermediation, could result in the loss of fee
income, as well as the loss of customer deposits.

Our controls and procedures may fail or be
circumvented.

Management regularly reviews and updates our internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well-designed and operated, is
based in part on certain assumptions and can provide only reasonable assurances
that the objectives of the system are met. Any failure or circumvention of our
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on our business,
consolidated financial condition and results of operations.

We rely on the accuracy and completeness of
information about customers or counterparties, and inaccurate or incomplete
information could negatively impact our consolidated financial condition and
results of operations.

In deciding whether to extend credit or enter into other transactions
with customers and counterparties, we may rely on information provided to us by
such customers and counterparties, including financial statements and other
financial information. We may also rely on representations of customers and
counterparties as to the accuracy and completeness of that information and,
with respect to financial statements, on reports of independent auditors. Our
financial condition and results of operations could be negatively impacted to
the extent we rely on financial statements that do not comply with generally
accepted accounting principles or that are inaccurate or misleading.

We are subject to examinations and challenges
by taxing authorities.

In the normal course of business, we are routinely subjected to
examinations and challenges from federal and state taxing authorities regarding
the amount of taxes due in connection with our investments and the businesses
in which we engage. Federal and state taxing authorities have recently become
increasingly aggressive in challenging tax positions taken by financial
institutions. These tax positions may relate to tax compliance, sales and use,
franchise, gross receipts, payroll, property or income tax issues, including
tax base, apportionment and tax planning. The challenges made by taxing
authorities may result in adjustments to the timing or amount of taxable income
or deductions or the allocations of income among tax jurisdictions. If any such
challenges are not resolved in our favor, they could have a material adverse
impact on our consolidated financial condition and results of operations.

We could experience an unexpected inability
to obtain needed liquidity.

Liquidity measures the ability to meet current and future cash flow
needs as they become due. The liquidity of a financial institution reflects its
ability to meet loan requests, to accommodate possible outflows in deposits,
and to take advantage of interest rate market opportunities. The ability of a
financial institution to meet its current financial obligations is a function
of its balance sheet structure, its ability to liquidate assets and its access
to alternative sources of funds. We seek to ensure our funding needs are met by
maintaining an appropriate level of liquidity through asset/liability
management. If we become unable to obtain funds when needed, it could have a
material adverse effect on our business and, in turn, our consolidated
financial condition and results of operations.

A decline in our stock price could require a
write-down of some portion or all of our goodwill.

If our stock price were to decline, or remain below our tangible book
value for an extended period of time, we could be required to write off all or
a portion of our goodwill, which represents our value in excess of our tangible
book value. Such write-off would reduce earnings in the period in which it is
recorded. Our stock price is subject to market conditions that can be impacted
by forces outside the control of management, such as a perceived weakness in
financial institutions in general, and may not be a direct result of our
performance. A write-off of goodwill could have a material adverse effect on
our consolidated financial condition and results of operations.

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Future growth or operating results may
require us to raise additional capital but that capital may not be available.

We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. To the extent our future
operating results erode capital or we elect to expand through loan growth or
acquisition, we may be required to raise capital.

Our ability to raise capital will depend on conditions in the capital
markets, which are outside of our control, and on our financial performance.
Accordingly, we cannot be assured of our ability to raise capital when needed
or on favorable terms. If we cannot raise additional capital when needed, we
will be subject to increased regulatory supervision and the imposition of
restrictions on our growth and business. These could negatively impact our
ability to operate or further expand our operations and may result in increases
in operating expenses and reductions in revenues that could have a material
effect on our consolidated financial condition and results of operations.

The holders of our junior subordinated debentures have rights that are
 senior to those of our shareholders.



On March 31, 2006, we issued $16.1 million of floating rate junior
 subordinated debentures in connection with a $16.1 million trust preferred securities issuance by our subsidiary, Baylake Capital Trust II.  The 2006 junior
 subordinated debentures mature in March of 2036.  The purpose of the transaction was to raise additional capital in order for us to redeem our trust preferred securities issued by our subsidiary Baylake Capital Trust I.



Payments of the principal and interest on the trust preferred securities
 are conditionally guaranteed by us.  The junior subordinated debentures are senior to our shares of common stock.  As a result, we must make payments on
 the junior subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock and, in the event of our bankruptcy,
 dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of our common stock.  We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our common stock.



To the extent that we issue additional junior subordinated debentures in
 connection with an additional trust preferred securities issuance, the additional junior subordinated debentures will rankpari passuwith our existing 2006 junior subordinated debentures and senior to our
 shares of common stock.



The holders of our convertible notes will have rights that are senior
 to those of our shareholders.



During the third and fourth quarter of 2009, we issued $5.35 million of our
 10% Convertible Notes due June 30, 2017 (the “Convertible Notes”).  The Convertible Notes are senior to our junior subordinated debentures issued in connection with trust
 preferred securities, as well as shares of our common stock.  In the event of our bankruptcy, dissolution or liquidation, the holders of our Convertible Notes must
 be satisfied before any distributions can be made to the holders of our common stock.



Our securities are not an insured deposit.



Securities issued by us are not a bank deposit and are not insured or
guaranteed by the FDIC or any other government agency.  Your investment in our securities are subject to investment risk, and you must be capable of affording
the loss of your entire investment.



The holding company cannot rely on dividends from Baylake
 Bank.



Our holding company is a separate and distinct legal entity from its
subsidiaries.  Historically, it has received substantially all of its revenue from dividends from Baylake Bank.  Federal and/or state laws and regulations
limit the amount of dividends that the Bank may pay to the holding company.  Also, a holding company’s right to participate in a distribution of assets upon
 a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.  In the event Baylake Bank is unable to pay
 dividends to the holding company, when needed, the holding company may not be able to service debt or pay its obligations, including dividends on the Trust Preferred
 Stock and Convertible Promissory Notes.  The inability to receive dividends from Baylake Bank could have a material adverse effect on our business, financial
condition and results of operations.  Our recent losses have had the consequence of not allowing Baylake Bank to pay dividends to the parent company without prior
regulatory approval.



We may not be able to attract and retain skilled people.



Our success depends, in large part, on our ability to attract and retain key
 people.  Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire people or retain them.  The
unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our local
markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.



We continually encounter technological change.



The financial services industry is continually undergoing rapid technological
 change with frequent introductions of new technology driven by products and services.  The effective use of technology increases efficiency and enables financial
 institutions to better serve customers and to reduce costs.  Our future success depends, in part, upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our
competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.  Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.



Possible restrictions on bank overdraft programs could significantly
 reduce our deposit service charge income.



On November 12, 2009, the Federal Reserve Board announced final rules
 that prohibit institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions.  The new
 rules require consumers to consent, or opt in, to the overdraft service for these two types of transactions before fees can be charged.  We anticipate these new
 rules could significantly impact our nonsufficient funds and overdraft income the last two quarters of 2010 because of the required implementation dates of July 1 for
 new accounts and August 15 for existing accounts.  A team is currently in place ensuring our systems are ready to meet the new rules.  In addition, this team
 is working on a communication plan for existing accounts, which will educate our customers on the various overdraft options.  Beyond this regulatory change, a bill
 has been introduced to the House which could place further restrictions on overdraft charges.  If this bill or one similar to it passed, our service charge income
 could be reduced even further.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our bank owns its headquarters and twenty-six branches and leases one
branch office from a third party. The main office is located in Sturgeon Bay,
Wisconsin and the branches are distributed by county as follows: eight in Brown
County, seven in Door County, one in Green Lake County, four in Kewaunee
County, one in Manitowoc County, one in Outagamie County, four in Waupaca
County and one in Waushara County.

The main office building located in Sturgeon Bay serves as our
corporate headquarters and main banking office. The main office also
accommodates our expanded business, primarily an insurance agency (Baylake
Insurance Agency) and brokerage service. The twenty-seven branches owned or
leased by our bank are in good condition and considered adequate for present
and near term requirements. In addition, our bank owns other real property that
we do not consider in the aggregate to be material to our consolidated
financial position. All of such other real property is reserved for future
expansion and is located in the following Wisconsin municipalities: Berlin,
Appleton, Neenah, and Oshkosh.

ITEM 3. LEGAL PROCEEDINGS

We may be involved from time to time in various routine legal
proceedings incidental to our business. Neither we nor any of our subsidiaries
is currently engaged in any legal proceedings that are expected to have a
material adverse effect on our consolidated financial statements.

ITEM 4. [RESERVED]

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Table of Contents

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Historically, trading in shares of our common stock has been limited.
Since mid-1993, our common stock has been quoted on the OTC Bulletin Board
(Trading symbol: BYLK.OB), an electronic interdealer quotation system providing
real-time quotations on eligible securities.

The following table summarizes high and low bid prices and cash
dividends declared for our common stock for the periods indicated. Bid prices
are as reported from the OTC Bulletin Board. The reported high and low prices
represent interdealer bid prices, without retail mark-up, mark-downs or
commission, and may not necessarily represent actual transactions.

|     |  |                 |              |      |   |       |  |                           |      |  |   |   |  | 
|---- |  | --------------- | ------------ | ---- | - | ----- |  | ------------------------- | ---- |  | - | - |  | 
|     |  | Calendar period |              | High |   | Low   |  | Cash dividends per
 share |     
|2008 |  |                 | 1st
 Quarter |      | $ | 11.75 |  | $                         | 8.55 |  | $ |  |  | 
|     |  |                 | 2nd
 Quarter |      | $ | 9.05  |  | $                         | 6.00 |  | $ |  |  | 
|     |  |                 | 3rd
 Quarter |      | $ | 6.75  |  | $                         | 4.00 |  | $ |  |  | 
|     |  |                 | 4th
 Quarter |      | $ | 6.75  |  | $                         | 3.50 |  | $ |  |  | 
|     |  |                 |              |      |   |       |  |                           |      |  |   |   |  | 
|2009 |  |                 | 1st
 Quarter |      | $ | 5.05  |  | $                         | 1.55 |  | $ |  |  | 
|     |  |                 | 2nd
 Quarter |      | $ | 4.95  |  | $                         | 1.85 |  | $ |  |  | 
|     |  |                 | 3rd
 Quarter |      | $ | 4.20  |  | $                         | 2.99 |  | $ |  |  | 
|     |  |                 | 4th
 Quarter |      | $ | 3.75  |  | $                         | 2.50 |  | $ |  |  | 

We had approximately 1,746 shareholders of record at March 12, 2010. The
number of shareholders does not separately reflect persons or entities that
hold their stock in nominee or street name through various brokerage firms.

The holders of our common stock are entitled to receive such dividends
when and as declared by our Board of Directors and approved by our regulators.
In determining the payment of cash dividends, our Board of Directors considers
the earnings, capital and debt servicing requirements, financial ratio
guidelines issued by the FRB and other banking regulators, our financial
condition, and other relevant factors.

Our ability to pay dividends is dependent upon our receipt of dividends
from our subsidiary bank, which is subject to regulatory restrictions. Such
restrictions, which govern state-chartered banks, generally limit the payment
of dividends on bank stock to the banks undivided profits after all payments
of all necessary expenses, provided that the banks surplus equals or exceeds
its capital, as discussed further in Item 7, Management Discussion and Analysis
of Financial Condition and Results of Operation-Capital Resources. In addition,
under the terms of our junior subordinated debentures due 2036, we would be
precluded from paying dividends on our common stock if we were in default under
the Debentures, if we exercised our right to defer payments of interest on the
Debentures, or if certain related defaults occurred.

Through 2007, cash dividends on our common stock had historically been
paid on a quarterly basis in March, June, September and January. No cash
dividends were declared during 2008 and 2009 versus total cash dividends of $0.64 per
share declared during 2007. Beginning in February 2008, our Board of Directors,
in consultation with our federal and state bank regulators, elected to forego
the payment of cash dividends on our common stock. The payment of dividends in
relationship to our financial position continues to be monitored on a quarterly
basis and our intentions are to reinstate payment of dividends at the earliest
appropriate opportunity. However, there is no assurance if or when we will be
able to do so or if we do, in what amounts. In order to pay dividends, we will
need to seek approval from the WDFI as well as the FRB.

In the event and at such time as we do resume payment of quarterly
dividends, we maintain a dividend reinvestment plan enabling participating
shareholders to elect to purchase shares of our common stock in lieu of
receiving cash dividends. Such shares may be newly issued or acquired by us in
the open market. New shares issued under this plan are limited to 1 million
over the life of the plan.

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On August 14, 2009 and September 30, 2009, we completed closings for a
private placement of 10% Convertible Notes due June 30, 2017 (the Convertible Notes).
Additional closings occurred on November 1, 2009 and December 31, 2009. The
Convertible Notes were offered and sold primarily to accredited investors as defined in
Securities Act of 1933 and up to 35 non-accredited investors in reliance on the
exemption from registration under Section 4(2) of the Securities Act of 1933,
as amended and Rule 506 promulgated thereunder. At the closings, we issued in
aggregate $5.4 million of Convertible Notes. The proceeds of this financing will be
contributed, in part, as additional capital to Baylake Bank and otherwise used
for general corporate purposes.

The Convertible Notes accrue interest at a fixed rate of 10% per annum upon
issuance and until maturity or earlier conversion or redemption. Interest is
payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of
each year, commencing October 1, 2009. The Convertible Notes are convertible into shares of
our common stock at a conversion ratio of one share of common stock for each
$5.00 in aggregate principal amount held on the record date of the conversion
subject to certain adjustments as described in the Convertible Notes. Prior to October 1,
2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the
holder) of the original principal amount into shares of our common stock at the
conversion ratio. On October 1, 2014, one-half of the original principal
amounts are mandatorily convertible at the conversion ratio if conversion has
not occurred. The principal amount of any Convertible Note that has not been converted or
redeemed will be payable at maturity on June 30, 2017. We are not obligated to
register the common stock related to the conversion of the Convertible Notes.

We sold $1.15 million of the Convertible Notes without registration during the fourth quarter of
2009.

Performance Graph

The following
graph shows the cumulative stockholder return on our common stock over the last
five fiscal years compared to the returns of Standard & Poors 500 Stock
Index and the NASDAQ Bank Index, prepared for NASDAQ by the Center for Research
in Securities Prices at the University of Chicago.

Cumulative Total Return(1)

(LINE GRAPH)

|                   |  |                 |        |      |  |        |  |      |        |      |  |        |  |  |       |  |  |       | 
|------------------ |  | --------------- | ------ | ---- |  | ------ |  | ---- | ------ | ---- |  | ------ |  |  | ----- |  |  | ----- | 
|                   |  | At December 31, |       
|                   |  | 2004            |        | 2005 |  | 2006   |  | 2007 |        | 2008 |  | 2009   | 
|Baylake
 Corp.     |  |                 | 100.00 |      |  | 96.90  |  |      | 99.87  |      |  | 67.41  |  |  | 32.57 |  |  | 18.24 | 
|NASDAQ Bank
 Index |  |                 | 100.00 |      |  | 95.67  |  |      | 106.20 |      |  | 82.76  |  |  | 62.96 |  |  | 51.31 | 
|S&P 500            |  |                 | 100.00 |      |  | 103.00 |  |      | 117.03 |      |  | 121.16 |  |  | 74.53 |  |  | 92.01 | 
|                   |  |                 |        |      |  |        |  |      |        |      |  |        |  |  |       |  |  |       | 

|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Assumes $100 invested on December 31, 2004 in each of Baylake Corp.
 common stock, the Standard & Poors 500 Stock Index and the NASDAQ Bank
 Index. Dividends are assumed to be reinvested.

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ITEM 6. SELECTED FINANCIAL DATA

BAYLAKE CORP. 
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA

|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|------------------------------------------------------------------------ |  | ---------------------------------------------- | --------- | ---- | - | --------- | -- | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|                                                                         |  | Year Ended
 December 31,                       |           |      |   |           |    |      |          
|                                                                         |  | 2009                                           |           | 2008 |   | 2007      |    | 2006 |           | 2005 |  
|                                                                         |  | (dollars in
 thousands, except per share data) |          
|                                                                        
|Results of operations:                                                   |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Interest and dividend income                                             |  | $                                              | 47,468    |      | $ | 57,276    |    | $    | 69,668    |      | $ | 70,014    |   | $ | 61,538    |  
|Interest expense                                                         |  |                                                | 18,259    |      |   | 28,227    |    |      | 38,753    |      |   | 36,378    |   |   | 26,660    |  
|Net interest income                                                      |  |                                                | 29,209    |      |   | 29,049    |    |      | 30,915    |      |   | 33,636    |   |   | 34,878    |  
|Provision for loan losses                                                |  |                                                | 6,500     |      |   | 17,961    |    |      | 9,761     |      |   | 903       |   |   | 3,217     |  
|Net interest income after provision for
 loan losses                     |  |                                                | 22,709    |      |   | 11,088    |    |      | 21,154    |      |   | 32,733    |   |   | 31,661    |  
|Non-interest income                                                      |  |                                                | 12,485    |      |   | 9,257     |    |      | 9,174     |      |   | 9,737     |   |   | 11,597    |  
|Non-interest expense:                                                    |  |                                                | 29,978    |      |   | 38,022    |    |      | 32,578    |      |   | 32,329    |   |   | 30,519    |  
|Income (loss) before provision (benefit)
 for income taxes               |  |                                                | 5,216     |      |   | (17,677   | )  |      | (2,250    | )    |   | 10,141    |   |   | 12,739    |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Income tax provision (benefit)                                           |  |                                                | 887       |      |   | (7,860    | )  |      | (2,416    | )    |   | 2,765     |   |   | 3,836     |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Net income (loss)                                                        |  | $                                              | 4,329     |      | $ | (9,817    | )  | $    | 166       |      | $ | 7,376     |   | $ | 8,903     |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Per Share Data:(1)                                                       |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Net income (loss) per share (basic)(1)                                   |  | $                                              | .55       |      | $ | (1.24     | )  | $    | 0.02      |      | $ | 0.95      |   | $ | 1.15      |  
|Net income (loss) per share (diluted)(1)                                 |  |                                                | .55       |      |   | (1.24     | )  |      | 0.02      |      |   | 0.94      |   |   | 1.14      |  
|Cash dividends per common share                                          |  |                                                |          |      |   |          |    |      | 0.64      |      |   | 0.64      |   |   | 0.61      |  
|Book value per share at end of period                                    |  |                                                | 9.43      |      |   | 8.72      |    |      | 10.18     |      |   | 10.50     |   |   | 10.09     |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Selected Financial Condition Data (at
 December 31):                     |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Total assets                                                             |  | $                                              | 1,044,457 |      | $ | 1,062,913 |    | $    | 1,106,616 |      | $ | 1,111,684 |   | $ | 1,089,408 |  
|Securities                                                               |  |                                                | 204,834   |      |   | 225,417   |    |      | 222,475   |      |   | 188,315   |   |   | 171,638   |  
|Gross loans                                                              |  |                                                | 651,894   |      |   | 728,722   |    |      | 760,210   |      |   | 819,568   |   |   | 812,296   |  
|Total deposits                                                           |  |                                                | 831,629   |      |   | 849,758   |    |      | 884,185   |      |   | 878,911   |   |   | 856,711   |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Short-term borrowings (2)                                                |  |                                                | 21,122    |      |   | 30,174    |    |      | 27,174    |      |   | 4,480     |   |   | 1,315     |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Other borrowings (3)                                                     |  |                                                | 85,000    |      |   | 85,095    |    |      | 85,172    |      |   | 115,179   |   |   | 125,185   |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Subordinated debentures                                                  |  |                                                | 16,100    |      |   | 16,100    |    |      | 16,100    |      |   | 16,100    |   |   | 16,100    |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Convertible promissory notes                                             |  |                                                | 5,350     |      |   |          |    |      |          |      |   |          |   |   |          |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Total shareholders equity                                               |  | $                                              | 74,598    |      | $ | 68,954    |    | $    | 80,262    |      | $ | 82,193    |   | $ | 78,544    |  
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Performance Ratios:                                                      |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Return on average assets                                                 |  |                                                | .41       | %    |   | (0.91     | %) |      | 0.02      | %    |   | 0.67      | % |   | 0.82      | %
|Return on average total shareholders equity                             |  |                                                | 6.01      | %    |   | (12.35    | %) |      | 0.21      | %    |   | 9.33      | % |   | 11.51     | %
|Dividend payout ratio                                                    |  |                                                |          |      |   |          |    |      | 3,030.48  | %    |   | 67.67     | % |   | 52.99     | %
|Net interest margin (4)                                                  |  |                                                | 3.18      | %    |   | 3.11      | %  |      | 3.21      | %    |   | 3.44      | % |   | 3.60      | %
|Net interest spread (4)                                                  |  |                                                | 3.04      | %    |   | 2.89      | %  |      | 2.80      | %    |   | 3.05      | % |   | 3.27      | %
|Non-interest income to average assets                                    |  |                                                | 1.19      | %    |   | 0.86      | %  |      | 0.83      | %    |   | 0.89      | % |   | 1.07      | %
|Non-interest expense to average assets                                   |  |                                                | 2.86      | %    |   | 3.53      | %  |      | 2.96      | %    |   | 2.94      | % |   | 2.81      | %
|Net overhead ratio (5)                                                   |  |                                                | 1.67      | %    |   | 2.67      | %  |      | 2.12      | %    |   | 2.06      | % |   | 1.74      | %
|Average loan-to-average deposit ratio                                    |  |                                                | 83.34     | %    |   | 87.18     | %  |      | 91.24     | %    |   | 94.73     | % |   | 94.16     | %
|Average interest-earning assets to average
 interest-bearing liabilities |  |                                                | 107.07    | %    |   | 107.41    | %  |      | 110.58    | %    |   | 111.09    | % |   | 112.73    | %
|Efficiency ratio (6)                                                     |  |                                                | 77.46     | %    |   | 97.54     | %  |      | 78.93     | %    |   | 72.48     | % |   | 63.88     | %
|Asset Quality Ratios:(7)                                                 |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Non-performing loans to total loans                                      |  |                                                | 4.38      | %    |   | 6.04      | %  |      | 4.94      | %    |   | 3.40      | % |   | 0.85      | %
|Allowance for loan losses to:                                            |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Gross loans                                                              |  |                                                | 1.47      | %    |   | 1.86      | %  |      | 1.56      | %    |   | 0.98      | % |   | 1.18      | %
|Non-performing loans                                                     |  |                                                | 33.51     | %    |   | 30.78     | %  |      | 31.53     | %    |   | 29.46     | % |   | 137.58    | %
|Net charge-offs to average loans                                         |  |                                                | 1.50      | %    |   | 2.18      | %  |      | 0.74      | %    |   | 0.29      | % |   | 0.52      | %
|Non-performing assets to total assets                                    |  |                                                | 4.18      | %    |   | 4.82      | %  |      | 3.86      | %    |   | 3.02      | % |   | 0.94      | %
|                                                                         |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Capital Ratios:(8)                                                       |  |                                                |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Shareholders equity to assets                                           |  |                                                | 7.14      | %    |   | 6.49      | %  |      | 7.25      | %    |   | 7.39      | % |   | 7.21      | %
|Tier 1 risk-based capital                                                |  |                                                | 10.22     | %    |   | 8.47      | %  |      | 10.07     | %    |   | 10.00     | % |   | 9.70      | %
|Total risk-based capital                                                 |  |                                                | 12.18     | %    |   | 9.72      | %  |      | 11.32     | %    |   | 10.87     | % |   | 10.73     | %
|Leverage ratio                                                           |  |                                                | 7.60      | %    |   | 6.68      | %  |      | 8.34      | %    |   | 8.53      | % |   | 8.27      | %

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|    |                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per
 share are based on the weighted average number of shares outstanding for the
 period.                                                                                                                                                                                           
|(2) | Consists of
 federal funds purchased and repurchase agreements.                                                                                                                                                                                                                               
|(3) | Consists of
 Federal Home Loan Bank term notes and borrowings from an unaffiliated
 correspondent bank.                                                                                                                                                                                       
|(4) | Net interest margin represents net interest income as a percentage of
 average interest-earning assets, and net interest rate spread represents the
 difference between the weighted average yield on interest-earning assets and
 the weighted average cost of interest-bearing liabilities. 
|(5) | Net overhead ratio represents the difference between non-interest
 expense and non-interest income, divided by average assets.                                                                                                                                                                
|(6) | Efficiency ratio represents non-interest expense, excluding
 gains/losses from sales of fixed assets, divided by the sum of tax equivalent
 interest income and non-interest income, excluding gains/losses from sales of
 securities.                                                        
|(7) | Non-performing loans consist of non-accrual loans, guaranteed loans
 90 days or more past due but still accruing interest and restructured loans.
 Non-performing assets include non-performing loans and foreclosed assets.                                                                  
|(8) | The capital ratios are presented on a consolidated basis. For
 information on our regulatory capital requirements, see Item 7. Managements
 Discussion and Analysis of Financial Condition and Results of
 Operations-Capital Resources and Item 1. Business-Regulation and
 Supervision.

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

General

The following sets forth managements discussion and analysis of our
consolidated financial condition and results of operations that should be read
in conjunction with our consolidated financial statements, related notes, the
selected financial data and the statistical information presented elsewhere in
this report for a more complete understanding of the following discussion and
analysis.

Critical Accounting Policies

In the course of our normal business activity, management must select
and apply many accounting policies and methodologies that are the basis for the
financial results presented in our consolidated financial statements. Some of
these policies are more critical than others.

Allowance for Loan Losses (ALL): The ALL
represents managements estimate of probable and inherent credit losses in the
loan portfolio. Estimating the amount of the ALL requires the exercise of
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset on the
consolidated balance sheet. Loan losses are charged off against the ALL while
recoveries of amounts previously charged off are credited to the ALL. A
provision for loan losses (PFLL) is charged to operations based on
managements periodic evaluation of the factors previously mentioned, as well
as other pertinent factors.

The ALL consists of a specific component on certain loans and a general
component for loans without specific reserves. The components of the ALL
represent estimations pursuant to either ASC 450-10, Accounting for Contingencies, or ASC 310-10, Accounting by Creditors for Impairment of a Loan.
The specific component of the ALL reflects estimated losses from analyses
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific credit
allocations are based on regular analyses of all impaired non-homogenous loans.
These analyses involve a high degree of judgment in estimating the amount of
loss associated with specific loans, including estimating the amount and timing
of future cash flows and collateral values. The general component is based on
our historical loss experience which is updated quarterly. The general
component of the ALL also includes consideration of concentrations, changes in
portfolio mix and volume and other qualitative factors.

There are many factors affecting the ALL, some of which are
quantitative, while others require qualitative judgment. The process for
determining the ALL (which management believes adequately considers potential
factors which might possibly result in credit losses) includes subjective
elements and, therefore, may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional PFLL could
be required that could adversely affect our earnings or financial position in
future periods. Allocations of the ALL may be made for specific loans but the
entire ALL is available for any loan that, in managements judgment, should be
charged-off or for which an actual loss is realized.

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Foreclosed Properties: Foreclosed properties
acquired through or in lieu of loan foreclosure are initially recorded at the
lower of carrying cost or fair value, less estimated costs to sell,
establishing a new cost basis. Fair value is determined using a variety of
market information including but not limited to appraisals, professional market
assessments and real estate tax assessment information. If fair value declines
subsequent to foreclosure, a write-down is recorded through expense.
Costs incurred after acquisition are expensed.

Provision for Impairment of Standby Letters of Credit:
The provision for impairment of standby letters of credit represents
managements estimate of probable incurred losses on off-balance sheet standby
letters of credit which are used to support our customers business
arrangements with an unrelated third party. In the event of further impairment,
a provision for impairment of standby letters of credit is charged to
operations based on managements periodic evaluation of the factors affecting
the standby letters of credit. See the Non-Interest Expense discussion in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations section for further information.

Income Tax Accounting: The assessment of tax
assets and liabilities involves the use of estimates, assumptions,
interpretations, and judgments concerning certain accounting pronouncements and
federal and state tax codes. There can be no assurance that future events, such
as court decisions or positions of federal and state taxing authorities, will
not differ from managements current assessment, the impact of which could be
significant to the consolidated results of our operations and reported
earnings. We believe that the tax assets are recoverable, and liabilities are adequate and
fairly stated in the consolidated financial statements. See Note 16-Income
Tax Expense to our consolidated financial statements for further information.

Overview

We are a full-service financial services company, providing a wide
variety of loan, deposit and other banking products and services to our
business, individual or retail, and municipal customers, as well as a full
range of trust, investment and cash management services. We are the bank
holding company of Baylake Bank, chartered as a Wisconsin state-chartered bank
and a member bank of the Federal Reserve Bank and Federal Home Loan Bank.

Our profitability, like most financial institutions, is dependent to a
large extent upon net interest income. Results of operations are also affected
by the PFLL, operating expenses, income taxes and non-interest income. Economic
conditions, competition and the monetary and fiscal policies of the Federal
government in general significantly affect financial institutions, including us.
Lending activities are also influenced by regional and local economic factors,
including specifically the demand for and supply of housing, competition among
lenders, interest rate conditions and prevailing market rates on competing
investments, customer preferences and levels of personal income and savings in
our market area.

In the last several years, we have developed an internal customer
relationship management system (CRM) to more effectively manage and market to
our internal customer base. We continue to upgrade the system to enhance
utilization of resources and the effectiveness of customer services within our
market areas.

During the first quarter of 2009, our regulatory capital ratios and
those of our bank were in excess of the levels established by regulatory
agencies for well capitalized financial institutions. Prior to that, during
the fourth quarter of 2008, our regulatory capital ratios and those of our bank
fell below well capitalized levels, but remained in excess of levels established
for adequately capitalized financial institutions. Significant emphasis was
placed on returning to well-capitalized levels during the first quarter of
2009. Action taken, included realizing gains on the sale of securities,
reallocating assets to lower risk-weighted levels, and significant reductions
in non-interest expenses.

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Performance Summary

The following is a brief summary of some of the factors that affected
our operating results in 2009. See the remainder of this section for a more
thorough discussion.

We reported net income of $4.3 million for the year ended December 31,
2009, an increase of $14.1 million over a loss of $9.8 million in 2008. Both
basic and diluted income per share were $0.55 for 2009 compared to ($1.24)
basic and diluted losses per share for 2008. Return on average assets for the
year ended December 31, 2009 was 0.41% and (0.91)% for the year ended December
31, 2008. The return on average equity was 6.01% for 2009 and (12.35)% for
2008. No cash dividends were declared in 2009 or 2008.

Key factors behind these results were:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Net interest income and net interest margin improved in 2009 as the
 rates paid on interest bearing liabilities decreased at greater levels than
 the decrease in rates on our interest earning assets, thereby increasing
 interest rate spread.                                                                                                                                                                                                                                                                                                                               
| | § | Tax-equivalent net interest income was $30.4 million for 2009, a
 decrease of $0.1 million or 0.3% from $30.5 million for 2008. Tax-equivalent
 interest income decreased $10.1 million, while interest expense decreased
 $10.0 million. The decrease in tax-equivalent net interest income was
 attributable to a reduction of $0.9 million in tax-exempt interest income
 resulting from a reduced allocation to tax-exempt securities in our
 securities portfolio.                                                                                                         
| | § | The net interest margin for 2009 was 3.18%, compared to 3.11% in
 2008. The 7 basis point (bps) increase in net interest margin largely
 resulted from a 15 bps increase in interest rate spread caused by an 89 bps
 decrease in the return on interest-earning assets which was more than offset
 by a 104 bps decrease in the cost of interest-bearing liabilities.                                                                                                                                                                                                          
| | § | Total loans were $651.9 million at December 31, 2009, a decrease of
 $76.8 million, or 10.5%, from December 31, 2008. Commercial real estate loans
 decreased $28.7 million (7.5%) and represented 54.2% of total loans at
 December 31, 2009 compared to 52.4% at year-end 2008. Total deposits were
 $831.6 million at December 31, 2009, a decrease of $18.2 million, or 2.1%,
 from year-end 2008.                                                                                                                                                                          
| | § | Charge-offs decreased from a year ago. Net loan charge-offs were
 $10.5 million in 2009, a decrease of $5.7 million compared to $16.2 million
 for 2008. Net loan charge-offs for commercial loans represented $4.0 million
 of the $10.5 million total in 2009. Net loan charge-offs represented 1.50% of
 average loans in 2009 compared to 2.18% in 2008. The PFLL decreased to $6.5
 million for 2009 compared to $18.0 million for 2008.                                                                                                                                   
| | § | Non-interest income was $12.5 million for 2009, an increase of $3.2
 million or 34.4% from 2008. A $3.4 million increase in net gains from sales
 of securities, a $0.7 million increase in gains on sale of loans, and a $0.6
 million increase in the cash surrender value of life insurance contributed to
 the increase. The increases were partially offset by a $0.5 million decrease
 in other fees to customers, a $0.5 million decrease in equity earnings in
 UFS, and a $0.6 million decrease in other income primarily related to a
 settlement favoring us in 2008.
| | § | Non-interest expense was $30.0 million for 2009, a decrease of $8.0
 million over 2008. This was primarily the result of a decrease in the
 provision on a standby letter of credit of $2.5 million, a decrease in the
 provision for other than temporary impairment of securities of $1.9 million,
 and decreases in the areas of operation of foreclosed properties and loan and
 collection expenses of $3.0 million and $0.5 million, respectively, and a
 decrease of $1.2 million in employee benefits, offset by an increase of $1.4
 million in FDIC insurance expense.
| | § | Provision for income taxes resulted in a tax expense of $0.9 million
 for 2009 versus a tax benefit of $7.9 million for 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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STATEMENT OF OPERATIONS ANALYSIS

2009 compared to
2008

Net Interest Income

Net interest income represents the difference between the dollar amount
of interest earned on interest-earning assets and the dollar amount of interest
paid on interest-bearing liabilities. The interest income and interest expense
of financial institutions are significantly affected by general economic
conditions, competition, policies of regulatory authorities and other factors.

Interest rate spread and net interest margin are used to measure and
explain changes in net interest income. Interest rate spread is the difference
between the yield on earning assets and the rate paid for interest-bearing
liabilities that fund those assets. Net interest margin is expressed as the
percentage of net interest income to average earning assets. Net interest
margin exceeds interest rate spread because non-interest bearing sources of
funds (net free funds), principally demand deposits and stockholders equity,
also support earning assets. To compare tax-exempt asset yields to taxable
yields, the yield on tax-exempt loans and securities is computed on a
tax-equivalent basis. The narrative below discusses net interest income,
interest rate spread and net interest margin on a tax-equivalent basis.

Table 1 provides average balances of interest-earning assets and
interest-bearing liabilities, interest income and expense, and the
corresponding interest rates earned and paid, as well as net interest income,
interest spread, and net interest margin on a tax-equivalent basis for the
years ended December 31, 2009, 2008 and 2007.

Net interest income in the consolidated statements of operations (which
excludes the tax-equivalent adjustment) was $29.2 million for 2009, compared to
$29.0 million for 2008. Net interest income in both 2009 and 2008 was
negatively impacted by the high level of non-performing loans for which
interest income is not recognized. The tax equivalent adjustments (adjustments
needed to bring tax-exempt interest to a level that would yield the same after-tax
income had that income been subject to taxation using a 34% tax rate) of $1.2
million for 2009 and $1.5 million for 2008 resulted in a tax-equivalent net
interest income of $30.4 million and $30.5 million, respectively. The net
interest margin for 2009 was 3.18% compared to 3.11% in 2008. The 7 bps
increase in net interest margin is attributable to a 15 bps increase in
interest rate spread resulting from an 89 bps decline in return on
interest-earning assets, which was more than offset by a 104 bps decrease in
the cost of interest-bearing liabilities in 2009.

In 2009, we had positioned the balance sheet to be slightly liability
sensitive (which means that liabilities will reprice faster than assets); thus,
the rate decreases impacted net interest income positively. We expect that in a
gradually increasing rate environment, our statement of operations would
benefit from asset sensitivity over the long term, although changes in the
portfolio or the pace of increases could affect that trend.

As shown in the rate/volume analysis in Table 2, volume changes
resulted in a $3.0 million decrease to tax equivalent net interest income in
2009. The decrease in and changes in the composition of earning assets resulted
in a $10.1 million decrease to tax equivalent interest income in 2009 offset by
a $10.0 million decrease in interest expense due to the composition change in
interest-bearing liabilities. Rate changes on earning assets decreased interest
income by $6.2 million but were more than offset by rate changes on
interest-bearing liabilities that decreased interest expense by $9.1 million,
for a net impact of $2.9 million due to changes in interest rates.

For 2009, the yield on earning assets declined to 5.09%, which was the
combined effect of a decrease of 69 bps in the loan yield, a 10 bps decline in
the yield on tax-exempt securities, a 181 bps decrease in the yield on federal
funds sold, a 232 bps decrease in the yield on money market instruments, and a
72 bps decline in yields on agency securities. The average loan yield was 5.58%
in 2009 and 6.27% in 2008. Competitive pricing on new and refinanced loans, as
well as tightened credit underwriting standards, reduced loan yields in 2009.

For 2009, the cost of interest-bearing liabilities decreased by 104 bps
from 3.09% in 2008, to 2.05%, resulting, in part, from a continuing decrease in
interest rates, generally, in 2009. The combined average cost of
interest-bearing deposits was 2.00%, down 106 bps from 2008, primarily
resulting from the continued low short-term interest rate environment during
2009. Also contributing to the decrease was the cost of wholesale funding,
(comprising of federal funds purchased (down 2.29% to 0.69%); repurchase
agreements (down 1.62% to 0.71%); FHLB advances (down 0.61% to 2.67%) and
subordinated debentures (down 2.69% to 2.24%). All of these items were impacted
favorably by the low interest rate environment for wholesale funding costs
during the year. Partially offsetting the decrease were the issuance of
Convertible Promissory Notes at a yield of 10.72%.

Average earning assets were $955.6 million in 2009, compared to $982.3
million in 2008. Average loans outstanding declined to $699.1 million in 2009
from $743.9 million in 2008, a decrease of 6.0%. Average loans to average total
assets decreased to 66.6% in 2009 from 69.0% in 2008. For 2009, tax-equivalent
interest income on loans decreased $7.6 million, of which $2.7 million related
to the decline in average outstanding balances and $4.9 million decrease
related to the lower yields on such loans. Balances of securities and
short-term investments increased $18.1 million on average. Tax equivalent
interest income on securities and short-term investments increased $1.2 million
from volume changes, and $1.3 million from the impact of the rate environment,
for a combined $2.5 million increase in tax equivalent interest income on
securities in our investment portfolio.

Average interest-bearing liabilities decreased $22.0 million in 2009
from 2008 levels, while net free funds (the total of demand deposits, accrued
expenses, other liabilities and stockholders equity less non-interest earning
assets) decreased $4.7 million. The decrease in net free funds is primarily
attributable to a decrease in stockholders equity. Average stockholders
equity decreased by $7.4 million, or 9.2%. Average interest-bearing deposits
declined $14.0 million, or 1.8%, to $766.5 million. This decline resulted from
a decline in savings deposits and time deposits greater than $100,000 offset by
increases in interest-bearing demand deposits and time deposits less than
$100,000. Interest expense on interest-bearing deposits decreased $0.9 million
from the volume and mix changes and $7.7 million from impact of the rate
environment, resulting in an aggregate decrease of $8.6 million in interest
expense on interest-earning deposits. Average wholesale-funding sources
decreased by $8.0 million during 2009. For 2009, interest expense on wholesale
funding sources decreased by $1.4 million from 2008 due to declining interest
rates.

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Table 1:
Average Balances and Interest Rates (interest and rates on a tax-equivalent
basis)

|                                           |  |                         |           |          |   |               |  |                  |       |          |   |               |  |                  |        |          |  |             |   |   |           |  |   |        |  |  |      |  
|------------------------------------------ |  | ----------------------- | --------- | -------- | - | ------------- |  | ---------------- | ----- | -------- | - | ------------- |  | ---------------- | ------ | -------- |  | ----------- | - | - | --------- |  | - | ------ |  |  | ---- | -
|                                           |  | Year ended December 31, |          
|                                           |  | 2009                    |           | 2008     |   | 2007          | 
|                                           |  | AverageBalance          |           | Interest |   | Average
 Rate |  | Average
 Balance |       | Interest |   | Average
 Rate |  | Average
 Balance |        | Interest |  | AverageRate |  
|                                           |  | (dollars in thousands)  |          
|ASSETS:                                    |  |                         |           |          |   |               |  |                  |       |          |   |               |  |                  |        |          |  |             |   |   |           |  |   |        |  |  |      |  
|Interest-Earning Assets                    |  |                         |           |          |   |               |  |                  |       |          |   |               |  |                  |        |          |  |             |   |   |           |  |   |        |  |  |      |  
|Loans, net1,2                              |  | $                       | 699,090   |          | $ | 39,022        |  |                  | 5.58  | %        | $ | 743,930       |  | $                | 46,640 |          |  | 6.27        | % | $ | 804,493   |  | $ | 61,165 |  |  | 7.60 | %
|U.S. Treasuries                            |  |                         | 2,856     |          |   |              |  |                  |      | %        |   |              |  |                  |       |          |  |            | % |   |          |  |   |       |  |  |     | %
|US government sponsored agencies           |  |                         | 144,897   |          |   | 5,761         |  |                  | 3.98  | %        |   | 151,622       |  |                  | 7,122  |          |  | 4.70        | % |   | 135,372   |  |   | 5,898  |  |  | 4.36 | %
|State and municipal obligations1           |  |                         | 41,821    |          |   | 2,506         |  |                  | 5.99  | %        |   | 55,268        |  |                  | 3,368  |          |  | 6.09        | % |   | 52,330    |  |   | 3,225  |  |  | 6.16 | %
|Other securities                           |  |                         | 19,055    |          |   | 1,232         |  |                  | 6.47  | %        |   | 21,488        |  |                  | 1,400  |          |  | 6.52        | % |   | 12,635    |  |   | 598    |  |  | 4.73 | %
|Federal funds sold                         |  |                         | 3,191     |          |   | 10            |  |                  | 0.32  | %        |   | 7,003         |  |                  | 149    |          |  | 2.13        | % |   | 3,211     |  |   | 159    |  |  | 4.95 | %
|Other money market
 instruments            |  |                         | 44,695    |          |   | 105           |  |                  | 0.23  | %        |   | 2,988         |  |                  | 76     |          |  | 2.55        | % |   | 3,373     |  |   | 159    |  |  | 4.71 | %
|Total earning assets                       |  |                         | 955,605   |          |   | 48,636        |  |                  | 5.09  | %        |   | 982,299       |  |                  | 58,755 |          |  | 5.98        | % |   | 1,011,414 |  |   | 71,204 |  |  | 7.04 | %
|Non-interest earning assets                |  |                         | 94,042    |          |   |               |  |                  |       |          |   | 96,137        |  |                  |        |          |  |             |   |   | 90,376    |  |   |        |  |  |      |  
|Total assets                               |  | $                       | 1,049,647 |          |   |               |  |                  |       |          | $ | 1,078,436     |  |                  |        |          |  |             |   | $ | 1,101,790 |  |   |        |  |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                         |           |          |   |               |  |                  |       |          |   |               |  |                  |        |          |  |             |   |   |           |  |   |        |  |  |      |  
|Interest-Bearing Liabilities               |  |                         |           |          |   |               |  |                  |       |          |   |               |  |                  |        |          |  |             |   |   |           |  |   |        |  |  |      |  
|NOW accounts                               |  | $                       | 135,430   |          |   | 554           |  |                  | 0.41  | %        | $ | 123,404       |  |                  | 1,556  |          |  | 1.26        | % | $ | 110,322   |  |   | 2,798  |  |  | 2.54 | %
|Savings accounts                           |  |                         | 231,315   |          |   | 1,723         |  |                  | 0.74  | %        |   | 232,495       |  |                  | 4,312  |          |  | 1.85        | % |   | 262,026   |  |   | 9,125  |  |  | 3.48 | %
|Time deposits> $100M                       |  |                         | 178,995   |          |   | 6,440         |  |                  | 3.60  | %        |   | 211,476       |  |                  | 9,322  |          |  | 4.41        | % |   | 212,133   |  |   | 10,420 |  |  | 4.91 | %
|Time deposits<$100M                        |  |                         | 220,750   |          |   | 6,575         |  |                  | 2.98  | %        |   | 213,147       |  |                  | 8,671  |          |  | 4.07        | % |   | 203,547   |  |   | 9,587  |  |  | 4.71 | %
|Total interest-bearing deposits            |  |                         | 766,490   |          |   | 15,292        |  |                  | 2.00  | %        |   | 780,522       |  |                  | 23,861 |          |  | 3.06        | % |   | 788,028   |  |   | 31,930 |  |  | 4.05 | %
|Federal funds purchased                    |  |                         | 322       |          |   | 2             |  |                  | 0.69  | %        |   | 2,888         |  |                  | 86     |          |  | 2.98        | % |   | 9,067     |  |   | 497    |  |  | 5.48 | %
|Repurchase agreements                      |  |                         | 23,028    |          |   | 164           |  |                  | 0.71  | %        |   | 29,861        |  |                  | 695    |          |  | 2.33        | % |   | 7,981     |  |   | 387    |  |  | 4.85 | %
|FHLB advances                              |  |                         | 85,029    |          |   | 2,272         |  |                  | 2.67  | %        |   | 85,145        |  |                  | 2,791  |          |  | 3.28        | % |   | 93,504    |  |   | 4,850  |  |  | 5.19 | %
|Subordinated debentures                    |  |                         | 16,100    |          |   | 365           |  |                  | 2.24  | %        |   | 16,100        |  |                  | 794    |          |  | 4.93        | % |   | 16,100    |  |   | 1,089  |  |  | 6.76 | %
|Convertible promissory notes               |  |                         | 1,506     |          |   | 164           |  |                  | 10.72 | %        |   |              |  |                  |       |          |  |            | % |   |          |  |   |       |  |  |     | %
|Total interest-bearing liabilities         |  |                         | 892,475   |          |   | 18,259        |  |                  | 2.05  | %        |   | 914,516       |  |                  | 28,227 |          |  | 3.09        | % |   | 914,680   |  |   | 38,753 |  |  | 4.24 | %
|Demand deposits                            |  |                         | 72,368    |          |   |               |  |                  |       |          |   | 72,852        |  |                  |        |          |  |             |   |   | 93,706    |  |   |        |  |  |      |  
|Accrued expenses and other liabilities     |  |                         | 12,724    |          |   |               |  |                  |       |          |   | 11,546        |  |                  |        |          |  |             |   |   | 12,587    |  |   |        |  |  |      |  
|Stockholders equity                       |  |                         | 72,080    |          |   |               |  |                  |       |          |   | 79,522        |  |                  |        |          |  |             |   |   | 80,817    |  |   |        |  |  |      |  
|Total liabilities and shareholders equity |  | $                       | 1,049,647 |          |   |               |  |                  |       |          | $ | 1,078,436     |  |                  |        |          |  |             |   | $ | 1,101,790 |  |   |        |  |  |      |  
|Net interest income and rate spread3       |  |                         |           |          | $ | 30,377        |  |                  | 3.04  | %        |   |               |  | $                | 30,528 |          |  | 2.89        | % |   |           |  | $ | 32,451 |  |  | 2.80 | %
|Net interest margin4                       |  |                         |           |          |   |               |  |                  | 3.18  | %        |   |               |  |                  |        |          |  | 3.11        | % |   |           |  |   |        |  |  | 3.21 | %

| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1 | The
 interest income on tax exempt securities and loans is computed on a
 tax-equivalent basis using a tax rate of 34% for all periods presented.                                                                                                   
| | 2 | The
 average loan balances and rates include non-accrual loans.                                                                                                                                                                                     
| | 3 | Interest
 rate spread is the difference between the annualized average yield earned on
 average interest-earning assets for the period and the annualized average
 rate of interest accrued on average interest-bearing liabilities for the
 period.
| | 4 | Net
 interest margin is the annualized effect of net interest income for a period
 divided by average interest-earning assets for the period.                                                                                                       

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Table of Contents

Table 2: Rate/Volume Analysis (1)

|                                     |  |                                                   |        |                                                   |   |        |   |        |         |      |   |        |   |   |         |   |   |         |  
|------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------------------------------- | - | ------ | - | ------ | ------- | ---- | - | ------ | - | - | ------- | - | - | ------- | -
|                                     |  | 2009 compared to 2008
 Increase (Decrease) due to |        | 2008 compared to 2007
 Increase (Decrease) due to |  
|                                     |  | Volume                                            |        | Rate                                              |   | Net    |   | Volume |         | Rate |   | Net    |  
|                                     |  | (dollars in thousands)                            |       
|Interest
 income:                    |  |                                                   |        |                                                   |   |        |   |        |         |      |   |        |   |   |         |   |   |         |  
|Loans (2)                            |  | $                                                 | (2,707 | )                                                 | $ | (4,911 | ) | $      | (7,618  | )    | $ | (3,306 | ) | $ | (11,219 | ) | $ | (14,525 | )
|U.S. Treasury Securities             |  |                                                   |       |                                                   |   |       |   |        |        |      |   |       |   |   |        |   |   |        |  
|U.S.
 government sponsored agencies  |  |                                                   | (305   | )                                                 |   | (1,056 | ) |        | (1,361  | )    |   | 556    |   |   | 668     |   |   | 1,224   |  
|State and
 municipal obligations (2) |  |                                                   | (852   | )                                                 |   | (10    | ) |        | (862    | )    |   | 135    |   |   | 8       |   |   | 143     |  
|Other
 securities                    |  |                                                   | (157   | )                                                 |   | (11    | ) |        | (168    | )    |   | 391    |   |   | 411     |   |   | 802     |  
|Federal
 funds sold                  |  |                                                   | (54    | )                                                 |   | (85    | ) |        | (139    | )    |   | 87     |   |   | (97     | ) |   | (10     | )
|Other money
 market instruments      |  |                                                   | 158    |                                                   |   | (129   | ) |        | 29      |      |   | (12    | ) |   | (71     | ) |   | (83     | )
|Total
 interest-earning assets       |  |                                                   | (3,917 | )                                                 |   | (6,202 | ) |        | (10,119 | )    |   | (2,149 | ) |   | (10,300 | ) |   | (12,449 | )
|Interest
 expense:                   |  |                                                   |        |                                                   |   |        |   |        |         |      |   |        |   |   |         |   |   |         |  
|NOW accounts                         |  |                                                   | 139    |                                                   |   | (1,141 | ) |        | (1,002  | )    |   | 225    |   |   | (1,467  | ) |   | (1,242  | )
|Savings
 accounts                    |  |                                                   | (22    | )                                                 |   | (2,567 | ) |        | (2,589  | )    |   | (701   | ) |   | (4,112  | ) |   | (4,813  | )
|Time
 deposits                       |  |                                                   | (1,012 | )                                                 |   | (3,966 | ) |        | (4,978  | )    |   | 303    |   |   | (2,317  | ) |   | (2,014  | )
|Federal
 funds purchased             |  |                                                   | (45    | )                                                 |   | (39    | ) |        | (84     | )    |   | (185   | ) |   | (226    | ) |   | (411    | )
|Repurchase
 agreements               |  |                                                   | (132   | )                                                 |   | (399   | ) |        | (531    | )    |   | 448    |   |   | (140    | ) |   | 308     |  
|FHLB
 advances                       |  |                                                   | (4     | )                                                 |   | (515   | ) |        | (519    | )    |   | (302   | ) |   | (1,757  | ) |   | (2,059  | )
|Subordinated
 debentures             |  |                                                   |       |                                                   |   | (429   | ) |        | (429    | )    |   |       |   |   | (295    | ) |   | (295    | )
|Convertible
 promissory notes        |  |                                                   | 164    |                                                   |   |       |   |        | 164     |      |   |       |   |   |        |   |   |        |  
|Total
 interest-bearing liabilities  |  |                                                   | (912   | )                                                 |   | (9,056 | ) |        | (9,968  | )    |   | (212   | ) |   | (10,314 | ) |   | (10,526 | )
|Net interest
 income                 |  | $                                                 | (3,005 | )                                                 | $ | 2,854  |   | $      | (151    | )    | $ | (1,937 | ) | $ | 14      |   | $ | (1,923  | )

| |     |                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The change
 in interest due to both rate and volume has been allocated proportionally to
 the relationship to the dollar amounts of the change in each.
| | (2) | The yield on
 tax-exempt loans and securities is computed on a tax equivalent basis using a
 tax rate of 34% for all periods presented.                

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Provision for Loan Losses

The PFLL is the cost of providing an allowance for probable and
inherent losses in our loan portfolio. The ALL consists of specific and general
components. Our internal risk system is used to identify loans that meet the
criteria for being impaired under the definition of ASC 310-10. The specific
component relates to loans that are individually classified as impaired. These
loans identified for impairment are assigned a loss allocation based upon that
analysis. The general component covers non-impaired loans and is based on
historical loss experience adjusted for qualitative factors. These qualitative
factors include: 1) changes in the nature, volume and terms of loans, 2)
changes in lending personnel, 3) changes in the quality of the loan review
function, 4) changes in nature and volume of past-due, non-accrual and/or
classified loans, 5) changes in concentration of credit risk, 6) changes in
economic and industry conditions, 7) changes in legal and regulatory
requirements, 8) unemployment and inflation statistics, and 9) changes in
underlying collateral values.

Net loan charge-offs for the year ended December 31, 2009 were $10.5
million compared to net charge-offs of $16.2 million for the same period in
2008. Net charge-offs to average loans were 1.50% for 2009 compared to 2.18% in
2008. For 2009, non-performing loans decreased by $15.4 million (34.9%), to
$28.7 million, from $44.1 million at December 31, 2008. Refer to the Financial
Condition - Risk Management and the Allowance for Loan Losses and Financial
Condition - Non-Performing Loans and Foreclosed Properties sections below for
more information related to non-performing loans.

PFLL for the year ended December 31, 2009 was $6.5 million compared to
$18.0 million for the same period in 2008. Our management believes that the
PFLL taken for the year ended December 31, 2009 is adequate in view of the
present condition of the loan portfolio and the amount and quality of the
collateral supporting non-performing loans. We are continually monitoring
non-performing loan relationships and will make provisions, as necessary, if
the facts and circumstances change. In addition, a decline in the quality of
our loan portfolio as a result of general economic conditions, factors
affecting particular borrowers or our market area, or otherwise, could affect
the adequacy of the ALL. If there are significant charge-offs against the ALL
or we otherwise determine that the ALL is inadequate, we will need to make
additional PFLLs in the future. See Financial Condition - Risk Management and
the Allowance for Loan Losses below for more information related to
non-performing loans.

Non-Interest Income

Trust service fees, fees from loan servicing, gains from sales of
loans, securities gains, income from our UFS subsidiary and service charges are
the primary components of non-interest income. Total non-interest income for
2009 was $12.5 million, a $3.2 million or 34.4% increase from 2008. The non-interest
income to average assets ratio was 1.19% for the year ended December 31, 2009
compared to 0.86% for the same period in 2008.

Gains from the sale of securities in our investment portfolio of $4.2
million were realized in 2009 compared to $0.8 million in 2008. These gains
were taken to improve our earnings and capital ratios. In 2009, gains from
sales of loans increased significantly due to the low interest rate environment
which led to an attractive refinance market. Gains from sales of loans increased
$0.7 million, or 204%, from 2008 to 2009. Fees for other services to customers
decreased $0.5 million in 2009. This is primarily due to a decline of $0.3
million in overdraft charges due to a reduction in customer overdrafts and a
decline of $0.3 million in income from brokerage services due to reduced
customer activity in that area.

Non-Interest Expense

Non-interest expense in 2009 decreased to $30.0 million from $38.0
million in 2008, for a decrease of $8.0 million (21.1%), primarily as a result
of a decrease in the provision for impairment of standby letters of credit, a
decrease in other than temporary impairment of securities charge, a decrease in
expenses related to the operation of foreclosed properties and costs related to
loans and collections, offset by an increase in FDIC insurance expense.

Salaries and employee benefits expense is the largest component of
non-interest expense, totaling $16.2 million in 2009, a decrease of $0.2
million or 1.2% from 2008, as a result of reduced head counts. The number of
full-time equivalent employees decreased from 315 in 2008 to 306 in 2009, a
decrease of 2.9%. In addition, due to our disappointing financial results in
2008 and our less than satisfactory performance in 2009, there were no
management incentive bonuses earned in either year.

Also contributing to the change in salary and employee benefits were
higher expenses related to our banks Supplemental Executive Retirement Plan
(Plan), which is intended to provide deferred compensation in excess of that
available under our other retirement programs to certain management and highly
compensated employees who have contributed and are expected to continue to
contribute to our success. Costs associated with the Plan amounted to $0.3
million for 2009, an increase of $0.1 million from 2008 due to an increase in
the earnings on investment balances and not as a result of bank contributions.
No contribution is planned in 2010 based on our 2009 financial performance.

Accrued benefit costs, principally for health insurance, pension costs
and bonus expense, represent the remaining portion of personnel-related costs.
An increase in health insurance costs is expected for 2010. Benefit expense is
down $1.2 million from 2008 due, in part, to a decrease of $0.6 million in our
401K contribution. The employer 5% matching of 401K contributions was
eliminated effective April 2009 and the 2% end-of-year employer contribution
was also suspended effective January 2009. Other benefit costs related to group
health insurance, education and training, other employee benefits, and bonus
expense were down $0.6 million due to a reduction of $0.2 million in bonus
expense, $0.1 million in health insurance costs, and $0.2 million reduction in
employee benefit costs, including training.

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Table of Contents

Net occupancy expense for 2009 remained unchanged at $2.5 million.

Data processing and courier expense in 2009 reflected a decrease of
$0.2 million, or 16.7%, compared to 2008. Effective January 2009, we received a
monthly volume discount for our data processing services. This resulted in a
$0.2 million reduction in expenses in 2009. Management estimates that data
processing expense should show minimal increases in the future with adjustments
related only to any volume-related increases that may occur.

Income from foreclosed properties is netted against foreclosed property
expenses in the determination of net foreclosed property expense. Foreclosed
property reflected a net expense from the operation of such real estate of $1.2
million in 2009 compared to $4.2 million in 2008. Provision for valuation
reductions of foreclosed properties were charged to 2009 operations in the
amount of $0.7 million, reflecting a decline in perceived market values of
properties obtained by us in collection efforts. This compared to $3.5 million
in 2008. A net gain of $0.1 million was recognized on the sale of foreclosed
properties in 2009 compared to a net loss of $0.1 million in 2008.

The provision for impairment loss on letters of credit relates to a
liability for our exposure on a specific standby letter of credit that supports
secondary market financing on behalf of the borrower. We believe the collateral
and cash flows will be sufficient to support the balance of this standby letter
of credit at December 31, 2009. We continue to monitor the financial condition
of the borrower on an ongoing basis and if it continues to deteriorate, we may
need to provide additional reserves with respect to this off-balance sheet
commitment. In January 2010, a $3.0 million payment was made to the bondholder
to reduce our exposure on the letter of credit. A majority of this exposure had
been incurred in years prior to 2009.

Non-interest expenses in 2009 decreased 21.1% to $30.0 million compared
to $38.0 million in 2008. Included in such non-interest expenses are FDIC
insurance premiums of $2.3 million for 2009 compared to $0.9 million for the
same period a year ago. FDIC insurance premiums consist of two components,
deposit insurance premiums and payments for servicing obligations of the Financing
Corporation (FICO) that were issued in connection with the resolution of
savings and loan associations. With the enactment in early 2006 of the Federal
Deposit Insurance Reform Act of 2005, major changes were introduced in the
calculation of FDIC deposit insurance premiums. Such changes were effective
January 1, 2007 and included establishment by the FDIC of a target reserve
ratio range for the Deposit Insurance Fund (DIF) of between 1.15% and 1.50%,
as opposed to the prior fixed reserve ratio of 1.25%. The FDIC approved 1.25%
as the target ratio. At the same time, the FDIC adopted a new risk-based system
for assessment of deposit insurance premiums under which all such institutions
are required to pay minimum annual premiums. The system categorizes
institutions in one of four risk categories, depending on capitalization and
supervisory rating criteria. Our banks assessment rate, like that of other
financial institutions, is confidential and may not be directly disclosed,
except to the extent required by law. To ease the transition to the new system,
insured institutions that had paid deposit insurance prior to 1997 were
eligible for a one-time assessment credit based on their respective share of
the aggregate assessment base. Our FDIC assessment for the first quarter of
2008 and for all of 2007 received and recorded after first quarter 2007, was
offset by a portion of our one-time assessment credit. The final portion of the
credit was applied to our FDIC assessment in the second quarter of 2008. Payments for the FICO portion will continue as
long as FICO obligations remain outstanding. In February 2009, the FDIC adopted
a final rule modifying the risk-based assessment system and setting initial
base assessment rates beginning April 1, 2009 at 45 bps from 12 bps. Our
assessment for the second quarter of 2009 under the risk-based assessment
system was $0.5 million. There was no assessment in the third or fourth quarter
of 2009.

In addition, in response to losses incurred by the DIF in 2008 and
early 2009, on May 22, 2009 the FDIC imposed a special assessment of 5 bps on
each FDIC-insured depository institutions total assets, minus Tier 1 capital,
calculated as of June 30, 2009. The special assessment, however, may not exceed
10 bps of an institutions domestic deposits. The special assessment to Baylake
Bank was $0.5 million.

On November 12, 2009, the Board of Directors of the FDIC adopted a rule
that required insured institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010,
2011, and 2012. The FDIC Board also voted to adopt a uniform 3 bps increase in
assessment rates effective on January 1, 2011. We were required to prepay
approximately $6.7 million in premiums in December 2009, although such premiums
will not be taken as a charge against our operations until the period for which
they apply.

Loan and collection expenses were $0.5 million lower in 2009 than in
2008. This is primarily related to costs on loans that are in the collection
process that have not been transferred to foreclosed properties and includes
costs incurred for property management fees, real estate taxes, insurance and
operating expenses. A majority of our legal services deemed appropriate in
resolving nonperforming loans, which had been provided by our internal legal
staff in prior years, were outsourced during 2009 and 2008. These external
legal costs totaled $0.3 million in 2009 compared to $0.7 million in 2008. In
2010, loan and collection costs are expected to continue at a comparable level
as 2009 unless and until the volume of nonperforming loans declines further.

Costs related to other outside services totaled $0.7 million in 2009,
$0.3 million lower than in 2008. The primary reason for the decrease of $0.3
million was the discontinuance of the High Performance Checking program,
including mailing, consulting fees and material costs in October of 2008. No
further costs associated with the program are anticipated.

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Off-Balance Sheet Arrangements

We do not use interest rate contracts (e.g. swaps), forward loan sales
or other derivatives to manage interest rate risk and do not have any of these
instruments outstanding. Our bank does have, through its normal operations,
loan commitments and standby letters of credit outstanding as of December 31,
2009 and 2008 in the amount of $182.7 million and $193.8 million, respectively.
These are further explained in Note 14 of the Notes to Consolidated Financial
Statements.

Provision for Income Taxes

Income tax expense totaled $0.9 million in 2009, compared to income tax
benefit of $7.9 million in 2008. The increased tax expense in 2009 reflected
the increase in our income before income taxes in 2009 compared to a loss in
2008.

See Note 1,  Nature of Business and Summary of Significant Accounting
Policies and Note 16, Income Tax Expense of the Notes to Consolidated
Financial Statements for a further discussion of income tax accounting. Income
tax expense recorded in the consolidated statements of operations involves
interpretation and application of certain accounting pronouncements and federal
and state tax codes and is, therefore, considered a critical accounting policy.
We undergo examination by various taxing authorities. Such taxing authorities
may require that changes in the amount of tax expense or valuation allowance be
recognized when their interpretations differ from those of management, based on
their judgments about information available to them at the time of their
examinations.

2008 compared to
2007

Net Interest Income

Net interest income in the consolidated statements of operations (which
excludes the tax equivalent adjustment) was $29.0 million for 2008 compared to
$30.9 million for 2007. Net interest income in both 2008 and 2007 was
negatively impacted by the high level of non-performing loans for which
interest income is not recognized. In addition, the high level of
non-performing loans further decreased net interest income. The tax equivalent
adjustments (adjustments needed to bring tax-exempt interest to a level that
would yield the same after-tax income had that income been subject to taxation
using a 34% tax rate) of $1.5 million for both 2008 and for 2007 resulted in a
tax-equivalent net interest income of $30.5 million and $32.5 million,
respectively. The decrease in 2008 net interest income was also impacted by a
reduced level of earning assets. The net interest margin for 2008 was 3.11%
compared to 3.21% in 2007. The 10 bps decrease in net interest margin is
attributable to a 9 bps increase in interest rate spread resulting from a 106
bps decline in return on interest-earning assets, offset by a 115 bps decrease
in the cost of interest-bearing liabilities in 2008.

We had positioned the balance sheet in 2008 to be slightly asset
sensitive (which means that assets reprice faster than liabilities); thus, the
rate decreases impacted net interest income negatively. We expect that in a
gradually increasing rate environment, our income statement would benefit from
asset sensitivity over the long term, although changes in the portfolio or the
pace of increases could affect that trend.

As shown in the rate/volume analysis in Table 2, volume changes
resulted in a $1.9 million decrease to tax equivalent net interest income in
2008. The decrease and composition of earning assets resulted in a $12.4
million decrease to tax equivalent net interest income in 2008 offset by a
$10.5 million decrease and composition change in interest-bearing liabilities.
Rate changes on earning assets decreased interest income by $10.3 million but
were offset by rate changes on interest-bearing liabilities that decreased
interest expense by $10.3 million, for no net rate impact.

For 2008, the yield on earning assets declined to 5.98% from 7.04% for
2007 reflecting the combined effect of a decrease of 133 bps in the loan yield,
a 7 bps decline in the yield on tax-exempt securities, a 282 bps decrease in
the yield on federal funds sold and a 217 bps decrease in the yield on money
market instruments. These decreases were offset by a 34 bps increase in the
yield achieved on agency securities and a 179 bps increase in yield on other
securities. The average loan yield was 6.27% in 2008 and 7.60% in 2007.
Competitive pricing on new and refinanced loans, as well as tightened credit
underwriting standards, dampened efforts for improvements in loan yields in
2008.

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For 2008, the cost of interest-bearing liabilities decreased by 115 bps
to 3.09% compared to 2007, resulting, in part, from a significant decrease in
interest rates in 2008. The combined average cost of interest-bearing deposits
was 3.06%, down 99 bps from 2007, primarily resulting from an average decrease
in the short-term interest rate environment during 2008. Also contributing to
the decrease was the cost of wholesale funding (comprising federal funds
purchased; repurchase agreements; FHLB advances and subordinated debentures)
which decreased by 213 bps to 3.26% for 2008, impacted favorably by a
decreasing interest rate environment for wholesale funding costs during the
year on reduced borrowings.

Average earning assets were $982.3 million in 2008, compared to $1.0
billion in 2007. Average loans outstanding declined to $743.9 million in 2008
from $804.5 million in 2007, a decrease of 7.5%. Average loans to average total
assets decreased to 69.0% in 2008 from 73.0% in 2007. For 2008, tax-equivalent
interest income on loans decreased $14.5 million, of which $3.3 million related
to the decline in average outstanding balances and $11.2 million related to the
lower yields on such loans. Balances of securities and short-term investments
increased $31.4 million on average in 2008 versus 2007. Tax equivalent interest
income on securities and short-term investments increased $1.2 million from
volume changes, and $0.9 million from the impact of the rate environment, for a
combined $2.1 million increase in tax equivalent interest income in 2008 versus
2007.

Average interest-bearing liabilities decreased $0.2 million in 2008,
while net free funds (the total of demand deposits, accrued expenses, other
liabilities and stockholders equity less non-interest earning assets)
decreased $23.2 million. The decrease in net free funds was primarily
attributable to a decrease in demand deposits. Average non-interest bearing
demand deposits decreased by $20.9 million, or 22.3% in 2008 versus 2007.
Average interest-bearing deposits declined $7.5 million, or 1.0%, to $780.5
million in 2008 versus $788.0 million in 2007. This decline resulted from a
decline in savings deposits and time deposits greater than $100,000, offset by
increases in interest-bearing demand deposits and time deposits under $100,000.
Interest expense on interest-bearing deposits decreased $0.2 million from the
volume and mix changes and $7.9 million from impact of the rate environment,
resulting in an aggregate decrease of $8.1 million in interest expense on
interest-bearing deposits in 2008 versus 2007. Average wholesale-funding
sources decreased by $7.3 million during 2008. For 2008, interest expense on
wholesale funding sources decreased by $2.5 million compared to 2007 from
declining rates.

BALANCE SHEET ANALYSIS

Loans

Gross loans outstanding declined to $651.9 million at December 31,
2009, a 10.5% decrease from December 31, 2008. This follows a 4.1% decrease
from the end of 2007.

Table 3 reflects composition (mix) of the loan portfolio at December 31
for the previous five fiscal years:

Table 3: Loan Composition

|                                       |  |                                            |         |             |  |        |    |             |         |        |  |             |    |        |         |             |  |        |    |             |         |   |  |       |    |   |         |   |  |       |   
|-------------------------------------- |  | ------------------------------------------ | ------- | ----------- |  | ------ | -- | ----------- | ------- | ------ |  | ----------- | -- | ------ | ------- | ----------- |  | ------ | -- | ----------- | ------- | - |  | ----- | -- | - | ------- | - |  | ----- | --
|                                       |  | As of December 31,
 (dollars in thousands) |        
|                                       |  | 2009                                       |         | 2008        |  | 2007   |    | 2006        |         | 2005   | 
|                                       |  | Amount                                     |         | % of
 Total |  | Amount |    | % of
 Total |         | Amount |  | % of
 Total |    | Amount |         | % of
 Total |  | Amount |    | % of
 Total |        
|                                       |  |                                            |         |             |  |        |    |             |         |        |  |             |    |        |         |             |  |        |    |             |        
|Amount of loans by type                |  |                                            |         |             |  |        |    |             |         |        |  |             |    |        |         |             |  |        |    |             |         |   |  |       |    |   |         |   |  |       |   
|                                       |  |                                            |         |             |  |        |    |             |         |        |  |             |    |        |         |             |  |        |    |             |         |   |  |       |    |   |         |   |  |       |   
|Real estate-mortgage                   |  |                                            |         |             |  |        |    |             |         |        |  |             |    |        |         |             |  |        |    |             |         |   |  |       |    |   |         |   |  |       |   
|Commercial                             |  | $                                          | 353,110 |             |  | 54.2   | %  | $           | 381,765 |        |  | 52.4        | %  | $      | 386,981 |             |  | 50.9   | %  | $           | 464,843 |   |  | 56.7  | %  | $ | 467,956 |   |  | 57.6  | % 
|1-4 Family residential                 |  |                                            | 124,830 |             |  | 19.2   | %  |             | 134,436 |        |  | 18.4        | %  |        | 119,932 |             |  | 15.8   | %  |             | 143,873 |   |  | 17.6  | %  |   | 148,736 |   |  | 18.3  | % 
|Construction                           |  |                                            | 62,827  |             |  | 9.6    | %  |             | 69,838  |        |  | 9.6         | %  |        | 93,047  |             |  | 12.2   | %  |             | 94,082  |   |  | 11.5  | %  |   | 85,729  |   |  | 10.6  | % 
|Commercial, financial and agricultural |  |                                            | 83,674  |             |  | 12.8   | %  |             | 110,432 |        |  | 15.2        | %  |        | 127,549 |             |  | 16.8   | %  |             | 82,619  |   |  | 10.1  | %  |   | 80,260  |   |  | 9.9   | % 
|                                      
|Consumer installment                   |  |                                            | 11,804  |             |  | 1.8    | %  |             | 12,876  |        |  | 1.8         | %  |        | 14,388  |             |  | 1.9    | %  |             | 14,893  |   |  | 1.8   | %  |   | 14,263  |   |  | 1.8   | % 
|Municipal loans                        |  |                                            | 16,009  |             |  | 2.5    | %  |             | 19,858  |        |  | 2.7         | %  |        | 18,663  |             |  | 2.5    | %  |             | 19,633  |   |  | 2.4   | %  |   | 15,785  |   |  | 1.9   | % 
|Less: deferred fees, net of costs      |  |                                            | (360    | )           |  | (0.1   | )% |             | (483    | )      |  | (0.1        | )% |        | (350    | )           |  | (0.1   | )% |             | (375    | ) |  | (0.1  | )% |   | (433    | ) |  | (0.1  | )%
|Total loans (net of unearned income)   |  | $                                          | 651,894 |             |  | 100.0  | %  | $           | 728,722 |        |  | 100.0       | %  | $      | 760,210 |             |  | 100.0  | %  | $           | 819,568 |   |  | 100.0 | %  | $ | 812,296 |   |  | 100.0 | % 

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Commercial real estate loans secured by farmland, multifamily property,
and nonfarm/non-residential real estate property totaled $353.1 million at
year-end 2009 comprising 54.2% of the loan portfolio. Loans of this type are
mainly for business property, multifamily property and community purpose
property. The credit risk related to these types of loans is greatly influenced
by general economic conditions, especially those applicable to the Northeast
Wisconsin market area, and the resulting impact on our borrowers operations.
Many times, we will take additional real estate collateral to further secure
the overall lending relationship. A decline in the tourism industry, or other
economic effects, such as increased interest rates affecting demand for real
estate, could affect both our lending opportunities in this area as well as
potentially affect the value of collateral held for these loans.

Commercial, financial and agricultural loans not secured by real estate
totaled $83.7 million at year-end 2009, a decline of $26.7 million or 24.2%
since year-end 2008. The commercial, financial and agricultural loan
classification primarily consists of commercial loans to small businesses.
Loans of this type are in a broad range of industries and include service,
retail, wholesale and manufacturing concerns. Agricultural loans are made
principally to farmers engaged in dairy, cherry and apple production. Borrowers
are primarily concentrated in Door, Brown, Outagamie, Waupaca, Waushara and
Kewaunee Counties, Wisconsin. The origination of new commercial and commercial
real estate loans was primarily from our market area in Brown County. Growth in
tourism-related business in Door County was slow again in 2009 compared to
growth experienced in years prior to 2006. The credit risk related to these
loans is largely influenced by general economic conditions, especially those
applicable to the Northeast Wisconsin market area, and the resulting impact on
a borrowers operations.

Management uses an active credit risk management process for commercial
loans to ensure that sound and consistent credit decisions are made. Management
attempts to control credit risk by adhering to detailed underwriting
procedures, performing comprehensive loan administration, and undertaking
periodic review of borrowers outstanding loans and commitments. Borrower
relationships are formally reviewed periodically during the life of the loan.
Further analyses by customer, industry, and location are performed to monitor
trends, financial performance and concentrations.

Real estate construction loans declined $7.0 million or 10.0% to $62.8
million at December 31, 2009 from $70.8 million December 31, 2008. Loans in
this classification are primarily short-term interim loans that provide
financing for the acquisition or development of commercial real estate, such as
multifamily or other commercial development projects. Real estate construction
loans are generally made to developers who are well known to us, have prior
experience and are well capitalized. Construction projects undertaken by these
developers are carefully reviewed by us to assess their economic feasibility.
The credit risk related to real estate construction loans is generally limited
to specific geographic areas, but it is also influenced by general economic
conditions. We attempt to control the credit risk on these types of loans by
making loans to developers in familiar markets, reviewing the merits of the
individual project, controlling loan structure and monitoring project progress
and advances of construction proceeds.

Our loan portfolio is diversified by types of borrowers and industry
groups within the market areas that we serve. Significant loan concentrations
are considered to exist for a financial entity when such amounts are loans to
multiple borrowers engaged in similar activities that cause them to be
similarly impacted by economic or other conditions. We have identified certain
industry groups within our market area, including lodging, restaurants, retail
shops, small manufacturing, real estate rental properties and real estate
development. At December 31, 2009, one industry group concentration existed in
our loans that exceeded 10% of total loans. Loans on non-residential real
estate rental properties located throughout our market area totaled $105.2
million or 16.1% of total loans at December 31, 2009.

Although growth was slow in 2009 for the tourism business in the Door
County market, management believes that business activity will remain adequate
to enable our customers in general to service their debt and to make
improvements to their operations.

At the end of 2009, residential real estate mortgage loans totaled
$124.8 million and comprised 19.1% of the loan portfolio. These loans decreased
$9.6 million or 7.1% during 2009. Given current trends, we do not anticipate
growth in mortgage loans during 2010. Residential real estate loans consist of
conventional home mortgages, adjustable indexed interest rate mortgage loans,
home equity loans, and secondary home mortgages. Loans are primarily for
properties within the market areas we serve. Residential real estate loans
generally contain a limit for the maximum loan to collateral value of 75% to
80% of fair market value. Private mortgage insurance may be required when the
loan-to-value ratio exceeds these limits.

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We offer adjustable-rate mortgage loans based upon market demands. At
year-end 2009, those loans totaled $27.3 million, a decrease of $1.6 million
over 2008. Adjustable rate mortgage loans contain an interest rate adjustment
provision tied to the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of one year (the index), plus an additional spread of
up to 2.75%. Interest rates on indexed mortgage loans are adjusted, up or down,
on predetermined dates fixed by contract, in relation to and based on the index
or market interest rates as of a predetermined time prior to the adjustment
date.

Adjustable rate mortgage loans have an initial period, ranging from one
to three years, during which the interest rate is fixed, with adjustments
permitted thereafter, subject to annual and lifetime interest rate caps which
vary with the product type. Annual limits on interest rate changes are 2% while
aggregate lifetime interest rate increases over the term of the loan are
currently at 6% above the original mortgage loan interest rate. At December 31, 2009, these loans represented
$27.3 million of our portfolio. We do not originate sub-prime loans.

We also participate in a fixed rate mortgage program under the Federal
Home Loan Mortgage Corporation (FHLMC) guidelines. These loans are sold in
the secondary market and we retain servicing rights. At December 31, 2009,
these loans totaled $66.7 million compared to $80.1 million at December 31,
2008. In 2009, we originated $13.2 million FHLMC mortgages.

In addition, we also offer fixed rate mortgages through participation
in fixed rate mortgage programs with private investors. These loans also are
sold in the secondary market with servicing rights released to the buyer. In
2009, we sold $66.0 million in mortgage loans through the secondary programs
compared to $22.6 million in 2008.

Installment loans to individuals totaled $11.8 million, or 1.8%, of the
total loan portfolio at December 31, 2009, compared to $12.9 million, or 1.8%,
at December 31, 2008. Installment loans include short-term installment loans,
direct and indirect automobile loans, recreational vehicle loans, credit card
loans, and other personal loans. Individual borrowers may be required to
provide collateral or a satisfactory endorsement or guaranty from another
party, depending upon the specific type of loan and the creditworthiness of the
borrower. Loans are made to individual borrowers located in the market areas we
serve. Credit risks for loans of this type are generally influenced by general
economic conditions (especially in the market areas served), the characteristics
of individual borrowers and the nature of the loan collateral. Reviewing the
creditworthiness of the borrowers, as well as taking the appropriate collateral
and guaranty positions on such loans primarily, controls credit risk.

Municipal loans totaled $16.0 million at December 31, 2009 compared to
$19.9 million at year-end 2008. Municipal loans are short or long term loans to
municipalities for the funding of various projects. The proceeds of these loans
are collateralized by the backing of the corresponding taxing authority and can
be used for general or revenue producing projects.

Table 4 details expected maturities by loan purpose as of December 31,
2009. Those loans with expected maturities over one year are further scheduled
by fixed rate or variable rate interest sensitivity.

Table 4: Loan Maturity and Interest Rate
Sensitivity

|                                         |  |                        |         |  |           |         |  |               |         |  |       |         | 
|---------------------------------------- |  | ---------------------- | ------- |  | --------- | ------- |  | ------------- | ------- |  | ----- | ------- | 
|                                         |  | Maturity               |        
|December
 31, 2009                       |  | Within 1 Year          |         |  | 1-5 Years |         |  | After 5 Years |         |  | Total |        
|                                         |  | (dollars in thousands) |        
|Loans
 secured primarily by real estate: |  |                        |         |  |           |         |  |               |         |  |       |         | 
|Secured by 1
 to 4 family residential    |  | $                      | 39,036  |  | $         | 44,476  |  | $             | 41,318  |  | $     | 124,830 | 
|Construction                             |  |                        | 41,369  |  |           | 17,767  |  |               | 3,691   |  |       | 62,827  | 
|Commercial
 real estate                  |  |                        | 122,002 |  |           | 172,848 |  |               | 57,900  |  |       | 352,750 | 
|Commercial,
 financial and agricultural  |  |                        | 23,873  |  |           | 40,097  |  |               | 19,704  |  |       | 83,674  | 
|Tax-exempt                               |  |                        | 5,246   |  |           | 3,151   |  |               | 7,612   |  |       | 16,009  | 
|Consumer                                 |  |                        | 7,296   |  |           | 4,315   |  |               | 193     |  |       | 11,804  | 
|Total                                    |  | $                      | 238,822 |  | $         | 282,654 |  | $             | 130,418 |  | $     | 651,894 | 

|                    |  |                      |  |  |            |         |               |   |         |  |  |  | 
|------------------- |  | -------------------- |  |  | ---------- | ------- | ------------- | - | ------- |  |  |  | 
|                    |  | Interest sensitivity | 
|                    |  |                      |  |  | Fixed rate |         | Variable rate |   |         |  | 
|Due after
 one year |  |                      |  |  | $          | 239,987 |               | $ | 173,085 |  |  |  | 

Note that
commercial real estate loans have been adjusted for deferred fees, net of
costs, in this analysis.

Critical
factors in the overall management of credit quality are sound loan underwriting
and administration, systematic monitoring of existing loans and commitments,
effective loan review on an ongoing basis, allowance to provide for anticipated
loan losses, and non-accrual and charge-off policies.

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Risk Management and the Allowance for Loan Losses

The loan portfolio is our primary asset subject to credit risk. To
address this credit risk, we set aside an allowance for probable and inherent
credit losses through periodic charges to our earnings. These charges are shown
in our consolidated statements of operations as provision for loan losses. See
Provision For Loan Losses in this Report. We attempt to control, monitor and
minimize credit risk through the use of prudent lending standards, a thorough
review of potential borrowers prior to lending, and ongoing and timely review
of payment performance. Asset quality administration, including early
identification of loans performing in a substandard manner as well as timely and
active resolution of problems, further enhances management of credit risk and
minimization of loan losses. Any losses that occur and are charged off against
the ALL are periodically reviewed with specific efforts focused on achieving
maximum recovery of both principal and interest.

In general, our loan policy establishes underwriting guidelines for
each of our major loan categories. In addition to requiring financial
statements, applications, credit histories and credit analyses for underwriting
our loans, some of the more significant guidelines for specific types of loans
are:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For commercial real estate loans; maximum loan-to-value ratios range
 from 50% to 80% upon origination depending on the collateral securing the loan. Loan terms
 have a maximum amortization period of 20 years. Hazard insurance is required
 on collateral securitizing the loan and appropriate legal work is performed
 to verify our lien position.                                            
| |  | For single and 2-4 family residential loans, maximum loan-to-value
 ratios do not exceed 80% upon origination, unless private mortgage insurance is purchased by
 the borrower. Loan terms have a maximum amortization period of 30 years.
 Hazard insurance is required on collateral securing the loan and appropriate
 legal work is performed to verify our lien position.                       
| |  | For commercial and industrial loans, loan-to-value ratios and loan
 terms will vary, reflecting varied collateral securitizing the loan.
 Documentation required for the loan transaction may include income tax
 returns, financial statements, profit and loss budgets and cash flow
 projections. Loans included in this type are short- term loans, lines of
 credit, term loans and floor plans.

As part of the improvements and enhancements to our loan policies,
among other things, we expanded prior existing protocols to require additional
due diligence in investigating potential borrowers and additional detail in
loan presentations. We addressed more in-depth and critical consideration of
credit histories, borrower stability, management expertise, collateral and
asset quality, loan term and loan-to-collateral ratios. All new credits and,
depending on risk profile, existing credits seeking new money, are subject to
these expanded procedures.

The Chief Credit Officer (CCO) was tasked with evaluating the loan portfolio with a view
toward being proactive in removing or minimizing problem credits in the
portfolio. As part of this philosophical shift toward a more proactive approach
to credit risk management during 2007, we instructed the CCO to be much more
critical in his review, identification and monitoring of problem loans and of
potential problem loans, in particular those that may be marginal in terms of
collateral adequacy.

Our philosophical shift did not affect the overall methodology by which
we calculate our ALL, although we did become more proactive in our efforts to
identify and remove or minimize problem credits in the portfolio. In
particular, we enhanced the impairment analysis process by requiring and
obtaining substantially more evidentiary support (including supplemental market
data and routine site visits) for our conclusions as to future payment
expectations and collateral values and, in general, are more conservative in
our analysis. In conjunction with our ongoing analysis, the weakening economy
in our lending markets, as well as national markets, and FRBs reduction of
market rates the performance of our loan portfolio has been negatively impacted
for both 2009 and 2008, both in earnings and collateral-to-value ratios.

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On a quarterly basis, management reviews the adequacy of the ALL. Based
on an estimation computed pursuant to the requirements of ASC 450-10,
Accounting for Contingencies, and ASC 310-10, Accounting by Creditors for
Impairment of a Loan, the analysis of the ALL consists of three components:
(i) specific credit allocation established for expected losses relating to
specific individual loans for which the recorded investment in the loans
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for significant loan categories; and (iii) general
portfolio allocation based on economic conditions as well as specific factors
in the markets in which we operate.

The specific credit allocation for the ALL is based on a regular
analysis by the loan officers of all commercial credits. The loan officers
grade commercial credits and the loan review function validates the grades
assigned. In the event that the loan review function downgrades the loan, it is
included in the ALL analysis process at the lower grade. This grading system is
in compliance with regulatory classifications. At least quarterly, all
commercial loans over a fixed dollar amount that have been deemed impaired are
evaluated. In compliance with ASC 310-10, the fair value of the loan is
determined based on either the present value of expected future cash flows
discounted at the loans effective interest rate, the market price of the loan
or, if the loan is collateral dependent, the fair value of the underlying
collateral less the cost of sale. This evaluation may include obtaining
supplemental market data and/or routine site visits to offer support to the
evaluation process. A specific allowance is then allocated to the loans based
on this assessment. Such allocations or impairments are reviewed by the CCO and
management familiar with the credits.

During 2009, $6.5 million was added to the ALL and charged to operating
expense, compared to $18.0 million in 2008.

Based upon information obtained subsequent to the close of our 2007
fiscal year, we completed an impairment evaluation of two loan relationships,
which comprised approximately 27% of our non-performing loan balances
outstanding at December 31, 2007. As a result of this evaluation, we recorded
an additional impairment charge of $2.0 million relating specifically to these
two loans in the fourth quarter of 2007. In addition to the $2.0 million
impairment charge described above, a $1.3 million provision was taken in the
fourth quarter of 2007 for unrelated loans. During 2008, an additional PFLL in
the amount of $1.2 million was charged to earnings relating to the more
significant of the two loan relationships. Prior to December 31, 2008, the
collateral underlying this loan was sold resulting in a total charge-off of
$3.1 million. The lesser relationship was charged off during 2008 in the amount
of $0.3 million.

During the fourth quarter of 2008, two related credit relationships
totaling $19.3 million experienced significant cash flow concerns. Prior to the
fourth quarter, these relationships had been paying as agreed and in
managements opinion, did not represent increased credit risk. As a result of
our evaluation of these relationships prior to December 31, 2008, a provision
of $10.2 million was charged to earnings of which $5.9 million relating to one
of the relationships was charged off against the ALL. In the second quarter of
2009, an additional charge-off of $2.7 million was recorded and in the fourth
quarter of 2009, $0.7 million was charged off. Subsequent to year end, in
February 2010, a payment of $6.2 million was received on this credit. Of the
payment, $5.0 million was applied to the outstanding non-accrual loan, with the
remaining $1.2 million applied as a charge-off recovery.

We have two other major components of the ALL that do not pertain to specific
loans: General Reserves  Historical and General Reserves  Other. During
2007, we continued to use the same methodology of determining historical loss
factors for the portfolio of loans to which there are no specific loss
allocations. We determine General Reserves  Historical based on our historical
recorded charge-offs of loans in particular categories, analyzed as a group. As
it relates to the historical loss component, we reduced the historical loss
lookback period from 16 quarters to an average of 8 and 12 quarters. This was
primarily done to enable the model to provide a better reflection of the recent
economic times. This resulted in increased allocations that we determined were
appropriate. We determine General Reserves  Other by taking into account other
factors, such as the concentration of loans in a particular industry or
geographic area and adjustments for economic indicators. By nature, our general
reserve changes with our fluid lending environment and the overall economic
environment in which we lend. As such, we are continually attempting to enhance
this portion of the allocation process to reflect anticipated losses in our
portfolio driven by these changing factors. During 2007, management further
enhanced the general component analysis to more specifically identify the
inherent risks in the loan portfolio. Expanded economic statistics,
specifically unemployment and inflation rates for national, state and local
markets are monitored and factored into the allocation to address repayment
risk. Further identification and management of portfolio concentration risks,
both by loan category and by specific markets was enhanced and is reflected in
the general allocation component. In the fourth quarter the model was further
enhanced to include more specific qualitative factors, as mentioned previously,
by loan type.

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During 2009, we also contracted with a third party that provides an ALL
methodology and an ALL model for determining necessary ALL levels. Although we
do not use the model results for the basis of our ALL levels, the model
provides a validation tool to our existing model.

All of the factors we take into account in determining PLL in the
general categories are subject to change; thus, the allocations are not
necessarily indicative of the loan categories in which future loan losses will
occur. As loan balances and estimated losses in a particular loan type decrease
or increase and as the factors and resulting allocations are monitored by
management, changes in the risk profile of the various parts of the loan
portfolio may be reflected in the allowance allocated.

Table 5: Quarterly Allowance for Loan Loss
Components

|                                          |  |                        |        |          |   |                 |  |          |        |          |   |        |  |   |       | 
|----------------------------------------- |  | ---------------------- | ------ | -------- | - | --------------- |  | -------- | ------ | -------- | - | ------ |  | - | ----- | 
|                                          |  | 12/31/08               |        | 03/31/09 |   | As of
 06/30/09 |  | 09/30/09 |        | 12/31/09 |  
|                                          |  | (dollars in thousands) |       
|Component 1
  Specific credit allocation |  | $                      | 6,019  |          | $ | 7,167           |  | $        | 5,538  |          | $ | 6,414  |  | $ | 1,155 | 
|Component 2
  General reserves           |  |                        | 7,472  |          |   | 7,222           |  |          | 7,510  |          |   | 6,908  |  |   | 7,911 | 
|Unallocated                               |  |                        | 70     |          |   | 291             |  |          | (27    | )        |   | 650    |  |   | 534   | 
|Allowance for Loan Losses                 |  | $                      | 13,561 |          | $ | 14,680          |  | $        | 13,021 |          | $ | 13,972 |  | $ | 9,600 | 

Management believes the ALL is at an appropriate level to absorb
probable and inherent losses in the loan portfolio at December 31, 2009.
Proactive efforts to collect on all non-performing loans, including use of the
legal process when deemed appropriate to minimize the risk of further
deterioration of such loans will be ongoing. In the event that the facts and
circumstances relating to these non-performing loans change, additions to the
ALL may become necessary. With respect to the remainder of the loan portfolio,
while management uses available information to recognize losses on loans,
future adjustments to the ALL may become necessary based on changes in economic
conditions and the impact of such changes on our borrowers. Management remains
watchful of credit quality issues and believes that issues within the portfolio
are reflective of the challenging economic environment experienced over the
past few years. Should the economic climate deteriorate further, the level of
non-performing loans, charge-offs and delinquencies could rise, warranting an
increase in the provision.

As an integral part of their examination process, various regulatory
agencies review the ALL as well. Such agencies may require that changes in the
ALL be recognized when their credit evaluations differ from those of
management, based on their judgments regarding information available to them at
the time of their examinations.

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As Table 6 indicates, the ALL at December 31, 2009 was $9.6 million
compared with $13.6 million at year-end 2008. Loans decreased 10.5% in 2009,
while the allowance as a percent of gross loans decreased to 1.5% from 1.9% at
year-end 2008. Net commercial mortgage loan charge-offs represented 34.6% of
the total net charge-offs for 2009. Net commercial loan charge-offs represented
36.1% of the total net charge-offs in 2009 while residential real
estate-mortgage loan net charge-offs represented 21.7% of the total net
charge-offs for 2009. Net loan charge-offs decreased significantly in 2009. The
ALL as a percent of total loans decreased as a result of net loan charge-offs
exceeding the provision expense. Loans charged-off are subject to periodic
review and specific efforts are taken to achieve maximum recovery of principal,
accrued interest and related expenses.

Table 6: Loan Loss Experience

|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                            |  | Years Ended December 31, |        
|                                                                            |  | 2009                     |         | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|                                                                            |  | (dollars in thousands)   |        
|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Daily average amount of loans                                               |  | $                        | 699,091 |      | $ | 743,930 |   | $    | 804,494 |      | $ | 818,086 |   | $ | 789,316 |  
|Loans, end of period                                                        |  | $                        | 651,894 |      | $ | 728,722 |   | $    | 760,210 |      | $ | 819,568 |   | $ | 812,296 |  
|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|ALL, at beginning of year                                                   |  | $                        | 13,561  |      | $ | 11,840  |   | $    | 8,058   |      | $ | 9,551   |   | $ | 10,445  |  
|Loans charged off:                                                          |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                        |  |                          | 2,297   |      |   | 587     |   |      | 437     |      |   | 204     |   |   | 537     |  
|Real estate-construction                                                    |  |                          | 647     |      |   | 2,355   |   |      | 25      |      |   | 624     |   |   |        |  
|Real estate-commercial                                                      |  |                          | 3,766   |      |   | 11,289  |   |      | 2,154   |      |   | 1,341   |   |   | 3,363   |  
|Commercial/agricultural loans                                               |  |                          | 4,135   |      |   | 2,301   |   |      | 3,627   |      |   | 847     |   |   | 651     |  
|Consumer loans                                                              |  |                          | 413     |      |   | 135     |   |      | 215     |      |   | 401     |   |   | 320     |  
|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total loans charged off                                                     |  |                          | 11,258  |      |   | 16,667  |   |      | 6,458   |      |   | 3,417   |   |   | 4,871   |  
|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries of loans previously charged off:                                 |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                        |  |                          | 24      |      |   | 164     |   |      | 63      |      |   | 409     |   |   | 392     |  
|Real estate-construction                                                    |  |                          | 238     |      |   |        |   |      |        |      |   |        |   |   |        |  
|Real estate-commercial                                                      |  |                          | 149     |      |   | 78      |   |      | 113     |      |   | 127     |   |   | 91      |  
|Commercial/agricultural loans                                               |  |                          | 355     |      |   | 143     |   |      | 206     |      |   | 134     |   |   | 163     |  
|Consumer loans                                                              |  |                          | 31      |      |   | 42      |   |      | 97      |      |   | 351     |   |   | 114     |  
|                                                                            |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total loans recovered                                                       |  |                          | 797     |      |   | 427     |   |      | 479     |      |   | 1,021   |   |   | 760     |  
|Net loans charged off (NCOs)                                              |  |                          | 10,461  |      |   | 16,240  |   |      | 5,979   |      |   | 2,396   |   |   | 4,111   |  
|Additions to allowance for provision for loan losses charged to
 operations |  |                          | 6,500   |      |   | 17,961  |   |      | 9,761   |      |   | 903     |   |   | 3,217   |  
|ALL, at end of year                                                         |  | $                        | 9,600   |      | $ | 13,561  |   | $    | 11,840  |      | $ | 8,058   |   | $ | 9,551   |  
|Ratio of NCOs during period to average loans outstanding                    |  |                          | 1.50    | %    |   | 2.18    | % |      | 0.74    | %    |   | 0.29    | % |   | 0.52    | %
|Ratio of ALL to NCOs                                                        |  |                          | 0.9     |      |   | 0.8     |   |      | 2.0     |      |   | 3.4     |   |   | 2.3     |  
|Ratio of ALL to total loans end of period                                   |  |                          | 1.47    | %    |   | 1.86    | % |      | 1.56    | %    |   | 0.98    | % |   | 1.18    | %

The change in ALL is a function of a number of factors, including but
not limited to changes in the loan portfolio, loan
loss provision, net charge-offs, and non-performing loans.

Table 7 shows the amount of the ALL allocated on the dates indicated to
each loan type as described. It also shows the percentage of balances for each
loan type to total loans. In general, it would be expected that those types of
loans which have historically more loss associated with them will have a
proportionally larger amount of the allowance allocated to them than do loans
that have less risk.

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Table 7: Allocation of the Allowance for Loan
Losses

|                                     |  |                        |       |                    |  |        |   |                   |        |        |  |                   |   |        |        |                   |  |        |   |                   |       |  |  |       |   |   |       |  |  |       |  
|------------------------------------ |  | ---------------------- | ----- | ------------------ |  | ------ | - | ----------------- | ------ | ------ |  | ----------------- | - | ------ | ------ | ----------------- |  | ------ | - | ----------------- | ----- |  |  | ----- | - | - | ----- |  |  | ----- | -
|                                     |  | As of December 31,     |      
|                                     |  | (dollars in thousands) |      
|                                     |  | 2009                   |       | 2008               |  | 2007   |   | 2006              |        | 2005   | 
|                                     |  | Amount                 |       | % of total 
 loans |  | Amount |   | % of total
 loans |        | Amount |  | % of total
 loans |   | Amount |        | % of total
 loans |  | Amount |   | % of total
 loans |      
|Commercial, financial & agricultural |  | $                      | 1,496 |                    |  | 12.8   | % | $                 | 6,375  |        |  | 15.2              | % | $      | 3,405  |                   |  | 16.8   | % | $                 | 2,082 |  |  | 10.1  | % | $ | 2,317 |  |  | 9.9   | %
|Commercial real estate               |  |                        | 4,558 |                    |  | 54.2   | % |                   | 4,726  |        |  | 52.3              | % |        | 5,367  |                   |  | 50.8   | % |                   | 4,280 |  |  | 56.6  | % |   | 5,633 |  |  | 57.5  | %
|Real estate                          |  |                        |       |                    |  |        |   |                   |        |        |  |                   |   |        |        |                   |  |        |   |                   |       |  |  |       |   |   |       |  |  |       |  
|Construction                         |  |                        | 1,184 |                    |  | 9.6    | % |                   | 806    |        |  | 9.6               | % |        | 1,774  |                   |  | 12.2   | % |                   | 597   |  |  | 11.5  | % |   | 454   |  |  | 10.6  | %
|Residential                          |  |                        | 1,453 |                    |  | 19.1   | % |                   | 1,308  |        |  | 18.4              | % |        | 987    |                   |  | 15.8   | % |                   | 755   |  |  | 17.6  | % |   | 482   |  |  | 18.3  | %
|Consumer installment loans           |  |                        | 375   |                    |  | 1.8    | % |                   | 259    |        |  | 1.8               | % |        | 306    |                   |  | 1.9    | % |                   | 342   |  |  | 1.8   | % |   | 243   |  |  | 1.8   | %
|Tax exempt loans                     |  |                        |      |                    |  | 2.5    | % |                   | 17     |        |  | 2.7               | % |        |       |                   |  | 2.5    | % |                   |      |  |  | 2.4   | % |   |      |  |  | 1.9   | %
|Not specifically allocated           |  |                        | 534   |                    |  |        |   |                   | 70     |        |  |                   |   |        | 1      |                   |  |        |   |                   | 2     |  |  |       |   |   | 422   |  |  |       |  
|Total allowance                      |  | $                      | 9,600 |                    |  | 100.0  | % | $                 | 13,561 |        |  | 100.0             | % | $      | 11,840 |                   |  | 100.0  | % | $                 | 8,058 |  |  | 100.0 | % | $ | 9,551 |  |  | 100.0 | %

Non-Performing Loans and Foreclosed Properties

Management encourages early identification of non-accrual and problem
loans in order to minimize the risk of loss.

Non-performing loans are defined as non-accrual loans, loans 90 days or
more past due but still accruing, and restructured loans. Additionally,
whenever management becomes aware of facts or circumstances that may adversely
impact the collection of principal or interest on loans, it is the practice of
management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. The accrual of interest income
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, unpaid interest credited to
income is reversed. If collection is in doubt, cash receipts on non-accrual
loans are used to reduce principal rather than recorded as interest income.

Restructuring loans involves the granting of some concession to the
borrower involving a loan modification, such as payment schedule or interest rate
changes. A troubled debt restructuring (TDR) includes a loan modification where
a borrower is experiencing financial difficulty and we grant a concession to
that borrower that we could not otherwise consider except for the borrowers
financial difficulties. TDR loans on a non-accrual status will be identified as
non-accrual loans and not as TDRs.

Table 8: Nonperforming Loans and Foreclosed
properties

|                                        |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                        |  | December 31,           |       
|                                        |  | 2009                   |        | 2008 |   | 2007   |   | 2006 |        | 2005 |  
|                                        |  | (dollars in thousands) |       
|                                        |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Nonaccrual loans                        |  | $                      | 26,591 |      | $ | 43,687 |   | $    | 37,555 |      | $ | 27,352 |   | $ | 6,942  |  
|Accruing loans past due 90 days or more |  |                        |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|Restructured loans                      |  |                        | 2,061  |      |   | 367    |   |      |       |      |   | 496    |   |   |       |  
|Total non-performing loans (NPLs)       |  |                        | 28,652 |      |   | 44,054 |   |      | 37,555 |      |   | 27,848 |   |   | 6,942  |  
|Foreclosed properties                   |  |                        | 14,995 |      |   | 7,143  |   |      | 5,167  |      |   | 5,760  |   |   | 3,333  |  
|Total non-performing assets (NPAs)      |  | $                      | 43,647 |      | $ | 51,197 |   | $    | 42,722 |      | $ | 33,608 |   | $ | 10,275 |  
|                                        |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Ratios:                                 |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|NPLs to total loans                     |  |                        | 4.40   | %    |   | 6.04   | % |      | 4.94   | %    |   | 3.40   | % |   | 0.85   | %
|NPAs to total assets                    |  |                        | 6.70   | %    |   | 4.82   | % |      | 3.86   | %    |   | 3.02   | % |   | 0.94   | %
|ALL to NPLs                             |  |                        | 33.51  | %    |   | 30.78  | % |      | 31.53  | %    |   | 28.94  | % |   | 137.58 | %

Non-performing loans at December 31, 2009 were $28.7 million compared
to $44.1 million at December 31, 2008. When comparing the previous quarter
ended September 30, 2009, non-performing loans decreased $11.8 million, or
29.1%. The sale of non-accrual assets of $2.8 million accounted for a portion
of the decline. In addition, $5.8 million of the reduction was attributed to
properties being transferred to foreclosed properties and $7.5 million was the
result of charge-offs. Offsetting the decline were new additions to non-accrual
loans of $2.7 million and an increase in restructured loans of $2.1 million.
Management believes collateral is currently sufficient to collect the net
carrying value of those loans in the event of foreclosure or repossession and
has aggressively charged off collateral deficiencies. Our assessment is based
on recent appraisals, professional market valuations and/or sales agreements
with respect to each of the properties. Management is continually monitoring
these relationships and in the event facts and circumstances change, additional
PFLLs may be necessary.

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Table 9: Quarterly Nonaccrual and
Restructured Loans

|                                                     |  |                        |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|---------------------------------------------------- |  | ---------------------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                                     |  | Quarters Ended         |       
|                                                     |  | 12/31/09               |        | 09/30/09 |   | 06/30/09 |  | 03/31/09 |        | 12/31/08 |  
|                                                     |  | (dollars in thousands) |       
|Nonaccrual Loans                                     |  | $                      | 26,590 |          | $ | 40,474   |  | $        | 51,601 |          | $ | 48,480 |  | $ | 43,687 | 
|Loans restructured in a troubled debt
 restructuring |  |                        | 2,061  |          |   | 11       |  |          | 12     |          |   | 428    |  |   | 367    | 
|Total Nonperforming Loans                            |  | $                      | 28,651 |          | $ | 40,485   |  | $        | 51,613 |          | $ | 48,908 |  | $ | 44,054 | 

Table 10: 30-89 Days Past Due Loans

The following
table presents an analysis of our past due loans excluding non-accrual loans:

PAST DUE LOANS (EXCLUDING NON-ACCRUALS) 
30-89 DAYS PAST DUE 
(Dollar amounts in thousands)

|                                |  |          |       |          |   |          |   |          |       |          |   |        |   |   |        |  
|------------------------------- |  | -------- | ----- | -------- | - | -------- | - | -------- | ----- | -------- | - | ------ | - | - | ------ | -
|                                |  | 12/31/09 |       | 09/30/09 |   | 06/30/09 |   | 03/31/09 |       | 12/31/08 |  
|Total secured by real estate    |  | $        | 8,881 |          | $ | 5,922    |   | $        | 6,936 |          | $ | 9,936  |   | $ | 11,957 |  
|Commercial and industrial loans |  |          | 255   |          |   | 862      |   |          | 2,512 |          |   | 3,255  |   |   | 671    |  
|Loans to individuals            |  |          | 370   |          |   | 204      |   |          | 104   |          |   | 131    |   |   | 145    |  
|All other loans                 |  |          | 1     |          |   | 139      |   |          | 143   |          |   | 5      |   |   | 2      |  
|Total                           |  | $        | 9,507 |          | $ | 7,127    |   | $        | 9,695 |          | $ | 13,327 |   | $ | 12,775 |  
|Percent of total loans          |  |          | 1.46  | %        |   | 1.06     | % |          | 1.37  | %        |   | 1.85   | % |   | 1.75   | %

As indicated above, loan balances 30 to 89 days past due have decreased
by $3.3 million since December 31, 2008. As the loans continue through the
collection process, we anticipate these past due levels continue to decline.

Table 11: Foregone Loan Interest

The following table shows, for those loans accounted for on a
non-accrual basis for the years ended as indicated, the gross interest that
would have been recorded if the loans had been current in accordance with their
original terms and the amount of interest income that was included in interest
income for the period.

|                                                   |  |                          |       |      |   |       |   |   |       |  
|-------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | -
|                                                   |  | Years ended December 31, |      
|                                                   |  | 2009                     |       | 2008 |   | 2007  |  
|                                                   |  | (dollars in thousands)   |      
|Interest income in accordance with original
 terms |  | $                        | 1,981 |      | $ | 2,887 |   | $ | 3,971 |  
|Interest income recognized                         |  |                          | (245  | )    |   | (213  | ) |   | (565  | )
|Reduction in interest income                       |  | $                        | 1,736 |      | $ | 2,674 |   | $ | 3,406 |  

Foreclosed properties, which represent properties that we acquired
through foreclosure or in satisfaction of debt, totaled $15.0 million at end of
year 2009. This compared to $7.1 million at year-end 2008. Management actively
seeks to ensure that properties held are administered to minimize any risk of
loss.

Activity for
foreclosed properties for 2009, 2008 and 2007, including costs of operation are
shown in Table 12:

Table 12: Foreclosed Properties Summary

|                                                       |  |                          |        |      |   |        |   |   |        |  
|------------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                       |  | Years ended December 31, |       
|                                                       |  | 2009                     |        | 2008 |   | 2007   |  
|Income from operation of foreclosed
 properties        |  | $                        | 118    |      | $ | 153    |   | $ | 64     |  
|Expense from operation of foreclosed
 properties       |  |                          | (1,403 | )    |   | (4,228 | ) |   | (966   | )
|Net gains (losses) from sale of foreclosed
 properties |  |                          | 108    |      |   | (119   | ) |   | (232   | )
|                                                       |  |                          |        |      |   |        |   |   |        |  
|Cost of operation and sale of foreclosed
 properties   |  | $                        | (1,177 | )    | $ | (4,194 | ) | $ | (1,134 | )

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Investment Portfolio

Our investment
portfolio is intended to provide us with adequate liquidity, flexibility in
asset/liability management and earning potential.

Table 13: Investment Portfolio

|                                                               |  |                        |         |      |   |         |  |   |         | 
|-------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                               |  | December 31,           |        
|                                                               |  | 2009                   |         | 2008 |   | 2007    | 
|                                                               |  | (dollars in thousands) |        
|Securities Available for Sale (AFS):                           |  |                        |         |      |   |         |  |   |         | 
|U.S. Treasury and U.S. government sponsored
 agency securities |  | $                      | 30,000  |      | $ | 4,489   |  | $ | 29,222  | 
|Obligations of states and political
 subdivisions              |  |                        | 38,042  |      |   | 53,854  |  |   | 55,741  | 
|Mortgage-backed securities                                     |  |                        | 118,982 |      |   | 152,118 |  |   | 118,848 | 
|Private placement and corporate bonds                          |  |                        | 15,137  |      |   | 15,130  |  |   | 15,141  | 
|Other equity securities                                        |  |                        | 3,330   |      |   | 2,679   |  |   | 3,419   | 
|Total amortized cost                                           |  | $                      | 205,491 |      | $ | 228,270 |  | $ | 222,371 | 
|Total fair value and carrying value                            |  | $                      | 204,834 |      | $ | 225,417 |  | $ | 222,475 | 

Securities classified as available for sale are those securities which
we have determined might be sold to manage interest rates, reposition holdings
to increase returns or modify durations, or in response to changes in interest
rates or other economic factors. They may or may not be held until maturity.
Securities available for sale are carried at market value. Such market values are
monitored at least quarterly and more frequently as economic conditions
warrant. As part of such monitoring, the credit quality of individual
securities and their issuers are assessed. Adjustments to market value that are
considered temporary at December 31, 2009 and 2008 are recorded as a separate
component of equity, net of tax. If an impairment of a security is identified
as other-than-temporary based on information available such as the decline in
the credit worthiness of the issuer, external market ratings or the anticipated
or realized elimination of associated dividends, such impairments are recorded
in the consolidated statement of operations. Subsequent to December 31, 2008, a
security held in the amount of $1.9 million was determined to be impaired on an
other-than-temporary basis. The book value of the security was eliminated from
the balance sheet and charged to earnings in the amount of $1.9 million. This
expense is identified as such on the statement of operations for the year ended
December 31, 2008.

In November
2007, our investment subsidiary sold agency securities with a total market
value of $30.0 million. In 2008, the Bank sold US government sponsored agency
securities with a total market value of $19.1 million and our investment subsidiary
sold similar securities with a total market value of $10.8 million to
reposition our investment portfolio and improve the yields we were receiving on
these type of securities. Replacement agency securities were subsequently
purchased that provided a higher yield and allowed us to take advantage of
opportunities in the market.

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During 2009, securities with a market value of $202.3 million were sold
and $290.5 million of other securities were purchased. Gains of $4.2 million
were realized on the sale of securities.

Table 14: Securities Portfolio Maturity
Distribution (dollars in thousands, rates on a tax-equivalent basis)

|                                                 |  |                                                                    |        |                                       |  |                                        |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |        |  |  |      |   |   |         |  |  |      |  
|------------------------------------------------ |  | ------------------------------------------------------------------ | ------ | ------------------------------------- |  | -------------------------------------- | - | --------------- | ------ | ------ |  | ----- | - | ------ | ------ | ----- |  | ------ | - | ----- | ------ |  |  | ---- | - | - | ------- |  |  | ---- | -
|                                                 |  | Securities AFS  maturity distribution and weighted average
 yield |       
|                                                 |  | Within one year                                                    |        | After one year but
 Within five years |  | After five years but
 Within ten years |   | After ten years |        | Total  | 
|                                                 |  | Amount                                                             |        | Yield                                 |  | Amount                                 |   | Yield           |        | Amount |  | Yield |   | Amount |        | Yield |  | Amount |   | Yield |       
|U.S. Treasury securities                         |  | $                                                                  | 30,000 |                                       |  | 0.00                                   | % | $               |       |        |  |      |   |        |       |       |  |       |   |       |       |  |  |     |   | $ | 30,000  |  |  | 0.00 | %
|Mortgage-backed securities                       |  |                                                                    | 1,472  |                                       |  | 2.58                                   | % |                 | 87,567 |        |  | 4.33  | % |        | 22,969 |       |  | 4.21   | % |       | 8,140  |  |  | 5.78 | % |   | 120,148 |  |  | 4.38 | %
|Obligations of states and political subdivisions |  |                                                                    |       |                                       |  |                                       |   |                 | 2,987  |        |  | 4.32  | % |        | 18,653 |       |  | 4.05   | % |       | 17,180 |  |  | 3.95 | % |   | 38,820  |  |  | 4.03 | %
|Private placement and corporate bonds            |  |                                                                    |       |                                       |  |                                       |   |                 |       |        |  |      |   |        |       |       |  |       |   |       | 12,536 |  |  | 7.64 | % |   | 12,536  |  |  | 7.64 | %
|                                                 |  |                                                                    |        |                                       |  |                                        |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |        |  |  |      |   |   |         |  |  |      |  
|Other                                            |  |                                                                    | 3,330  |                                       |  | 3.84                                   | % |                 |       |        |  |      |   |        |       |       |  |       |   |       |       |  |  |     |   |   | 3,330   |  |  | 3.84 | %
|Total carrying value                             |  | $                                                                  | 34,802 |                                       |  | 0.48                                   | % | $               | 90,554 |        |  | 4.33  | % | $      | 41,622 |       |  | 4.14   | % | $     | 37,856 |  |  | 5.57 | % | $ | 204,834 |  |  | 3.86 | %

Securities averaged $253.3 million in 2009 compared with $231.4 million
in 2008. In 2009, taxable securities comprised approximately 66.0% of the total
average investments compared to 76.1% in 2008. Tax-exempt securities for 2009
accounted for 16.3% of the total average investments compared to 23.9% in 2008.

Goodwill

Goodwill is not amortized but is subject to impairment tests on an
annual basis or more frequently if deemed appropriate. For 2008, the market
value of our stock was determined by using a three-year quarterly average
multiple of market value to book value. Based on the results of this analysis,
no impairment was identified at December 31, 2008.

For 2009, consideration was given to the market value of our stock.
However, based on current market conditions, we hired a firm specialized in rendering valuation opinions
for banks and bank holding companies nationwide.  In rendering their opinion as to the fair value of our stock,
they considered the nature and history of our Company, the competitive and economic outlook for the trade area
and for the banking industry in general, the book value and financial condition of our Company, our future earnings
and dividend paying capacity, the size of the block valued, and the prevailing market prices of bank stocks.
The following valuation methodologies were considered: 1.) net asset value  defined as the net worth of the Company, 2.) market value 
defined as the price at which knowledgeable buyers and sellers would agree, and 3.) investment value  defined
as an estimate of the present value of the future benefits, usually earnings, cash flow, or dividends,
that will accrue to our common stock.  When consideration was given to the three valuation methodologies,
as well as all other relevant valuation variables and factors, the fully-diluted cash fair value range of our
common shares was deemed to be in excess of the book value and therefore, no impairment was recognized.

Deposits

Deposits are our largest source of funds. Average total deposits for
2009 were $838.9 million, a decrease of 1.7% from 2008. At December 31, 2009,
deposits were $831.6 million, a decrease of $18.2 million (2.1%) from $849.8
million at December 31, 2008. Average brokered deposits decreased $45.2
million, (35.9%) between 2008 and 2009, total brokered deposits decreased $65.0
million to $48.9 million at year-end 2009 from $113.9 million at year-end 2008.
The reduction in brokered certificates of deposit was a result of our strategic
decision to allow those deposits to mature in order to reduce our reliance on
such deposits. From a liquidity standpoint, those funds were not necessary as
our cash position was sufficient to pay time desposits as they matured and otherwise provide us with liquidity
for our operations. Management views these as a stable source of
funds. If liquidity concerns arose, we believe (but cannot assure) that we have
alternative sources of funds, such as lines with correspondent banks and
borrowing arrangements with the FHLB should the need present itself. Typically,
overall deposits for the first six months tend to decline slightly as a result
of the seasonality of our customer base, as customers draw down deposits during
the first half of the year in anticipation of the summer tourist season.

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Table 15: Average Deposits Distribution

For the year ended 
December 31,

|                                                              |  |                        |         |            |       |               |  |        |     |            |   |                |  |        |   |            |  |               |  |   |         |  |       |   |  |  |      | 
|------------------------------------------------------------- |  | ---------------------- | ------- | ---------- | ----- | ------------- |  | ------ | --- | ---------- | - | -------------- |  | ------ | - | ---------- |  | ------------- |  | - | ------- |  | ----- | - |  |  | ---- | 
|                                                              |  | 2009                   |         | 2008       |       | 2007          | 
|                                                              |  | Amount                 |         | % of Total |       | Average
 Rate |  | Amount |     | % of Total |   | Average 
 Rate |  | Amount |   | % of Total |  | Average
 Rate | 
|                                                              |  | (dollars in thousands) |        
|Noninterest-bearing demand deposits                           |  | $                      | 72,368  |            | 8.6   | %             |  |        | 0.0 | %          | $ | 72,852         |  | 8.5    | % |            |  | 0.0%          |  | $ | 93,706  |  | 10.6  | % |  |  | 0.0% | 
|Interest-bearing demand deposits                              |  |                        | 135,430 |            | 16.1  | %             |  |        | 0.4 | %          |   | 123,404        |  | 14.5   | % |            |  | 1.3%          |  |   | 110,322 |  | 12.5  | % |  |  | 2.5% | 
|Savings deposits                                              |  |                        | 231,315 |            | 27.6  | %             |  |        | 0.7 | %          |   | 232,495        |  | 27.2   | % |            |  | 1.9%          |  |   | 262,026 |  | 29.7  | % |  |  | 3.5% | 
|Other time deposits (excluding brokered deposits)             |  |                        | 210,165 |            | 25.1  | %             |  |        | 3.0 | %          |   | 194,648        |  | 22.8   | % |            |  | 4.1%          |  |   | 184,480 |  | 20.9  | % |  |  | 4.7% | 
|Time deposits $100,000 and over (excluding brokered deposits) |  |                        | 108,932 |            | 13.0  | %             |  |        | 3.2 | %          |   | 104,123        |  | 12.2   | % |            |  | 4.6%          |  |   | 115,021 |  | 13.0  | % |  |  | 5.3% | 
|Brokered certificates of deposit                              |  |                        | 80,648  |            | 9.6   | %             |  |        | 4.1 | %          |   | 125,852        |  | 14.7   | % |            |  | 4.2%          |  |   | 116,179 |  | 13.2  | % |  |  | 4.6% | 
|Total deposits                                                |  | $                      | 838,858 |            | 100.0 | %             |  |        |     |            | $ | 853,374        |  | 100.0  | % |            |  |               |  | $ | 881,734 |  | 100.0 | % |  |  |      | 

Table 16: Maturity Distribution-Certificates
of Deposit and Other Time Deposits of $100,000 or More

|                                       |  |                         |         |                     |   |       |  |   |         | 
|-------------------------------------- |  | ----------------------- | ------- | ------------------- | - | ----- |  | - | ------- | 
|                                       |  | December 31, 2009       |        
|                                       |  | Certificates of Deposit |         | Other Time Deposits |   | Total | 
|                                       |  | (Dollars in thousands)  |        
|Three months
 or less                  |  | $                       | 40,786  |                     | $ | 2,332 |  | $ | 43,118  | 
|Over three
 months through six months  |  |                         | 34,956  |                     |   | 1,688 |  |   | 36,644  | 
|Over six
 months through twelve months |  |                         | 37,984  |                     |   | 1,188 |  |   | 39,172  | 
|Over twelve
 months                    |  |                         | 37,053  |                     |   | 3,777 |  |   | 40,830  | 
|Total                                  |  | $                       | 150,779 |                     | $ | 8,985 |  | $ | 159,764 | 

As shown in Table 15, non-interest bearing demand deposits in 2009
averaged $72.4 million, down 0.7% from $72.9 million in 2008. This $0.5 million
decrease reflects the shift from non-interest bearing to interest-bearing
accounts. As of December 31, 2009, non-interest-bearing demand deposits totaled
$81.3 million compared to $73.6 million at year-end 2008.

Interest-bearing deposits generally consist of interest-bearing
checking, savings deposits, money market accounts, individual retirement
accounts (IRAs) and certificates of deposit (CDs). In 2009,
interest-bearing deposits averaged $766.5 million, a decrease of 1.8% from
2008. Average balances of NOW accounts, savings deposits and money market
accounts increased $10.9 million (3.0%) as a result of customer preference to
shorter terms in a down interest rate environment. During the same period, time
deposits, including CDs and IRAs (other than brokered time deposits and time
deposits over $100,000) increased average deposits by $20.1 million (10.3%),
primarily in response to customer reaction to aggressive short-term rate
declines in national markets. Average time deposits over $100,000, other than
brokered time deposits, decreased by $0.2 million (0.2%). These deposits were
priced within the framework of our rate structure and did not materially
increase the average rates on deposit liabilities. Increased competition for
consumer deposits and customer awareness of interest rates continue to limit
our core deposit growth in these types of deposits. Despite this reduced
growth, our average brokered deposits decreased $45.3 million, (36.0%) in 2009
compared to 2008.

Emphasis will be placed on generating additional core deposits in 2010
through competitive pricing of deposit products and through the branch delivery
systems that have already been established. We will also attempt to attract and
retain core deposit accounts through new product offerings and customer
service. In the event that core deposit growth goals are not accomplished, we
will continue to look at other wholesale sources of funds.

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Other funding sources

Total other funding sources, including short-term borrowings, Federal
Home Loan Bank (FHLB) advances, convertible promissory notes and subordinated debentures, were $127.6
million at December 31, 2009, a decrease of $3.8 million, (2.9%), from $131.4
million at December 31, 2008.

Table 17: Short-term Borrowings

|                                                                             |  |                        |        |      |   |        |   |   |        |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                             |  | December 31,           |       
|                                                                             |  | 2009                   |        | 2008 |   | 2007   |  
|                                                                             |  | (Dollars in thousands) |       
|Federal funds purchased and securities sold
 under agreements to repurchase: |  |                        |        |      |   |        |   |   |        |  
|Balance end of year                                                          |  | $                      | 21,122 |      | $ | 30,174 |   | $ | 27,174 |  
|Average amounts outstanding during year                                      |  | $                      | 23,330 |      | $ | 32,750 |   | $ | 17,048 |  
|Maximum month-end amounts outstanding                                        |  | $                      | 33,757 |      | $ | 45,659 |   | $ | 41,107 |  
|Average interest rates on amounts
 outstanding at end of year                |  |                        | 0.50   | %    |   | 1.15   | % |   | 4.73   | %
|Average interest rates on amounts
 outstanding during year                   |  |                        | 0.71   | %    |   | 2.38   | % |   | 5.18   | %

Federal funds are purchased from money center banks and correspondent
banks at prevailing overnight interest rates. Securities are sold to bank
customers under repurchase agreements at prevailing market rates. Borrowings
from the FHLB are secured by our portfolio of one to four family residential
mortgages, home equity lines of credit and eligible investment securities
allowing us to use FHLB borrowings for additional funding purposes.
Substantially all of our FHLB advances are included as short-term borrowings.

Long-term Debt

In connection with the issuance of Trust Preferred Securities in 2001
(see Capital Resources), we issued long-term subordinated debentures to
Baylake Capital Trust I, a Delaware Business Trust subsidiary. On March 31,
2006, we redeemed the debentures and funded the redemption through the issuance
of $16.1 million of trust preferred securities and $498,000 of trust common
securities under the name Baylake Capital Trust II. Subordinated debentures
totaled $16.1 million at December 31, 2008, 2007 and 2006. For additional
details, see Note 11, Subordinated Debentures, to the Consolidated Financial
Statements.

During the third and fourth quarters of 2009, we completed three
separate closings of a private placement of our 10% Convertible Notes due June
30, 2017 (the Convertible Notes). The Convertible Notes were offered and sold in reliance on the
exemption from registration under Section 4(2) of the Securities Act of 1933
and Rule 506 promulgated there under. Through December 31, 2009, we issued $5.35 million principal amount
of the Convertible Notes, at par, and received gross proceeds in the same amount.

The Convertible Notes accrue interest at a fixed rate of 10% per annum upon
issuance and until maturity or earlier conversion or redemption. Interest is
payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of
each year. The Convertible Notes are convertible into shares of our common stock at a
conversion ratio of one share of common stock for each $5.00 in aggregate
principal amount held on the record date of the conversion subject to certain
adjustments as described in the Convertible Notes. Prior to October 1, 2014, each holder of
the Convertible Notes may convert up to 100% (at the discretion of the holder) of the
original principal amount into shares of our common stock at the conversion
ratio. On October 1, 2014, one-half of the original principal amounts are
mandatorily convertible at the conversion ratio if conversion has not occurred.
The principal amount of any Convertible Note that has not been converted or redeemed will
be payable at maturity on June 30, 2017. We are not obligated to register the
common stock related to the conversion of the Convertible Notes.

We incurred debt offering costs of $0.2 million. These costs are
capitalized and amortized to interest expense using the effective interest
method over the initial conversion term, which is October 1, 2014. The total
amount of Convertible Notes offered is $15.0 million. We anticipate a fourth closing during
the first quarter of 2010. The Convertible Notes offering expires on April 30, 2010.

Contractual Obligations

As of December 31, 2009, we were contractually obligated under
long-term agreements as follows:

Table 18: Contractual Obligations

|                                                            |  |                        |         |                  |   |              |  |              |         |                   |   |        |  |   |        | 
|----------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ------------ |  | ------------ | ------- | ----------------- | - | ------ |  | - | ------ | 
|                                                            |  | Payments due by period |        
|(dollars in thousands)                                      |  | Total                  |         | Less than 1 year |   | 1 to 3 years |  | 3 to 5 years |         | More than 5 years |  
|Certificates of
 deposit and other time deposit obligations |  | $                      | 373,063 |                  | $ | 273,189      |  | $            | 88,591  |                   | $ | 11,283 |  | $ |       | 
|Subordinated debentures                                     |  |                        | 16,100  |                  |   |             |  |              |        |                   |   |       |  |   | 16,100 | 
|Convertible promissory notes(1)                             |  |                        | 5,350   |                  |   |             |  |              |        |                   |   | 5,350  |  |   |       | 
|FHLB advances                                               |  |                        | 85,000  |                  |   | 10,000       |  |              | 75,000  |                   |   |       |  |   |       | 
|Operating leases                                            |  |                        | 22      |                  |   | 22           |  |              |        |                   |   |       |  |   |       | 
|Totals                                                      |  | $                      | 479,535 |                  | $ | 283,211      |  | $            | 163,591 |                   | $ | 16,633 |  | $ | 16,100 | 

(1) One-half of the Convertible Notes are mandatorily converted to shares of common stock
by October 1, 2014. The principal amount of any Convertible Note that has not been converted or redeemed will be
payable at maturity on June 30, 2017.

For a discussion of these contractual obligations, see Note 5,
Premises and Equipment, Note 11, Subordinated Debentures, and Note 12,
Convertible Promissory Notes, to Consolidated Financial Statements.

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Liquidity

Liquidity management refers to our ability to ensure that cash is
available in a timely manner to meet loan demand and depositors needs, and to
service other liabilities as they become due, without undue cost or risk, or
causing a disruption to normal operating activities. We and our subsidiary bank
have different liquidity considerations.

Our primary sources of funds are dividends from our subsidiary bank,
investment income, proceeds from the sale of securities, principal payments on
our loans and investments, and net proceeds from borrowings and the offerings
of subordinated debentures and convertible promissory notes. We generally manage
our liquidity position in order to provide funds necessary to pay dividends to
our shareholders. Dividends received from our bank totaled $2.3 million in 2007
and were our main source of liquidity in 2008. After consultation with our
federal and state regulators, our Board of Directors elected to forego paying
the dividend normally paid to our shareholders beginning in the first quarter
of 2008. In order to begin paying dividends in the future, we will need to seek
prior approval from the Wisconsin Department of Financial Institutions as well
as the FRB.

Our bank meets its cash flow needs by having funding sources available
to it to satisfy the credit needs of customers as well as having available
funds to satisfy deposit withdrawal requests. Liquidity at our bank is derived
from deposit growth, maturing loans, the maturity and marketability of our
investment portfolio, access to other funding sources, marketability of certain
of our assets, the ability to use our loan and investment portfolios as collateral
for secured borrowings and strong capital positions.

Maturing investments and investment sales have been a primary source of
liquidity at our bank. Principal payments on investments totaling $113.7
million were made in 2009 and $202.3 million of proceeds were received from
investment sales. In addition, $290.5 million in investments were purchased in
2009. At December 31, 2009, the carrying value of investment securities
maturing within one year was $31.6 million, or 15.4% of the total investment
securities portfolio. This compares to 11.7% of our investment securities with
one year or less maturities as of December 31, 2008. At the end of 2009, the
investment portfolio contained $119.7 million of U.S. Treasury, U.S. government
sponsored agency securities and mortgage backed securities representing 58.5%
of the total investment portfolio. These securities tend to be highly
marketable and had a fair value approximately $2.1 million above amortized cost
at year-end 2009.

During 2009, we maintained large balances at the Federal Reserve Bank
for liquidity purposes. On average, those balances were $40.4 million. At
year-end, the balance was $65.7 million. We anticipate reducing those balances
in 2010.

Deposit growth is another potential source of liquidity for our bank.
However, as a financing activity reflected in the 2009 Consolidated Statements
of Cash Flows, deposit reduction consumed $18.1 million in cash during 2009.
Our banks overall average deposit base declined $14.5 million or 1.7% during
2009. Deposit growth is potentially the most stable source of liquidity for our
bank, although brokered deposits are inherently less stable than locally
generated core deposits. Affecting liquidity are core deposit growth levels,
certificate of deposit maturity structure and retention, and characteristics
and diversification of wholesale funding sources affecting the channels by
which brokered deposits are acquired. Conversely, deposit outflow would require
our bank to develop alternative sources of funds which may not be as liquid and
may be potentially a more costly alternative.

Federal funds sold averaged $3.2 million in 2009 compared to $7.0
million in 2008. Funds provided from the maturity of these assets typically are
used as funding sources for seasonal loan growth, which typically has higher
yields. Short-term and liquid by nature, federal funds sold generally provide a
yield lower than other earning assets. Our bank has a strategy of maintaining a
sufficient level of liquidity to accommodate fluctuations in funding sources
and will at times take advantage of specific opportunities to temporarily
invest excess funds at narrower than normal rate spreads while still generating
additional interest revenue. At December 31, 2009, our bank had $0.08 million
in federal funds sold.

The scheduled maturity of loans can provide a source of additional
liquidity. At December 31, 2009, our bank has $223.9 million of loans maturing
within one year, or 34.4% of total loans. Factors affecting liquidity relative
to loans are loan origination volumes, loan prepayment rates and the maturity
structure of existing loans. Our banks liquidity position is influenced by
changes in interest rates, economic conditions and competition. Conversely,
loan demand as a need for liquidity will cause us to acquire other sources of
funding which could be harder to find and, therefore, more costly to acquire.

Within the classification of short-term borrowings at year-end 2009 and
2008, federal funds purchased and securities sold under agreements to repurchase
totaled $21.1 million. At December 31, 2009, our bank had no federal funds
purchased. Federal funds are purchased from various upstream correspondent
banks while securities sold under agreements to repurchase are obtained from a
base of business customers. At December 31, 2009, our bank had $32.6 million
available in the form of federal funds lines. Short-term and long-term FHLB
advances are another source of funds, totaling $85.0 million at year-end 2009.
At December 31, 2009, our bank had $17.7 million in the form of additional
available FHLB advances.

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Our banks liquidity resources were sufficient in 2009 to fund the
deposit run-off, growth in investments and meet other cash needs when
necessary.

Management expects that deposit growth will be the primary funding
source of our banks liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although federal funds purchased and borrowings from
the FHLB provided funds in 2009, management expects deposit growth resulting
from branch expansion efforts and marketing efforts to attract and retain core
deposits, as well as brokered deposits, to be a reliable funding source in the
future. Shorter-term liquidity needs will mainly be derived from growth in
short-term borrowings, maturing federal funds sold and portfolio investments,
loan maturities and access to other funding sources.

In assessing liquidity, historical information such as seasonality
(loan demands effect on liquidity which starts before and during the tourist
season and deposit draw down which affects liquidity shortly before and during
the early part of the tourist season), local economic cycles and the economy in
general are considered along with the current ratios, management goals and our
resources available to meet anticipated liquidity needs. Management believes
that, in the current economic environment, our liquidity position is adequate.
To managements knowledge, there are no known trends nor any known demands,
commitments, events or uncertainties that will result or are reasonably likely
to result in a material increase or decrease in our liquidity.

Capital Resources

Stockholders equity at December 31, 2009 increased $5.6 million or
8.1% to $74.6 million, compared to $69.0 million at the end of 2008.
Accumulated other comprehensive loss decreased to $0.3 million at year-end 2009
versus accumulated other comprehensive loss of $1.6 million at year-end 2008.
The ratio of stockholders equity to assets at December 31, 2009 was 7.1%,
compared to 6.5% at year-end 2008.

On June 5, 2006, our Board of Directors authorized management, in its
discretion, to repurchase up to 300,000 shares, representing approximately 3.8%
of our common stock for a period not to exceed June 30, 2007. The program
allowed us to repurchase our shares as opportunities arose at prevailing market
prices in open market or privately negotiated transactions. Shares repurchased
are held as treasury stock and accordingly, are accounted for as a reduction of
stockholders equity. During 2007, the final 50,000 shares authorized were
repurchased. In July 2007, our Board of Directors approved a reimplementation
of this program, for the repurchase of an additional 300,000 shares through
June 30, 2008. We repurchased 79,000 shares under this new program between July
1 and December 31, 2007. No shares were purchased in 2008 and the program
expired June 30, 2008.

Under applicable regulatory guidelines, the Trust Preferred Securities
qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital. Any
additional portion of Trust Preferred Securities would qualify as Tier 2
capital. As of December 31, 2009, all $16.1 million of the Trust Preferred
Securities qualify as Tier 1 capital. Our convertible promissory notes, which
qualify as Tier 2 capital, totaled $5.35 million at the end of 2009.

No cash dividends were declared in 2009 and 2008.

The adequacy of our capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management.

The FRB has established capital adequacy rules which take into account
risks attributable to balance sheet assets and off-balance sheet activities.
All banks and bank holding companies must meet a minimum total risk-based
capital ratio of 8%. Of the 8% required, at least half must consist of core
capital elements defined as Tier 1 capital. The federal banking agencies also
have adopted leverage capital guidelines which banking organizations must meet.
Under these guidelines, the most highly rated banking organizations must meet a
leverage ratio of at least 3% Tier 1 capital to assets, while lower rated
banking organizations must maintain a ratio of at least 4% to 5%. Failure to
meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the consolidated financial statements.

Through the first three quarters of 2008, our regulatory capital ratios
and those of our bank were in excess of the levels established for well
capitalized institutions. To be well capitalized under the regulatory
framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital
ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%.
During the fourth quarter of 2008, our regulatory capital ratios and those of
our bank fell below well capitalized levels, but remained in excess of levels
established for adequately capitalized financial institutions under the
regulatory framework for prompt corrective action. As of March 31, 2009 and
throughout the remainder of 2009, our regulatory capital ratios returned to
well capitalized. As of December 31, 2009, our Tier 1 capital ratio was
10.22%, our total capital ratio was 12.18%, and our leverage ratio was 7.60%.

Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable expansion of product and market share
and to provide depositor and investor confidence. Our capital level must be
maintained at an appropriate level to provide the opportunity for an adequate
return on the capital employed. Management actively reviews our capital
strategies to ensure that capital levels are appropriate based on the perceived
business risks, further growth opportunities, industry standards, and
regulatory requirements.

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Table 20: Selected Quarterly Financial Data

The following
is selected financial data summarizing the results of operations for each
quarter in the years ended December 31, 2009 and 2008:

|                                    |  |                                        |        |         |   |               |   |              |        |  |   |        |  
|----------------------------------- |  | -------------------------------------- | ------ | ------- | - | ------------- | - | ------------ | ------ |  | - | ------ | -
|                                    |  | 2009
 Quarter Ended                    |       
|                                    |  | March
 31                              |        | June 30 |   | September
 30 |   | December
 31 |       
|                                    |  | (In
 thousands, except per share data) |       
|Interest
 income                    |  | $                                      | 12,513 |         | $ | 11,580        |   | $            | 11,829 |  | $ | 11,547 |  
|Interest
 expense                   |  |                                        | 5,075  |         |   | 4,814         |   |              | 4,411  |  |   | 3,959  |  
|Net interest
 income                |  |                                        | 7,438  |         |   | 6,766         |   |              | 7,418  |  |   | 7,588  |  
|Provision
 for loan losses          |  |                                        | 1,200  |         |   | 1,200         |   |              | 1,200  |  |   | 2,900  |  
|Net interest
 income after PLL      |  |                                        | 6,238  |         |   | 5,566         |   |              | 6,218  |  |   | 4,688  |  
|Non-interest
 income                |  |                                        | 4,536  |         |   | 2,592         |   |              | 2,090  |  |   | 3,268  |  
|Non-interest
 expense               |  |                                        | 7,427  |         |   | 7,815         |   |              | 7,429  |  |   | 7,310  |  
|Income
 before income tax expense   |  |                                        | 3,347  |         |   | 344           |   |              | 879    |  |   | 646    |  
|Provision
 (benefit) for income tax |  |                                        | 1,065  |         |   | (190          | ) |              | 44     |  |   | (33    | )
|Net income (loss)                   |  | $                                      | 2,282  |         | $ | 534           |   | $            | 835    |  | $ | 678    |  
|                                    |  |                                        |        |         |   |               |   |              |        |  |   |        |  
|Basic
 earnings (loss) per share    |  | $                                      | 0.29   |         | $ | 0.07          |   | $            | 0.11   |  | $ | 0.09   |  
|Diluted
 earnings (loss) per share  |  | $                                      | 0.29   |         | $ | 0.07          |   | $            | 0.11   |  | $ | 0.09   |  

|                                  |  |                                        |        |         |   |               |   |              |        |   |   |         |  
|--------------------------------- |  | -------------------------------------- | ------ | ------- | - | ------------- | - | ------------ | ------ | - | - | ------- | -
|                                  |  | 2008
 Quarter Ended                    |       
|                                  |  | March
 31                              |        | June 30 |   | September
 30 |   | December
 31 |       
|                                  |  | (In
 thousands, except per share data) |       
|Interest
 income                  |  | $                                      | 15,607 |         | $ | 14,302        |   | $            | 13,947 |   | $ | 13,420  |  
|Interest
 expense                 |  |                                        | 8,404  |         |   | 7,115         |   |              | 6,628  |   |   | 6,080   |  
|Net interest
 income              |  |                                        | 7,203  |         |   | 7,187         |   |              | 7,319  |   |   | 7,340   |  
|Provision
 for loan losses        |  |                                        | 300    |         |   | 861           |   |              | 3,200  |   |   | 13,600  |  
|Net interest
 income after PLL    |  |                                        | 6,903  |         |   | 6,326         |   |              | 4,119  |   |   | (6,260  | )
|Non-interest
 income              |  |                                        | 2,315  |         |   | 2,199         |   |              | 2,102  |   |   | 2,641   |  
|Non-interest
 expense             |  |                                        | 7,842  |         |   | 9,014         |   |              | 8,712  |   |   | 12,454  |  
|Income
 before income tax expense |  |                                        | 1,376  |         |   | (489          | ) |              | (2,491 | ) |   | (16,073 | )
|Provision
 for income tax         |  |                                        | 211    |         |   | (584          | ) |              | (1,317 | ) |   | (6,170  | )
|Net income                        |  | $                                      | 1,165  |         | $ | 95            |   | $            | (1,174 | ) | $ | (9,903  | )
|                                  |  |                                        |        |         |   |               |   |              |        |   |   |         |  
|Basic
 earnings per share         |  | $                                      | 0.15   |         | $ | 0.01          |   | $            | (0.15  | ) | $ | (1.25   | )
|Diluted
 earnings per share       |  | $                                      | 0.15   |         | $ | 0.01          |   | $            | (0.15  | ) | $ | (1.25   | )

Recent Accounting Pronouncements

See Note 1 to the Notes to Consolidated Financial Statements titled
Effects of Newly Issued But Not Yet Effective Accounting Standards for
additional detail.

42

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Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK.

Interest Rate Sensitivity Management

Our business and the composition of our consolidated balance sheet
consist of investments in interest-earning assets (including loans and
securities) which are primarily funded by interest-bearing liabilities
(deposits and borrowings). We maintain all of our financial instruments for non-trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. Our operating income and net income
depends, to a substantial extent, on rate spread (i.e., the differences
between the income we receive from loans, securities, and other earning assets
and the interest expense we pay to obtain deposits and other liabilities).
These rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and the policies of various governmental
and regulatory authorities.

We measure our overall interest rate sensitivity through a net interest
income analysis. The net interest income analysis measures the changes in net
interest income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of changes in net interest income in the event of an
immediate and sustained 100 and 200 bps increases in market interest rates or a
100 and 200 bps decrease in market rates. The interest rates scenarios are used
for analytical purposes and do not necessarily represent managements view of
future market movements. The tables below present our projected changes in net
interest income for 2010 based on financial data at December 31, 2009, for the
various rate shock levels indicated.

Table 19: Net Interest Income Sensitivity
Analysis

|                                                           |  |                         |        |                                                |  |                                                |     |   |  |      |    | 
|---------------------------------------------------------- |  | ----------------------- | ------ | ---------------------------------------------- |  | ---------------------------------------------- | --- | - |  | ---- | -- | 
|Potential
 impact on 2010 consolidated net interest income |  | Net
 Interest Income    |       
|                                                           |  | Amount                  |        | Potential
 Change in Net 
 Interest Income ($) |  | Potential
 Change in Net 
 Interest Income (%) |    
|                                                           |  | (Dollars
 in thousands) |       
|+ 200 bps                                                  |  | $                       | 29,388 |                                                |  | $                                              | 398 |   |  | 1.4  | %  | 
|+ 100 bps                                                  |  | $                       | 29,453 |                                                |  | $                                              | 463 |   |  | 1.6  | %  | 
|Base                                                       |  | $                       | 28,990 |                                                |  |                                                |    |   |  |     |    | 
|- 100 bps                                                  |  | $                       | 29,132 |                                                |  | $                                              | 142 |   |  | 0.5  | %  | 
|- 200 bps                                                  |  | $                       | 28,110 |                                                |  | ($                                             | 878 | ) |  | (3.0 | %) | 

Note: The table above may not be indicative of future results.

In order to limit exposure to interest rate risk, we have developed
strategies to manage our liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The origination of floating rate loans such as
business, construction and other prime or LIBOR-based loans is emphasized. The
majority of fixed rate loans have re-pricing periods less than five years. The
mix of floating and fixed rate assets is designed to mitigate the impact of
rate changes on our net interest income. Virtually all fixed rate residential
mortgage loans with maturities greater than five years are sold into the
secondary market.

There can be no assurance that the results of operations would be
impacted as indicated in the above table if interest rates did move by the
amounts discussed above. Management continually reviews its interest risk
position through its Asset/Liability Management Committee. Managements
philosophy is to maintain relatively matched rate sensitive asset and liability
positions within the range described above in order to provide earnings
stability in the event of significant interest rate changes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and notes to related statements
thereto are set forth on the following pages.

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REPORT BY BAYLAKE CORP.S MANAGEMENT 
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining an
effective system of internal control over financial reporting, as such term is
defined in Exchange Act 13a-15(f). The Companys system of internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. There are inherent limitations in the effectiveness of
any system of internal control over financial reporting, including the
possibility of human error and circumvention or overriding of controls.
Accordingly, even an effective system of internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation. Projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.

Management assessed the Companys systems of internal control over
financial reporting as of December 31, 2009. This assessment was based on
criteria for effective internal control over financial reporting described in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that as of December 31, 2009, the Company maintained
effective internal control over financial reporting based on those criteria.

The Companys independent registered public accountants have issued an
audit report on the effectiveness of the Companys internal control over
financial reporting.

BAYLAKE CORP.
March 15, 2010

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of
Directors and Shareholders
Baylake Corp.
Sturgeon Bay, Wisconsin

We have audited the accompanying consolidated balance sheets of Baylake
Corp. (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders equity and cash
flows for the years then ended. We also have
audited the Companys internal control over financial reporting as of December
31, 2009, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting in
the accompanying Report by Baylake Corp.s Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the Companys internal
control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained
in all material respects. Our audit of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall consolidated financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Baylake Corp. as of December 31, 2009 and 2008, and the results
of its operations, changes in stockholders equity and its cash flows for  the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in COSO.

/s/ Baker Tilly Virchow Krause, LLPBaker Tilly Virchow Krause, LLP

Milwaukee, Wisconsin
March 15, 2010

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of Directors and Shareholders
Baylake Corp.
Sturgeon Bay, Wisconsin

We have audited the accompanying consolidated statement of operations, changes in stockholders
equity and cash flows for the year ended December 31, 2007 of Baylake Corp.  These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the results of its operations and cash flows for the year ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance for
uncertainty in income taxes and mortgage servicing assets.

Crowe Horwath LLP

Oak Brook, Illinois
March 29, 2008

46

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|                                                    
|----------------------------------------------------
|BAYLAKE CORP.                                       
|CONSOLIDATED BALANCE SHEETS                         
|December 31, 2009 and 2008                          
|(Dollar amounts in thousands, except per share data)
|                                                    
|                                                    

|                                                                                                                                              |  |      |           |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                                                              |  | 2009 |           | 2008 |  
|ASSETS                                                                                                                                        |  |      |           |      |   |           |  
|Cash and due from financial institutions                                                                                                      |  | $    | 86,442    |      | $ | 23,085    |  
|Federal funds sold                                                                                                                            |  |      | 84        |      |   | 397       |  
|Securities available for sale                                                                                                                 |  |      | 204,834   |      |   | 225,417   |  
|Loans held for sale                                                                                                                           |  |      | 2,567     |      |   | 368       |  
|Loans, net of allowance of $9,600 and
 $13,561                                                                                                |  |      | 642,294   |      |   | 715,161   |  
|Cash value of life insurance                                                                                                                  |  |      | 24,062    |      |   | 23,435    |  
|Premises and equipment, net                                                                                                                   |  |      | 23,523    |      |   | 24,451    |  
|Federal Home Loan Bank stock                                                                                                                  |  |      | 6,792     |      |   | 6,792     |  
|Foreclosed properties, net                                                                                                                    |  |      | 14,995    |      |   | 7,143     |  
|Goodwill                                                                                                                                      |  |      | 6,108     |      |   | 6,108     |  
|Deferred income taxes                                                                                                                         |  |      | 8,856     |      |   | 13,501    |  
|Accrued interest receivable                                                                                                                   |  |      | 3,376     |      |   | 3,968     |  
|Other assets                                                                                                                                  |  |      | 20,524    |      |   | 13,087    |  
|                                                                                                                                              |  |      |           |      |   |           |  
|Total assets                                                                                                                                  |  | $    | 1,044,457 |      | $ | 1,062,913 |  
|                                                                                                                                              |  |      |           |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                          |  |      |           |      |   |           |  
|Deposits                                                                                                                                      |  |      |           |      |   |           |  
|Non-interest-bearing                                                                                                                          |  | $    | 81,336    |      | $ | 73,537    |  
|Interest-bearing                                                                                                                              |  |      | 750,293   |      |   | 776,221   |  
|Total deposits                                                                                                                                |  |      | 831,629   |      |   | 849,758   |  
|                                                                                                                                              |  |      |           |      |   |           |  
|Federal Home Loan Bank advances                                                                                                               |  |      | 85,000    |      |   | 85,095    |  
|Federal funds purchased and repurchase
 agreements                                                                                            |  |      | 21,122    |      |   | 30,174    |  
|Subordinated debentures                                                                                                                       |  |      | 16,100    |      |   | 16,100    |  
|Convertible promissory notes                                                                                                                  |  |      | 5,350     |      |   |          |  
|Accrued expenses and other liabilities                                                                                                        |  |      | 10,658    |      |   | 12,832    |  
|Total liabilities                                                                                                                             |  |      | 969,859   |      |   | 993,959   |  
|                                                                                                                                              |  |      |           |      |   |           |  
|Commitments and Contingencies (Note 15)                                                                                                       |  |      |           |      |   |           |  
|Common stock, $5 par value, authorized
 50,000,000; issued-8,132,552 shares in 2009 and 2008, outstanding-7,911,539
 shares in 2009 and 2008. |  |      | 40,662    |      |   | 40,662    |  
|Additional paid-in capital                                                                                                                    |  |      | 11,979    |      |   | 11,977    |  
|Retained earnings                                                                                                                             |  |      | 25,828    |      |   | 21,499    |  
|Treasury stock (221,013 shares in 2009 and
 2008)                                                                                             |  |      | (3,549    | )    |   | (3,549    | )
|Accumulated other comprehensive loss                                                                                                          |  |      | (322      | )    |   | (1,635    | )
|Total stockholders equity                                                                                                                    |  |      | 74,598    |      |   | 68,954    |  
|                                                                                                                                              |  |      |           |      |   |           |  
|Total liabilities and stockholders equity                                                                                                    |  | $    | 1,044,457 |      | $ | 1,062,913 |  

See accompanying notes to the consolidated
financial statements.

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|                                                    
|----------------------------------------------------
|BAYLAKE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS 
|Years ended December 31, 2009, 2008, and 2007       
|(Dollar amounts in thousands, except per share data)
|                                                    
|                                                    

|                                                                     |  |      |        |      |   |         |   |   |        |  
|-------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | - | - | ------ | -
|                                                                     |  | 2009 |        | 2008 |   | 2007    |  
|Interest and dividend income                                         |  |      |        |      |   |         |   |   |        |  
|Loans, including fees                                                |  | $    | 38,698 |      | $ | 46,304  |   | $ | 60,727 |  
|Taxable securities                                                   |  |      | 7,020  |      |   | 8,523   |   |   | 6,495  |  
|Tax exempt securities                                                |  |      | 1,635  |      |   | 2,223   |   |   | 2,128  |  
|Federal funds sold and other                                         |  |      | 115    |      |   | 226     |   |   | 318    |  
|Total interest and dividend income                                   |  |      | 47,468 |      |   | 57,276  |   |   | 69,668 |  
|Interest expense                                                     |  |      |        |      |   |         |   |   |        |  
|Deposits                                                             |  |      | 15,292 |      |   | 23,861  |   |   | 31,930 |  
|Federal funds purchased and repurchase
 agreements                   |  |      | 166    |      |   | 781     |   |   | 884    |  
|Federal Home Loan Bank advances and other
 debt                      |  |      | 2,272  |      |   | 2,791   |   |   | 4,850  |  
|Subordinated debentures                                              |  |      | 365    |      |   | 794     |   |   | 1,089  |  
|Convertible promissory notes                                         |  |      | 164    |      |   |        |   |   |       |  
|Total interest expense                                               |  |      | 18,259 |      |   | 28,227  |   |   | 38,753 |  
|                                                                     |  |      |        |      |   |         |   |   |        |  
|Net interest income                                                  |  |      | 29,209 |      |   | 29,049  |   |   | 30,915 |  
|                                                                     |  |      |        |      |   |         |   |   |        |  
|Provision for loan losses                                            |  |      | 6,500  |      |   | 17,961  |   |   | 9,761  |  
|                                                                     |  |      |        |      |   |         |   |   |        |  
|Net interest income after provision for loan losses                  |  |      | 22,709 |      |   | 11,088  |   |   | 21,154 |  
|Non-interest income                                                  |  |      |        |      |   |         |   |   |        |  
|Fees from fiduciary activities                                       |  |      | 634    |      |   | 756     |   |   | 956    |  
|Fees from loan servicing                                             |  |      | 720    |      |   | 720     |   |   | 1,019  |  
|Deposits, fees, and charges                                          |  |      | 5,171  |      |   | 5,673   |   |   | 5,253  |  
|Gains from sales of loans                                            |  |      | 988    |      |   | 325     |   |   | 630    |  
|Net decrease in valuation of mortgage
 servicing rights              |  |      | (359   | )    |   | (535    | ) |   | (595   | )
|Net gains from sale of securities                                    |  |      | 4,163  |      |   | 765     |   |   | 352    |  
|Net gains (losses) from sale and disposal
 of premises and equipment |  |      | 2      |      |   | 39      |   |   | (7     | )
|Net change in cash surrender value of life
 insurance                |  |      | 627    |      |   | 31      |   |   | 863    |  
|Income in equity of UFS subsidiary                                   |  |      | 462    |      |   | 830     |   |   | 556    |  
|Other income                                                         |  |      | 77     |      |   | 653     |   |   | 147    |  
|Total non-interest income                                            |  |      | 12,485 |      |   | 9,257   |   |   | 9,174  |  
|Non-interest expenses                                                |  |      |        |      |   |         |   |   |        |  
|Salaries and employee benefits                                       |  |      | 16,151 |      |   | 16,353  |   |   | 18,662 |  
|Occupancy expense                                                    |  |      | 2,452  |      |   | 2,471   |   |   | 2,456  |  
|Equipment expense                                                    |  |      | 1,396  |      |   | 1,372   |   |   | 1,517  |  
|Data processing and courier                                          |  |      | 962    |      |   | 1,210   |   |   | 1,299  |  
|FDIC insurance expense                                               |  |      | 2,334  |      |   | 902     |   |   | 504    |  
|Operation of other real estate                                       |  |      | 1,177  |      |   | 4,194   |   |   | 1,134  |  
|Provision for impairment of standby letters
 of credit               |  |      | 20     |      |   | 2,539   |   |   |       |  
|Other than temporary impairment of
 securities                       |  |      |       |      |   | 1,900   |   |   |       |  
|Loan and collection expense                                          |  |      | 659    |      |   | 1,185   |   |   | 1,006  |  
|Other outside services                                               |  |      | 703    |      |   | 988     |   |   | 1,104  |  
|Other operating expenses                                             |  |      | 4,124  |      |   | 5,810   |   |   | 5,400  |  
|Total non-interest expenses                                          |  |      | 29,978 |      |   | 38,022  |   |   | 32,578 |  
|Income (loss) before provision for income taxes                      |  |      | 5,216  |      |   | (17,677 | ) |   | (2,250 | )
|Provision for (benefit from) income taxes                            |  |      | 887    |      |   | (7,860  | ) |   | (2,416 | )
|                                                                     |  |      |        |      |   |         |   |   |        |  
|Net income (loss)                                                    |  | $    | 4,329  |      | $ | (9,817  | ) | $ | 166    |  
|                                                                     |  |      |        |      |   |         |   |   |        |  
|Basic earnings (loss) per common share                               |  | $    | 0.55   |      | $ | (1.24   | ) | $ | 0.02   |  
|Diluted earnings (loss) per common share                             |  | $    | 0.55   |      | $ | (1.24   | ) | $ | 0.02   |  

See accompanying notes to the consolidated
financial statements.

48

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|                                                          
|----------------------------------------------------------
|BAYLAKE CORP.                                             
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|Years ended December 31, 2009, 2008, and 2007             
|(Dollar amounts in thousands, except per share data)      
|                                                          
|                                                          

|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---------------------------- | - | ------------------ |  | --------------- | ------ | ------------------------------------------------ | - | ------------- | - | - | ------ | - | - | ------ | - | - | ------- | -
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        | Accumulated
 Other
 Comprehensive
 Income (loss) |   | Total
 Equity |  
|                                                                                                  |  |              |           | Additional
 Paid-in
 Capital |   | Retained
 Earnings |  | Treasury
 Stock |        |                                                  |  
|                                                                                                  |  | Common Stock |           |                              |   |                    |  |                
|                                                                                                  |  | Shares       |           | Amount                       |   |                    |  |                 |        |                                                 
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Balance,
 January 1, 2007                                                                         |  |              | 7,830,141 |                              | $ | 39,611             |  | $               | 10,403 |                                                  | $ | 35,134        |   | $ | (1,726 | ) | $ | (1,229 | ) | $ | 82,193  |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Net income for the year                                                                           |  |              |          |                              |   |                   |  |                 |       |                                                  |   | 166           |   |   |       |   |   |       |   |   | 166     |  
|Net changes in unrealized gain on securities available for sale, net
 of ($723) deferred taxes    |  |              |          |                              |   |                   |  |                 |       |                                                  |   |              |   |   |       |   |   | 1,314  |   |   | 1,314   |  
|Total comprehensive income                                                                        |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   | 1,480   |  
|Stock compensation expense recognized, net of $8 deferred taxes                                   |  |              |          |                              |   |                   |  |                 | 21     |                                                  |   |              |   |   |       |   |   |       |   |   | 21      |  
|Stock options exercised                                                                           |  |              | 110,005   |                              |   | 551                |  |                 | 634    |                                                  |   |              |   |   |       |   |   |       |   |   | 1,185   |  
|UFS stock options exercised                                                                       |  |              |          |                              |   |                   |  |                 |       |                                                  |   | (50           | ) |   |       |   |   |       |   |   | (50     | )
|Common stock issued under dividend reinvestment plan                                              |  |              | 78,814    |                              |   | 373                |  |                 | 723    |                                                  |   |              |   |   |       |   |   |       |   |   | 1,096   |  
|Treasury stock repurchases                                                                        |  |              | (129,000  | )                            |   |                   |  |                 |       |                                                  |   |               |   |   | (1,823 | ) |   |       |   |   | (1,823  | )
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Tax benefit from exercise of stock options                                                        |  |              |          |                              |   |                   |  |                 | 94     |                                                  |   |              |   |   |       |   |   |       |   |   | 94      |  
|Cumulative effect adjustments                                                                     |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Adjustment for adoption of new accounting guidance for uncertainty in income taxes                |  |              |          |                              |   |                   |  |                 |       |                                                  |   | 980           |   |   |       |   |   |       |   |   | 980     |  
|Adjustment for
 adoption of new accounting guidance for mortgage servicing assets, net of $74 tax |  |              |           |                              |   |                    |  |                 |        |                                                  |   | 117           |   |   |        |   |   |        |   |   | 117     |  
|Cash dividends declared ($.64 per share)                                                          |  |              |          |                              |   |                   |  |                 |       |                                                  |   | (5,031        | ) |   |       |   |   |       |   |   | (5,031  | )
|                                                                                                 
|Balance,
 December 31, 2007                                                                       |  |              | 7,885,960 |                              |   | 40,535             |  |                 | 11,875 |                                                  |   | 31,316        |   |   | (3,549 | ) |   | 85     |   | $ | 80,262  |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Net loss for the year                                                                             |  |              |          |                              |   |                   |  |                 |       |                                                  |   | (9,817        | ) |   |       |   |   |       |   |   | (9,817  | )
|Net changes in unrealized gain on securities available for sale, net
 of ($1,237) deferred taxes  |  |              |          |                              |   |                   |  |                 |       |                                                  |   |              |   |   |       |   |   | (4,092 | ) |   | (4,092  | )
|Reclassification adjustment for net gains realized in income                                      |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   | (765   | ) |   | (765    | )
|Reclassification adjustment for other than temporary impairment
 realized in income               |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   | 1,900  |   |   | 1,900   |  
|Tax effect                                                                                        |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   | 1,237  |   |   | 1,237   |  
|Total comprehensive loss                                                                          |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   | (11,537 | )
|Stock compensation expense recognized, net of $8 deferred taxes                                   |  |              |          |                              |   |                   |  |                 | (36    | )                                                |   |              |   |   |       |   |   |       |   |   | (36     | )
|Common stock issued under Dividend Reinvestment Plan                                              |  |              | 25,579    |                              |   | 127                |  |                 | 138    |                                                  |   |              |   |   |       |   |   |       |   |   | 265     |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Balance,
 December 31, 2008                                                                       |  |              | 7,911,539 |                              | $ | 40,662             |  | $               | 11,977 |                                                  | $ | 21,499        |   | $ | (3,549 | ) | $ | (1,635 | ) | $ | 68,954  |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Net income for the year                                                                           |  |              |          |                              |   |                   |  |                 |       |                                                  |   | 4,329         |   |   |       |   |   |       |   |   | 4,329   |  
|Changes in unrealized loss on securities available for sale                                       |  |              |          |                              |   |                   |  |                 |       |                                                  |   |              |   |   |       |   |   | 6,359  |   |   | 6,359   |  
|Reclassification adjustment for net gains realized in income                                      |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   | (4,163 | ) |   | (4,163  | )
|Tax effect                                                                                        |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   | (883   | ) |   | (883    | )
|                                                                                                 
|Total comprehensive loss                                                                          |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   | 5,642   |  
|Stock compensation expense recognized, net of deferred tax                                        |  |              |          |                              |   |                   |  |                 | 2      |                                                  |   |              |   |   |       |   |   |       |   |   | 2       |  
|                                                                                                  |  |              |           |                              |   |                    |  |                 |        |                                                  |   |               |   |   |        |   |   |        |   |   |         |  
|Balance,
 December 31, 2009                                                                       |  |              | 7,911,539 |                              | $ | 40,662             |  | $               | 11,979 |                                                  | $ | 25,828        |   | $ | (3,549 | ) | $ | (322   | ) | $ | 74,598  |  

See accompanying notes to the consolidated
financial statements.

49

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|                                             
|---------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|Years ended December 31, 2009, 2008, and 2007
|(Dollar amounts in thousands)                
|                                             
|                                             

|                                                                                          |  |      |          |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | ------- | - | - | ------- | -
|                                                                                          |  | 2009 |          | 2008 |   | 2007    |  
|Cash flows from operating activities:                                                     |  |      |          |      |   |         |   |   |         |  
|Reconciliation of net income (loss) to net
 cash provided by operating activities:        |  |      |          |      |   |         |   |   |         |  
|Net income (loss)                                                                         |  | $    | 4,329    |      | $ | (9,817  | ) | $ | 166     |  
|Adjustments to reconcile net income (loss)
 to net cash provided to operating activities: |  |      |          |      |   |         |   |   |         |  
|Depreciation and amortization                                                             |  |      | 1,391    |      |   | 1,394   |   |   | 1,534   |  
|Amortization of debt issuance costs                                                       |  |      | 12       |      |   |        |   |   |        |  
|Amortization of core deposit intangible                                                   |  |      | 52       |      |   | 52      |   |   | 52      |  
|Provision for losses on loans                                                             |  |      | 6,500    |      |   | 17,961  |   |   | 9,761   |  
|Provision for impairment of letters of
 credit                                            |  |      | 20       |      |   | 2,539   |   |   |        |  
|Other than temporary impairment of
 securities                                            |  |      |         |      |   | 1,900   |   |   |        |  
|Net amortization of premium/discount on
 securities                                       |  |      | 1,374    |      |   | (124    | ) |   | 112     |  
|Net increase in cash surrender value of life
 insurance                                   |  |      | (627     | )    |   | (31     | ) |   | (863    | )
|Net realized gain on sale of securities                                                   |  |      | (4,163   | )    |   | (765    | ) |   | (352    | )
|Net gain on sale of loans                                                                 |  |      | (988     | )    |   | (325    | ) |   | (630    | )
|Proceeds from sale of loans held for sale                                                 |  |      | 84,188   |      |   | 24,737  |   |   | 42,976  |  
|Origination of loans held for sale                                                        |  |      | (85,507  | )    |   | (24,068 | ) |   | (42,198 | )
|Net decrease in valuation of mortgage
 servicing rights                                   |  |      | 359      |      |   | 535     |   |   | 595     |  
|Provision for valuation allowance on
 foreclosed properties                               |  |      | 678      |      |   | 3,610   |   |   | 133     |  
|Net (gain) loss from sale and disposal of
 premises and equipment                         |  |      | (2       | )    |   | (39     | ) |   | 7       |  
|Net (gain) loss from disposal of foreclosed
 properties                                   |  |      | (108     | )    |   | 119     |   |   | 232     |  
|Provision (benefit) from deferred tax
 expense                                            |  |      | 3,760    |      |   | (5,926  | ) |   | (2,205  | )
|Stock option compensation expense
 recognized                                             |  |      | 2        |      |   | (44     | ) |   | 21      |  
|Income in equity of UFS subsidiary                                                        |  |      | (462     | )    |   | (830    | ) |   | (556    | )
|Tax benefit (expense) from
 exercise/forfeiture of stock options                          |  |      |         |      |   | 8       |   |   | (94     | )
|Prepaid FDIC assessment                                                                   |  |      | (6,658   | )    |   |        |   |   |        |  
|Changes in assets and liabilities:                                                        |  |      |          |      |   |         |   |   |         |  
|Accrued interest receivable and other
 assets                                             |  |      | (615     | )    |   | (1,199  | ) |   | (454    | )
|Accrued expenses and other liabilities                                                    |  |      | (2,194   | )    |   | (2,168  | ) |   | (1,048  | )
|Net cash provided by operating activities                                                 |  |      | 1,341    |      |   | 7,519   |   |   | 7,189   |  
|                                                                                          |  |      |          |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                     |  |      |          |      |   |         |   |   |         |  
|Proceeds from sale of securities
 available-for-sale                                      |  |      | 206,529  |      |   | 56,089  |   |   | 34,479  |  
|Principal payments on securities
 available-for-sale                                      |  |      | 113,714  |      |   | 28,760  |   |   | 26,454  |  
|Purchase of securities available-for-sale                                                 |  |      | (294,675 | )    |   | (91,759 | ) |   | (92,816 | )
|Proceeds from sale of foreclosed properties                                               |  |      | 3,775    |      |   | 2,623   |   |   | 6,160   |  
|Proceeds from sale of premises and
 equipment                                             |  |      | 14       |      |   | 97      |   |   |        |  
|Loan originations and payments, net                                                       |  |      | 54,171   |      |   | 6,920   |   |   | 47,447  |  
|Additions to premises and equipment                                                       |  |      | (475     | )    |   | (639    | ) |   | (406    | )
|Proceeds from life insurance death benefit                                                |  |      |          |      |   |        |   |   | 2,431   |  
|Net change in federal funds sold                                                          |  |      | 313      |      |   | (397    | ) |   |        |  
|Investment in bank-owned life insurance                                                   |  |      |         |      |   |        |   |   | (732    | )
|Dividend from UFS subsidiary                                                              |  |      | 750      |      |   |        |   |   |        |  
|Net cash provided by investing activities                                                 |  |      | 84,116   |      |   | 1,694   |   |   | 23,017  |  

See accompanying notes to the consolidated
financial statements.

50

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Table of Contents

|                                             
|---------------------------------------------
|BAYLAKE CORP.                                
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|Years ended December 31, 2009, 2008, and 2007
|(Dollar amounts in thousands)                
|                                             
|                                             

|                                                                 |  |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                 |  | 2009 |         | 2008 |   | 2007    |  
|Cash flows from financing activities:                            |  |      |         |      |   |         |   |   |         |  
|Net change in deposits                                           |  | $    | (18,129 | )    | $ | (34,427 | ) | $ | 5,274   |  
|Net change in federal funds purchased and repurchase
 agreements |  |      | (9,052  | )    |   | 3,000   |   |   | 22,694  |  
|Proceeds from Federal Home Loan Bank
 advances                   |  |      | 20,000  |      |   | 85,000  |   |   | 50,000  |  
|Repayments on Federal Home Loan Bank
 advances                   |  |      | (20,095 | )    |   | (85,077 | ) |   | (80,007 | )
|Proceeds from issuance of convertible
 promissory notes          |  |      | 5,350   |      |   |        |   |   |        |  
|Debit issuance costs                                             |  |      | (174    | )    |   |        |   |   |        |  
|Proceeds from exercise of stock options                          |  |      |        |      |   |        |   |   | 1,184   |  
|Tax benefit (expense) from
 exercise/forfeiture of options       |  |      |        |      |   | (8      | ) |   | 94      |  
|Treasury stock repurchases                                       |  |      |        |      |   |        |   |   | (1,823  | )
|Dividend reinvestment plan                                       |  |      |        |      |   | 265     |   |   | 1,096   |  
|Cash dividends paid                                              |  |      |        |      |   | (1,262  | ) |   | (5,022  | )
|Net cash provided by (used in) financing
 activities             |  |      | (22,100 | )    |   | (32,509 | ) |   | (6,510  | )
|                                                                 |  |      |         |      |   |         |   |   |         |  
|Net change in cash and cash equivalents                          |  |      | 63,357  |      |   | (23,296 | ) |   | 23,696  |  
|                                                                 |  |      |         |      |   |         |   |   |         |  
|Beginning cash and cash equivalents                              |  |      | 23,085  |      |   | 46,381  |   |   | 22,685  |  
|                                                                 |  |      |         |      |   |         |   |   |         |  
|Ending cash and cash equivalents                                 |  | $    | 86,442  |      | $ | 23,085  |   | $ | 46,381  |  
|                                                                 |  |      |         |      |   |         |   |   |         |  
|Supplemental cash flow information:                              |  |      |         |      |   |         |   |   |         |  
|Interest paid                                                    |  | $    | 15,268  |      | $ | 30,119  |   | $ | 38,511  |  
|Income taxes paid                                                |  |      |        |      |   | 47      |   |   | 1,589   |  
|                                                                 |  |      |         |      |   |         |   |   |         |  
|Supplemental noncash disclosures:                                |  |      |         |      |   |         |   |   |         |  
|Transfers from loans to foreclosed
 properties                   |  | $    | 12,196  |      | $ | 8,328   |   | $ | 5,932   |  
|Mortgage servicing rights resulting from
 sale of loans          |  |      | 108     |      |   | 29      |   |   | 116     |  
|Transfer of premises to premises held for
 sale                  |  |      |        |      |   | 1,357   |   |   |        |  

See accompanying notes to the consolidated
financial statements.

51

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1 - NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Baylake Corp. (the Company)
include the accounts of the Company, its wholly owned subsidiary Baylake Bank,
(the Bank), and the Banks wholly owned subsidiaries: Baylake Investments,
Inc., Baylake Insurance Agency, Inc., and Baylake City Center LLC. All
significant intercompany items and transactions have been eliminated.

The Bank owns a 49.8% interest (500 shares) in United Financial
Services, Inc., (UFS) a data processing service. In addition to the ownership
interest, UFS and the Company have a common member on each respective Board of
Directors. The investment in this entity is carried under the equity method of
accounting and the pro rata share of its income is included in other income. On
June 27, 2006, UFS amended an earlier agreement for employment with a key
employee of UFS allowing that individual the option to purchase up to 20%, or
240 shares, of the authorized shares of UFS. The option price is $1,000 per
share less dividends or distributions to owners, or $843 as of December 31, 2009. The current book value of UFS
is approximately $8,168 per share as of December 31, 2009. During 2007, options for 120 shares were exercised
by the key employee. The exercise of all or a portion of the remaining options
will have the effect of reducing the Companys share of the future earnings and
will not be a material impact to the carrying value of the asset on Baylake
Banks consolidated balance sheet. Income in equity of UFS recognized by the Company was $462,
$830, and $556 for the years ended 2009, 2008, and 2007, respectively. Amounts
paid to UFS for data processing services by Baylake Bank were $1,020, $1,196,
and $1,210 in 2009, 2008, and 2007, respectively.

Baylake Bank makes commercial, mortgage, and installment loans to
customers substantially all of whom are located in Door, Brown, Kewaunee,
Manitowoc, Waushara, Outagamie, Green Lake, and Waupaca Counties of Wisconsin.
Although Baylake Bank has a diversified portfolio, a substantial portion of its
debtors ability to honor their contracts is dependent upon the economic
condition of the local tourism/recreation businesses, as well as the
industrial, commercial and agricultural industries.

Use of Estimates: To prepare financial
statements in conformity with U.S. generally accepted accounting principles,
management makes estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported in the consolidated
financial statements and the disclosures provided, and actual results could
differ. The allowance for loan losses, provision for letter of credit
impairment loss, foreclosed assets, other than temporary impairment of
securities, income tax expense, and fair values of financial instruments are
particularly subject to change.

Cash Flows: Cash and cash equivalents include
cash and deposits with other financial institutions. Net cash flows are
reported for customer loan and deposit transactions, and federal funds
purchased and repurchase agreements.

Securities: Debt securities are classified as
available for sale when they might be sold before maturity. Equity securities
with readily determinable fair values are classified as available for sale. Securities
available for sale are carried at fair value, with unrealized holding gains and
losses and losses deemed other-than-temporarily impaired due to non-credit
issues are reported in other comprehensive income, net of tax. Unrealized
losses deemed other-than-temporarily impaired due to credit issues are reported
in operations. Interest income includes amortization of purchase premium or
accretion of purchase discount. Premiums and discounts on securities are
amortized on the level-yield method without anticipating prepayments. Gains and
losses on sales are recorded on the trade date and determined using the
specific identification method.

|  
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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1  NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Declines in the fair value of securities below their cost that are
other than temporary due to credit issues are reflected as Other than temporary
impairment of securities in the statement of operations. In estimating
other-than-temporary losses, management considers: (1) the length of time and
extent that fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the Companys ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value. The difference between the present values of the cash flows
expected to be collected and the amortized cost basis is the credit loss. The
credit loss is the portion of the other-than-temporary impairment that is
recognized in earnings and is a reduction to the cost basis of the security.
The portion of other-than-temporary impairment related to all other factors is
included in other comprehensive income (loss).

Federal Home Loan Bank (FHLB) stock: The Bank
is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in additional
amounts. FHLB stock is carried at cost, classified as a restricted security,
and periodically evaluated for impairment based on ultimate recovery of par
value. The determination of whether a decline affects the ultimate recovery is
influenced by criteria such as: 1) the significance of the decline in net
assets of the FHLB as compared to the capital stock amount and length of time a
decline has persisted; 2) impact of legislative and regulatory changes on the
FHLB and 3) the liquidity position of the FHLB. Both cash and stock dividends
are reported as income.

The Corporation reviewed recent SEC filings for FHLB operating
performance, including its SEC Form 10-Q as of September 30, 2009 (and as
amended February 16, 2010), as well as its 8-K filed on February 22, 2010
relating to its expected 2009 operating results. Based on the results of the
review, no impairment has been recorded on these securities.

Loans Held for Sale: Mortgage loans originated
and intended for sale in the secondary market are carried at the lower of
aggregate cost or market, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings.

Mortgage loans held for sale may be sold with servicing rights
retained. The carrying value of mortgage loans sold is reduced by the amount
allocated to the servicing right at the time of sale. Gains and losses on sales
of mortgage loans are based on the difference between the selling price and the
carrying value of the related loan sold.

Loans: Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, net of unearned interest,
deferred loan fees and costs, and an allowance for loan losses. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized in interest
income using the level-yield method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent. Past due status is based on the
contractual terms of the loan. In all cases, loans are placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is
considered doubtful.

All interest accrued but not received for loans placed on non-accrual
is reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.

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|53

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Allowance for Loan Losses: The allowance for
loan losses is a valuation allowance for probable and inherent credit losses.
Loan losses are charged against the allowance when management believes the
non-collectability of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. The allowance
consists of specific and general components. The specific component relates to
loans that are individually classified as impaired. The general component
covers non-impaired loans and is based on historical loss experience adjusted
for certain qualitative factors. The entire allowance is available for any loan
that, in managements judgment, should be charged-off.

A loan is impaired when full payment under the loan terms is not
expected. Commercial and commercial real estate loans are individually
evaluated for impairment. If a loan is impaired, a specific allowance is
established so that the loan is reported, net, at the present value of
estimated future cash flows using the loans existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Large groups
of smaller balance homogeneous loans, such as consumer and residential real
estate loans are collectively evaluated for impairment, and accordingly, they
are not separately identified for impairment disclosures.

Mortgage Servicing Rights: Mortgage servicing
rights are recognized separately when they are acquired through sales of loans
with servicing retained. For sales of loans prior to January 1, 2007, a
portion of the cost of the loan was allocated to the mortgage servicing right
based on relative fair values. For sales of loans beginning in 2007, the Company adopted new accounting guidance whereby mortgage servicing rights are
initially recorded at fair value with the offsetting effect recorded as a
reduction to gain/loss on sale of loans.

Prior to January 1, 2007, all mortgage servicing assets were measured
using the amortization method which required servicing rights to be amortized
into non-interest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying loans. Additionally,
prior to January 1, 2007, mortgage servicing assets were evaluated for
impairment based upon the fair value of the rights as compared to carrying
amount. Impairment was determined by stratifying the underlying loans being
serviced into groupings based on predominant risk characteristics, such as
interest rate, loan type and investor type. Impairment was recognized through a
valuation allowance for an individual grouping, to the extent that fair value
was less than the carrying amount. If the Company later determined that all or
a portion of the impairment no longer existed for a particular grouping, a
reduction of the allowance may have been recorded as an increase to income.

Upon adoption of new accounting guidance, the Company elected to measure all classes
of mortgage servicing assets at fair value resulting in a cumulative-effect
adjustment increasing retained earnings by $117 as of January 1, 2007. Under
the fair value measurement method, the Company measures fair value based on
market prices for comparable servicing contracts, when available, or
alternatively, based on a valuation model that calculates the present value of
estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net
servicing income, such as the cost to service, the discount rate, prepayment
speeds and default rates and losses. The Company compares the valuation model
inputs and results to published industry data in order to validate the model
results and assumptions. Changes in fair value are indicated as net change in
valuation of servicing rights on the consolidated statement of operations in
the period in which change occurs. The fair values of mortgage servicing rights
is subject to significant fluctuations as a result of changes in estimated and
actual prepayment speeds and default rates and losses.

Loan servicing fee income, which is reported on the consolidated
statement of operations as fees from loan servicing, is recorded for fees
earned for servicing loans. The fees are based on a contractual percentage of
the outstanding principal; or a fixed amount per loan and are recorded as
income when earned. Loan servicing fees totaled $720, $720 and $1,019 for the
years ended December 31, 2009, 2008 and 2007, respectively. Late fees and
ancillary fees related to loan servicing are not material.

Mortgage servicing rights are carried in other assets on the
consolidated balance sheet and amount to $609 and $860 on loans serviced for
others totaling $78,167 and $93,617 at December 31 2009 and 2008, respectively.
Capitalized servicing rights totaled $108, $29, and $116 during 2009, 2008, and
2007, respectively. The decrease in fair value of servicing rights recognized
in income in 2009, 2008, and 2007 was $359, $535, and $595 respectively.

Bank Owned Life Insurance: The Company has
purchased life insurance policies on certain key executives. Bank owned life
insurance is recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the net cash surrender value.

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|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Transfers of Financial Assets: Transfers of
financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and (3) the
Company does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.

Foreclosed Properties: Assets acquired through
or instead of loan foreclosure are initially recorded at the lower of carrying
cost or fair value, less estimated costs to sell, establishing a new cost
basis. If fair value declines subsequent to foreclosure, a valuation allowance
is recorded through expense. Costs incurred after acquisition are expensed.

Premises, held for sale: Premises held for
sale consist of development property in the Green Bay area and vacant land.
Property held for sale is carried at the lower of cost or fair value.

Premises and Equipment: Land is carried at
cost. Premises and equipment are stated at cost less accumulated depreciation.
Buildings and related components are depreciated using the straight-line method
with useful lives ranging from 5 to 40 years. Furniture, fixtures, and
equipment are depreciated using the straight-line (or accelerated) method with
useful lives ranging from 3 to 12 years.

Goodwill and Other Intangible Assets: Goodwill
results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets.

During 2009, in light of the decline in the trading price of the Companys common stock
relative to the net book value per common share, the Company, with the assistance of a third party valuation firm, determined an
estimated cash fair value of the Companys common stock, consideration was given to the nature and history of the Company, the competitive and
economic outlook for the trade area and for the banking industry in general, the book value and financial condition of the
Company, the future earnings and dividend paying capacity, the size of the block valued, and the prevailing market prices of
bank stocks.  The following valuation methodologies were considered: 1.) net asset value - defined as the net worth of the
Company, 2.) market value - defined as the price at which knowledgeable buyers and sellers would agree, and 3.) investment value -
defined as an estimate of the present value of the future benefits, usually earnings, cash flow, or dividends, that will accrue to the
Companys common stock.  When consideration was given to the three valuation methodologies, as well as all other relevant valuation variables
and factors, the fully-diluted cash fair value range of the Companys common shares was considered to be in excess of the book value and therefore,
management concluded that  goodwill was not impaired.

Other intangible assets consist of core deposit intangible assets
arising from a branch acquisition. They are initially measured at fair value
and then are amortized over their estimated useful lives, determined to be
seven years. The balance of the core deposit intangible, which is included in
other assets in the consolidated balance sheet, was $48 and $99 at December 31,
2009 and 2008, respectively. Scheduled amortization expense related to the core
deposit intangible is $48 for 2010.

Long-Term Assets: Premises and equipment, goodwill, core deposit and other
intangible assets, and other long-term assets are reviewed for impairment when events indicate that their carrying
amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.
Management has determined that such assets have not been impaired as of December 31, 2009 and 2008.

Loan Commitments and Related Financial Instruments:
Financial instruments include off-balance-sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet
customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay.
Such financial instruments are recorded when they are funded. Instruments, such
as standby letters of credit, that are considered financial guarantees in
accordance with ASC 460-10 are recorded at fair value.

Trust Fee Income: The Company provides trust
services to customers and in return charges fees using terms customary in its
industry, including charging fees based on the agreed-upon percentages of
assets managed or as otherwise specified in the underlying agreements. Income
from trust services is recognized when the services are provided as fees from
fiduciary activities in the consolidated statement of operations.

Advertising Expense: The Company expenses all
advertising costs as they are incurred. Total advertising costs for the years
ended December 31, 2009, 2008, and 2007 were $259, $288, and $291,
respectively.

Earnings Per Common Share: Basic earnings per
common share is net income or loss divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
includes the dilutive effect of additional potential common shares issuable
under stock options and convertible promissory notes.

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|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Loss Contingencies: Loss contingencies,
including claims and legal actions arising in the ordinary course of business,
are recorded as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated.

Restrictions on Cash: Cash on hand or on
deposit with the Federal Reserve Bank of $1,568 and $1,704 was required to meet
regulatory reserve and clearing requirements at December 31, 2009 and 2008.
Effective October 1, 2008, these balances began earning interest.

Dividend Reinvestment Plan: The Company
administers a dividend reinvestment plan (DRIP), whereby the Company allocates
applicable dividends to acquire, on the participants behalf, shares of the
Companys common stock. Shares issued in 2009 and 2008 were 0 and 25,579,
respectively.

Operating Segments: While the chief decision
makers monitor the revenue streams of the various products and services, the
identifiable segments are not material and operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the financial
service operations are considered by management to be aggregated in one
reportable operating segment.

Subordinated Debentures: As of December 31,
2009, the Company sponsored one trust, of which 100% of the common equity is
owned by the Company. The trust has issued trust preferred securities to third
party investors and loaned the proceeds to the Company in the form of junior
subordinated notes. The notes held by the trust are the sole assets of that
trust. Distributions on the trust preferred securities of the trust are payable
quarterly at a rate equal to the interest being earned by the trust on the
notes held by the trust.

The trust preferred securities are subject to mandatory redemption upon
repayment of the notes. The Company has entered into agreements which, taken
collectively, fully and unconditionally guarantee the trust preferred
securities subject to the terms of each of the guarantees. The securities are
not subject to a sinking fund requirement. The Company has the right to defer
dividend payments to the trust preferred security holders for up to five years.

The trust is a variable interest entity under U.S. GAAP and is not
consolidated. The Companys investment in the common stock of the trust is
included in the other assets category in the Companys consolidated balance
sheet.

Convertible Promissory Notes (the Convertible Notes): During
2009, the Company issued $5.35 million through a private placement of 10%
Convertible Notes. The Convertible Notes accrue interest at a fixed rate of 10% per annum
upon issuance and until maturity or earlier conversion or redemption. Interest
is payable quarterly, in arrears, on January 1, April 1, July 1, and October 1,
of each year. The Convertible Notes are convertible into shares of the Companys common
stock at a conversion ratio of one share of common stock for each $5.00 in
aggregate principal amount held on the record date of the conversion subject to
certain adjustments as described in the Convertible Notes. Prior to October 1, 2014, each
holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of
the original principal amount into shares of our common stock at the conversion
ratio. On October 1, 2014, one-half of the original principal amounts are
mandatorily convertible at the conversion ratio if conversion has not occurred.
The principal amount of any Convertible Note that has not been converted or redeemed will
be payable at maturity on June 30, 2017.

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|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 1  NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Income Taxes: The Company accounts for income
taxes in accordance with ASC Topic 740, Income Taxes. Under this guidance,
deferred taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates that will apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense in the period that
includes the enactment date. See Note 16 for details on the Companys income
taxes.

The Company adopted new accounting guidance for uncertainty in
income taxes as of January 1, 2007.  A tax position is recognized as a benefit only if it is more
likely than not that the tax position would be sustained in a tax examination, with a tax examination presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than 50% likely being realized on examination.
For tax positions not meeting the more likely than not test, no tax benefit is recorded.

The Company regularly reviews the carrying amount of its deferred tax
assets to determine if the establishment of a valuation allowance is necessary.
If based on the available evidence, it is more likely than not that all or a
portion of the Companys deferred tax assets will not be realized in future periods,
a deferred tax valuation allowance would be established. Consideration is given
to various positive and negative factors that could affect the realization of
the deferred tax assets.

In 2002, the Company purchased Bank Owned Life Insurance (BOLI)
 in two separate instances.  At the time of our purchases, there were uncertainties with respect to the tax treatment
 of these BOLI products in general that served as a basis for establishing a tax liability.  The primary concern revolved
 around the taxability of the income derived from the separate account BOLI product due to issues surrounding the concept of
 investor control and other issues that arose in Corporate-Owned-Life Insurance.  As of January 1, 2007, the Company conducted
 a review of that analysis and concluded that no tax liability was required.  Consequently, the Company recorded a cumulative effect
 adjustment of $980 to increase retained earnings and reduce tax liabilities.  This adjustment included interest but not penalties.

In evaluating this available evidence, management considers, among
other things, historical financial performance, expectation of future earnings,
the ability to carry back losses to recoup taxes previously paid, length of
statutory carry forward periods, experience with operating loss and tax credit
carry forwards not expiring unused, tax planning strategies and timing of
reversals of temporary differences. Significant judgment is required in
assessing future earning trends and the timing of reversals of temporary
differences. The Companys evaluation is based on current tax laws as well as
managements expectations of future performance.

The Company is subject to the income tax laws of the U.S., its states
and municipalities. These tax laws are complex and subject to different
interpretations by the taxpayer and the relevant Governmental taxing
authorities. On January 1, 2008, the Company adopted accounting guidance related to uncertainty in
income taxes. The guidance prescribes a comprehensive model for how companies
should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under
the guidance, tax positions shall initially be recognized in the financial
statements when it is more likely than not the position will be sustained upon
the examination by the tax authorities. Such tax positions shall initially and
subsequently be measured as the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and all relevant facts. The
guidance also revises disclosure requirements to include an annual tabular roll
forward of unrecognized tax benefits. In establishing a provision for income
tax expense, the Company must make judgments and interpretations about the
application of these inherently complex tax laws within the framework of
existing U.S. GAAP.

Reclassifications: Certain items previously reported were reclassified to conform to the
current presentation.

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|BAYLAKE CORP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|December 31, 2009, 2008 and 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(Dollar amounts in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
 POLICIES(Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In November 2007, the Financial Accounting Standards Board (FASB)
 Accounting Codification Statement (ASC) 810-10 Non-controlling Interest in
 Consolidated Financial Statements  an amendment to ASC 860-10 was
 issued. ASC 810-10 changes the way consolidated net earnings are presented.
 The new standard requires consolidated net earnings to be reported at amounts
 attributable to both the parent and the non-controlling interest and will
 require disclosure on the face of the consolidated statement of operations
 amounts attributable to the parent and the non-controlling interest. The
 adoption of this statement will result in more transparent reporting of the
 net earnings attributable to the non-controlling interest. The statement
 establishes a single method of accounting for changes in a parents ownership
 interest in a subsidiary that do not result in deconsolidation. We adopted
 ASC 810-10 effective January 1, 2009. The adoption of this statement had no effect on our consolidated financial condition, results of
 operations or liquidity.                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In February 2008, the FASB issued ASC 860-10 Accounting for Transfers of Financial
 Assets and Repurchase Financing Transactions. ASC 860-10 requires
 the initial transfer of a financial asset and a repurchase financing that was
 entered into contemporaneously with or in contemplation of the initial
 transfer, to be treated as a linked transaction under ASC 860-10, unless
 certain criteria are met, in which case the initial transfer and repurchase
 will not be evaluated as a linked transaction, but will be evaluated
 separately under ASC 860-10. ASC 860-10 was effective for fiscal years
 beginning after November 15, 2008, and interim periods within those fiscal
 years. The adoption of ASC 860-10 had no effect on our
 consolidated financial condition, results of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In March 2008, the FASB issued ASC 815-10 Disclosures About Derivative
 Instruments and Hedging Activities  an amendment of ASC 815-10.
 ASC 815-10 requires entities to provide enhanced qualitative disclosures
 about objectives and strategies with respect to an entitys derivative and
 hedging activities. ASC 815-10 was effective for fiscal years and interim
 periods beginning after November 15, 2008. The adoption of ASC 815-10 had no effect on our consolidated financial condition, results of
 operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In October 2008, the FASB issued ASC 820-10 Determining the Fair
 Value of a Financial Asset When the Market for That Asset Is Not Active.
 ASC 820-10 clarifies the application of ASC 820-10 in an inactive market and
 provides key considerations in determining the fair value of an asset where
 the market is not active. ASC 820-10 was effective immediately upon issuance.
 The adoption of ASC 820-10 did not have a material impact on our consolidated
 financial condition, results of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In December 2008, the FASB issued ASC 860-10 Disclosures by Public Entities
 (Enterprises) about Transfers of Financial Assets and Interest in Variable
 Interest Entities. ASC 860-10 require enhanced disclosures about
 the transfers of financial assets and interests in variable interest
 entities. ASC 860-10 was effective for interim and annual reporting periods
 ending after December 15, 2008. The adoption of ASC 860-10 had no effect on our consolidated financial condition, results of
 operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In April 2009, the FASB issued ASC 320-10 Recognition and Presentation of
 Other-Than-Temporary Impairments. ASC 320-10 amended the
 other-than-temporary guidance to make the guidance more operational and to
 improve the presentation of other-than-temporary impairments in the financial
 statements. ASC 320-10 modifies the current indicator that, to avoid
 considering an impairment to be other-than-temporary, management must assert
 that it has both the intent and ability to hold an impaired security for a
 period of time sufficient to allow for any anticipated recovery in fair
 value. ASC 320-10 would require management to assert that (a) it does not
 have the intent to sell the security and (b) it is more likely than not that
 it will not have to sell the security before its recovery. ASC 320-10 changes
 the total amount recognized in earnings when there are factors other than
 credit losses associated with an impairment of a debt security. The
 impairment is separated into impairments related to credit losses and
 impairments related to all other factors with only the portion of impairment
 related to credit losses included in earnings in the current period. The
 adoption of ASC 320-10 had no effect on our consolidated
 financial condition, results of operations or liquidity.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|BAYLAKE CORP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|December 31, 2009, 2008 and 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(Dollar amounts in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
 POLICIES(Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In April 2009, FASB issued ASC 820-10, Determining Fair Value When the Volume and Level of Activity for the
 Asset or Liability Have Significantly Decreased and Identifying Transactions
 That Are Not Orderly.ASC 820-10 provides additional guidance on
 determining whether a market for a financial asset is not active and a
 transaction is not distressed for fair value measurements under ASC 820-10 Fair Value Measurements.ASC 820-10 was effective for our
 interim and annual periods ending after June 15, 2009. The adoption of ASC
 820-10 had no effect on our consolidated financial
 condition, results of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|ASC 825-10 and ASC 270-10, Interim
 Disclosures about Fair Value of Financial Instruments,require
 disclosures about fair value of financial instruments in interim periods of
 publicly traded companies that were previously only required to be disclosed
 in annual financial statements. The provisions of ASC 825-10 and ASC 270-10
 were effective for the initial interim period ending June 30, 2009. ASC 825-10 and
 ASC 270-10 amend only the disclosure requirements about fair value of
 financial instruments in interim periods. The new interim disclosures
 required by ASC 825-10 and ASC 270-10 are included in the consolidated
 financial statements.                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|ASC 855-10 Subsequent Events,establishes
 general standards of accounting for and disclosure of events that occur after
 the balance sheet date but before financial statements are issued or
 available to be issued. ASC 855-10 defines (i) the period after the balance
 sheet date during which a reporting entitys management should evaluate
 events or transactions that may occur for potential recognition or disclosure
 in the financial statements, (ii) the circumstances under which an entity
 should recognize events or transactions occurring after the balance sheet
 date in its financial statements, and (iii) the disclosures an entity should
 make about events or transactions that occurred after the balance sheet date.
 ASC 855-10 became effective for consolidated financial statements for periods
 ending after June 15, 2009. ASC 855-10 did not have a significant impact on
 our consolidated financial statements.                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In December 2009, The FASB issued ASC 860-10 Accounting for Transfers of Financial Assets, an
 Amendment of ASC 860-10amends ASC 860-10, Accounting for Transfers and Servicing of Financial
 Assets and Extinguishments of Liabilities,to enhance reporting
 about transfers of financial assets, including securitizations, and where
 companies have continuing exposure to the risks related to transferred
 financial assets. ASC 860-10 eliminates the concept of a qualifying
 special-purpose entity and changes the requirements for derecognizing
 financial assets. ASC 860-10 also requires additional disclosures about all
 continuing involvements with transferred financial assets, including
 information about gains and losses resulting from transfers during the
 period. ASC 860-10 will become effective January 1, 2010 and is not expected
 to have a significant impact on our consolidated financial statements.                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In June, 2009, FASB issued ASC 810-10, Amendments to ASC 810-10, Consolidation
 of Variable Interest Entities,to change how a company determines
 when an entity that is insufficiently capitalized or is not controlled
 through voting (or similar rights) should be consolidated. The determination
 of whether a company is required to consolidate an entity is based on, among
 other things, an entitys purpose and design and a companys ability to
 direct the activities of the entity that most significantly impact the entitys
 economic performance. ASC 810-10 requires additional disclosures about the
 reporting entitys involvement with variable-interest entities and any
 significant changes in risk exposure due to that involvement as well as its
 affect on the entitys financial statements. ASC 810-10 will become effective
 January 1, 2010 and is not expected to have a significant impact on our
 consolidated financial statements.                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of
 Generally Accepted Accounting Principles,ASC 105-10 establishes
 the FASB Accounting Standards Codification (the Codification) as the source
 of authoritative accounting principles recognized by the FASB to be applied
 by non-governmental entities in the preparation of financial statements in
 conformity with generally accepted accounting principles. Rules and
 interpretive releases of the SEC under authority of federal securities laws
 are also sources of authoritative guidance for SEC registrants. All guidance
 contained in the Codification carries an equal level of authority. All
 non-grandfathered, non-SEC accounting literature not included in the
 Codification is superseded and deemed non-authoritative. ASC 105-10 is
 effective for our financial statements for periods ending after September 15,
 2009. ASC 105-10 did not have a significant impact on our consolidated
 financial statements.
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Table of Contents

|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2009, 2008 and 2007          
|(Dollar amounts in thousands)             

NOTE 2  FAIR VALUE INFORMATION

Accounting guidance establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The guidance describes three
levels of inputs that may be used to measure fair value:

| |          |                                                                                                                                                                                                                                                               
| | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1: | Quoted
 prices (unadjusted) for identical assets or liabilities in active markets
 that the entity has the ability to access as of the measurement date.                                                                                                      
| | Level 2: | Significant
 other observable inputs other than Level 1 prices such as quoted prices for
 similar assets or liabilities; quoted prices in markets that are not active;
 or other inputs that are observable or can be corroborated by observable
 market data.
| | Level 3: | Significant
 unobservable inputs that reflect a reporting entitys own assumptions about
 the assumptions that market participants would use in pricing an asset or
 liability.                                                                               

The fair value
of securities available for sale is determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing,
which is a mathematical technique widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities relationship to other
benchmark quoted securities (Level 2 inputs). None of the Companys securities
available for sale at December 31, 2009 were measured using Level 1 inputs.

The fair value
of mortgage servicing rights is based on a valuation model that calculates the
present value of estimated net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income. The Company compares the valuation model inputs
and results to widely available published industry data for reasonableness
(Level 2 inputs).

The fair value
of foreclosed properties is determined using a variety of market information including but not limited to appraisals,
professional market assessments and real estate tax assessment information (Level 2 inputs).

The fair value
of impaired loans is based on review of
comparable collateral in the similar marketplaces and analysis of expected cash
flows of the loan in relationship to the agreed terms of the loan. (Level 3
inputs).

Assets
measured at fair value on a recurring basis are summarized below:

ASSETS MEASURED ON A RECURRING BASIS

($ in thousands)



December 31,
2009
     
     Quoted Prices in
Active Markets
For Identical Assets
(Level 1)
     
     Significant
Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Assets:Securities available for sale:U.S. Treasury securities
     
     $
     30,000
     
     $
     
     
     $
     30,000
     
     $
     U.S government sponsored agency securities
     
     
     
     
     
     
     
     
     
     
     
     Mortgage backed securities
     
     
     120,148
     
     
     
     
     
     120,148
     
     
     Obligations of states and political subdivisions
     
     
     38,820
     
     
     
     
     
     38,820
     
     
     Private placement and corporate bonds
     
     
     12,536
     
     
     
     
     
     12,536
     
     
     Other Securities
     
     
     3,330
     
     
     
     
     
     3,330
     
     
     Total securities available for sale
     
     
     204,834
     
     
     
     
     
     204,834
     
     
     Mortgage servicing rights
     
     
     609
     
     
     
     
     
     609
     
     
     Forclosed properties
     
     
     14,995
     
     
     
     
     
     14,995
     
     
     Total
     
     $
     220,438
     
     $
     
     
     $
     220,438
     
     $
     




December 31,
2008
     
     Quoted Prices in
Active Markets
For Identical Assets
(Level 1)
     
     Significant
Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Assets:Securities available for sale:U.S. Treasury securities
     
     $
     
     
     $
     
     
     $
     
     
     $
     U.S government sponsored agency securities
     
     
     4,605
     
     
     
     
     
     4,605
     
     
     Mortgage backed securities
     
     
     155,133
     
     
     
     
     
     155,133
     
     
     Obligations of states and political subdivisions
     
     
     53,647
     
     
     
     
     
     53,647
     
     
     Private placement and corporate bonds
     
     
     9,353
     
     
     
     
     
     9,353
     
     
     Other Securities
     
     
     2,679
     
     
     
     
     
     2,679
     
     
     Total securities available for sale
     
     
     225,417
     
     
     
     
     
     225,417
     
     
     Mortgage servicing rights
     
     
     860
     
     
     
     
     
     860
     
     
     Forclosed properties
     
     
     7,143
     
     
     
     
     
     7,143
     
     
     Total
     
     $
     233,420
     
     $
     
     
     $
     233,420
     
     $
     




60    Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED
 FINANCIAL STATEMENTSDecember 31, 2009, 2008
 and 2007(Dollar amounts in
 thousands)NOTE 2  FAIR VALUE INFORMATION(continued)

Assets
measured at fair value on a non-recurring basis are summarized below:

ASSETS MEASURED ON A NON-RECURRING BASIS
($ in thousands)

December 31,
 2009
 
 Quoted Prices in
 Active Markets
 For Identical Assets
 (Level 1)
 
 Significant
 Other
 Observable
 Inputs
 (Level 2)
 
 Significant
 Unobservable
 Inputs
 (Level 3)Assets:Impaired loans
 
 $
 8,848
 
 $
 
 
 $
 
 
 $
 8,848December 31,
 2008
 
 Quoted Prices in
 Active Markets
 For Identical Assets
 (Level 1)
 
 Significant
 Other
 Observable
 Inputs
 (Level 2)
 
 Significant
 Unobservable
 Inputs
 (Level 3)Assets:Impaired loans
 
 $
 20,280
 
 $
 
 
 $
 
 
 $
 20,280The methods
and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash
equivalents, accrued interest receivable and payable, demand deposits,
short-term borrowings, and variable rate loans or deposits that reprice frequently
and fully. Security fair values are based on market prices or dealer quotes
and, if no such information is available, on the rate and term of the security
and information about the issuer. For fixed rate loans and deposits and
variable rate loans or deposits with infrequent repricing or repricing limits,
fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values.
Fair value of loans held for sale is based on market quotes. Fair value of
subordinated debt and convertible promissory notes is based on current rates for similar financing. It is not
practical to determine the fair value of Federal Home Loan Bank stock due to
restrictions placed on its transferability. The fair value of off-balance sheet
items is measured based on the present value of expected future cash flows for
instruments where the Bank is obligated to fund such commitments.

The accounting guidance for financial instruments requires disclosures
of estimated fair value of certain financial instruments and the methods and
significant assumptions used to estimate their fair values. Certain financial
instruments and all nonfinancial instruments are excluded from the scope of
this guidance. Accordingly, the fair value disclosures required by this
guidance are only indicative of the value of individual financial instruments
as of the dates indicated and should not be considered an indication of the
fair value of the Company.

December 31,2009
 
 2008Carrying
 Amount
 
 Fair
 Value
 
 Carrying
 Amount
 
 Fair
 ValueFinancial assetsCash and cash equivalents
 
 $
 86,442
 
 $
 86,442
 
 $
 23,085
 
 $
 23,085Federal funds sold
 
 
 84
 
 
 84
 
 
 397
 
 
 397Securities available for sale
 
 
 204,834
 
 
 204,834
 
 
 225,417
 
 
 225,417Loans held for sale
 
 
 2,567
 
 
 2,599
 
 
 368
 
 
 373Loans, net
 
 
 642,294
 
 
 647,102
 
 
 715,161
 
 
 721,569Federal Home Loan Bank stock
 
 
 6,792
 
 
 6,792
 
 
 6,792
 
 
 n/aAccrued interest receivable
 
 
 3,376
 
 
 3,376
 
 
 3,968
 
 
 3,968Financial liabilitiesDeposits
 
 
 831,629
 
 
 833,428
 
 
 849,758
 
 
 854,228Federal funds purchased and repurchase
 agreements
 
 
 21,122
 
 
 21,122
 
 
 30,174
 
 
 30,174Federal Home Loan Bank advances
 
 
 85,000
 
 
 86,303
 
 
 85,095
 
 
 86,228Subordinated debentures
 
 
 16,100
 
 
 16,100
 
 
 16,100
 
 
 16,100Convertible promissory notes
 
 
 5,350
 
 
 5,350
 
 
 
 
 
 Accrued interest payable
 
 
 1,889
 
 
 1,889
 
 
 2,857
 
 
 2,857Off balance sheet credit related items
 Letter of credit
 
 
 2,978
 
 
 2,978
 
 
 2,957
 
 
 2,95761Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 3 - SECURITIES

The fair value of securities available for sale and the related
unrealized gains and losses as of December 31, 2009 and 2008 are as follows:

2009Fair
 Value
 
 Gross
 Unrealized
 Gains
 
 Gross
 Unrealized
 LossesU.S. Treasury seurities
 
 $
 30,000
 
 $
 
 
 $
 U.S. government sponsored agency securities
 
 
 
 
 
 
 
 
 Obligations of states and political
 subdivisions
 
 
 38,820
 
 
 853
 
 
 (75
 )Mortgage-backed securities
 
 
 120,148
 
 
 1,666
 
 
 (500
 )Private placement and corporate bonds
 
 
 12,536
 
 
 
 
 
 (2,601
 )Other securities
 
 
 3,330
 
 
 
 
 
 $
 204,834
 
 $
 2,519
 
 $
 (3,176
 )2008Fair
 Value
 
 Gross
 Unrealized
 Gains
 
 Gross
 Unrealized
 LossesU.S. Treasury securities
 
 $
 
 
 $
 
 
 $
 U.S. government sponsored agency securities
 
 
 4,605
 
 
 116
 
 
 Obligations of states and political
 subdivisions
 
 
 53,647
 
 
 724
 
 
 (931
 )Mortgage-backed securities
 
 
 155,133
 
 
 3,051
 
 
 (36
 )Private placement and corporate bonds
 
 
 9,353
 
 
 
 
 
 (5,777
 )Other securities
 
 
 2,679
 
 
 
 
 
 $
 225,417
 
 $
 3,891
 
 $
 (6,744
 )Other
securities consist of short-term money market mutual funds and equity
securities in the Federal Reserve Bank and other nonmarketable equity
securities, which are carried at cost.

A summary of
sales of securities available for sale during the year ended December 31 is as
follows:

2009
 
 2008
 
 2007Proceeds
 
 $
 202,347
 
 $
 56,089
 
 $
 34,479Gross realized gains
 
 
 4,164
 
 
 774
 
 
 353Gross realized losses
 
 
 1
 
 
 9
 
 
 1The estimated fair value of securities at December 31, 2009, by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities on mortgage backed securities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.


EstimatedFair 
 ValueDue in one
 year or less
 
 $
 30,000Due after
 one year through five years
 
 
 2,987Due after
 five years through ten years
 
 
 18,653Due after
 ten years
 
 
 29,71681,356Other equity
 securities
 
 
 3,330Mortgage-backed
 securities
 
 
 120,148$
 204,834Securities
pledged to secure public deposits and borrowed funds had a carrying value of
$129,517 and $134,029 at December 31, 2009 and 2008, respectively.

62Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 3 - SECURITIES
(continued)

Securities
with unrealized losses at December 31, 2009 and 2008, aggregated by investment
category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:

Less than 12 Months
 
 12 Months or More
 
 TotalDescription
 of Securities
 
 Fair
 Value
 
 Unrealized
 Loss
 
 Fair
 Value
 
 Unrealized
 Loss
 
 Fair
 Value
 
 Unrealized
 Loss2009U.S. Treasury securities
 
 $
 30,000
 
 $
 
 
 $
 
 
 $
 
 
 $
 30,000
 
 $
 U.S. government sponsored agency securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Obligations states and political
 subdivisions
 
 
 3,043
 
 
 (47
 )
 
 762
 
 
 (28
 )
 
 3,805
 
 
 (75
 )Mortgage-backed securities
 
 
 45,920
 
 
 (468
 )
 
 1,141
 
 
 (32
 )
 
 47,061
 
 
 (500
 )Private placement and corporate bonds
 
 
 
 
 
 
 
 
 12,536
 
 
 (2,601
 )
 
 12,536
 
 
 (2,601
 )Total temporarily impaired
 
 $
 78,963
 
 $
 (515
 )
 $
 14,439
 
 $
 (2,661
 )
 $
 93,402
 
 $
 (3,176
 )2008U.S. Treasury securities
 
 $
 
 
 $
 
 
 $
 
 
 $
 
 
 $
 
 
 $
 U.S. government sponsored agency securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Obligations states and political
 subdivisions
 
 
 24,005
 
 
 (931
 )
 
 
 
 
 
 
 
 24,005
 
 
 (931
 )Mortgage-backed securities
 
 
 16,925
 
 
 (33
 )
 
 3,717
 
 
 (3
 )
 
 20,642
 
 
 (36
 )Private placement and corporate bonds
 
 
 7,901
 
 
 (4,133
 )
 
 1,452
 
 
 (1,644
 )
 
 9,353
 
 
 (5,777
 )Total temporarily impaired
 
 $
 48,831
 
 $
 (5,097
 )
 $
 5,169
 
 $
 (1,647
 )
 $
 54,000
 
 $
 (6,744
 )At December
31, 2009, the obligations of states and political subdivisions category with
continuous unrealized losses for twelve months or more comprises two
securities. The mortgage-backed securities category with continuous unrealized
losses for twelve months or more comprises one security, and the private
placement and corporate bond category with continuous unrealized losses for
twelve months or more comprises four securities.

We evaluate
securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation.
As part of such monitoring, the credit quality of individual securities and
their issuers are assessed. Adjustments to market value that are considered
temporary are recorded as separate components of equity, net of tax. If an
impairment of a security is identified as other than temporary based on
information available, such as the decline in the credit worthiness of the
issuer, external market ratings or the anticipated or realized elimination of
associated dividends, such impairments are further analyzed to determine if a
credit loss exists. If there is a credit loss, it will be recorded in the
statement of operations. Losses other than credit will continue to be
recognized in other comprehensive income. Unrealized losses reflected in the
preceding tables have not been included in results of operations because the
unrealized loss was not deemed other-than-temporary.
Management has determined that more likely than not the Company
will not be required to sell the debt security before its anticipated recovery and therefore, there is no other-than-temporary impairment.
 The losses on these securities are expected to
dissipate as they approach their maturity dates and/or if interest rates
decline.

At December
31, 2009 and 2008, there were no holdings of securities of any one issuer,
other than the U.S. Government and its agencies, in an amount greater than 10%
of the Companys stockholders equity.

63Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 4 - LOANS

Major
classifications of loans as of December 31, 2009 and 2008 are as follows:

2009
 
 2008Commercial
 
 $
 83,674
 
 $
 110,432Real estateResidential
 
 
 124,830
 
 
 134,436Commercial
 
 
 353,110
 
 
 381,765Construction
 
 
 62,827
 
 
 69,838Consumer
 
 
 11,804
 
 
 12,876Municipal
 loans
 
 
 16,009
 
 
 19,858652,254
 
 
 729,205Less:Deferred loan origination fees, net of
 costs
 
 
 360
 
 
 483Allowance for loan losses
 
 
 9,600
 
 
 13,561Net loans
 
 $
 642,294
 
 $
 715,161Loans having a
carrying value of $80,236 and $49,948 are pledged as collateral for borrowings
from the Federal Home Loan Bank at December 31, 2009 and 2008, respectively.

Certain
directors and officers of the Company and the Bank, including their immediate
families, companies in which they are principal owners, and trusts in which
they are involved, were loan customers of the Bank during 2009 and 2008.

A summary of
the changes in those loans is as follows:

For the year ended
December 31,2009
     
     2008Balance at beginning of year
     
     $
     5,523
     
     $
     4,544New loans made
     
     
     2,247
     
     
     5,185Repayments received
     
     
     (2,180
     )
     
     (4,028
     )Reclassification for loans related to former officers and directors
     
     
     (64
     )
     
     (178
     )Balance at end of year
     
     $
     5,526
     
     $
     5,523Changes in the
allowance for loan losses were as follows:

For the year ended December 31,2009
 
 2008
 
 2007Balance at
 beginning of year
 
 $
 13,561
 
 $
 11,840
 
 $
 8,058Provision
 charged to operations
 
 
 6,500
 
 
 17,961
 
 
 9,761Recoveries
 
 
 797
 
 
 427
 
 
 479Loans
 charged off
 
 
 (11,258
 )
 
 (16,667
 )
 
 (6,458
 )Balance at
 end of year
 
 $
 9,600
 
 $
 13,561
 
 $
 11,840Information
regarding impaired loans is as follows:

December 31,2009
 
 2008Impaired
 loans with no allocated allowance for loan loss
 
 $
 18,648
 
 $
 17,755Impaired
 loans with allocated allowance for loan loss
 
 
 10,003
 
 
 26,299Allowance
 allocated to impaired loans
 
 
 1,155
 
 
 6,019For the year ended December 31,2009
 
 2008
 
 2007Average
 impaired loans during the period
 
 $
 42,955
 
 $
 39,492
 
 $
 34,231Interest
 income recognized during impairment
 
 
 245
 
 
 213
 
 
 565Cash-basis
 interest income recognized
 
 
 240
 
 
 106
 
 
 505Nonperforming
loans were as follows:

December 31,2009
 
 2008Loans past
 due over 90 days still on accrual
 
 $
 
 
 $
 Loans
 restructured in a troubled debt restructuring
 
 
 2,061
 
 
 367Non-accrual
 loans
 
 
 26,590
 
 
 43,687Total nonperforming loans
 
 $
 28,651
 
 $
 44,054If these loans
had been current throughout their terms, interest income for the non-accrual
period would have approximated $1,981, $2,887 and $3,971 for the years ended
December 31, 2009, 2008, and 2007 respectively.

64Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 5 - PREMISES AND EQUIPMENT

December 31,2009
 
 2008Land
 
 $
 5,357
 
 $
 5,357Buildings
 and improvements
 
 
 24,945
 
 
 24,836Equipment
 
 
 11,998
 
 
 11,93142,300
 
 
 42,124Less
 accumulated depreciation
 
 
 18,777
 
 
 17,673Premises and equipment
 
 $
 23,523
 
 $
 24,451Depreciation expense was $1,391, $1,394, and $1,534 for 2009, 2008, and
2007, respectively.

The Company has a three-year lease to rent space for a branch bank
location in a mall in Howard, Wisconsin that was extended in 2007. The Company
must also pay its proportional share of costs for common areas at the mall.
Rent expense for these facilities for 2009, 2008, and 2007 was $39, $38, and
$37, respectively. Future minimum lease payments under the remaining lease
agreement that expires in August 2010 is $22.

During 2008 vacant property owned by the Company was sold with realized
gains totaling $63. At December 31, 2009, approximately 12 acres of land were
held for sale with a cost basis of $1,541.

At year-end 2009, there is still one unit of space under a condominium
development arrangement held for sale with a cost basis of $465.

NOTE 6  FORECLOSED PROPERTIES, NET

Foreclosed
properties are summarized as follows:

For the year ended December 31,2009
 
 2008
 
 2007Beginning
 balance
 
 $
 7,143
 
 $
 5,167
 
 $
 5,760Transfer of
 net realizable value to foreclosed properties
 
 
 12,196
 
 
 8,328
 
 
 5,932Sale
 proceeds, net
 
 
 (3,774
 )
 
 (2,623
 )
 
 (6,160
 )Net gain
 (loss) from sale of foreclosed properties
 
 
 108
 
 
 (119
 )
 
 (232
 )Provision
 for foreclosed properties
 
 
 (678
 )
 
 (3,610
 )
 
 (133
 )Total foreclosed properties
 
 $
 14,995
 
 $
 7,143
 
 $
 5,167Changes in
 the valuation allowance for losses on foreclosed properties were as follows:For the year ended December 31,2009
 
 2008
 
 2007Beginning
 balance
 
 $
 3,391
 
 $
 207
 
 $
 108Provision
 charged to operations
 
 
 678
 
 
 3,610
 
 
 133Amounts related
 to properties disposed
 
 
 (1,296
 )
 
 (426
 )
 
 (34
 )Balance at
 end of year
 
 $
 2,773
 
 $
 3,391
 
 $
 20765Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 7  MORTGAGE SERVICING RIGHTS

We have
 obligations to service residential first mortgage loans and commercial loans
 that have been sold in the secondary market. New mortgage servicing rights
 (MSRs) are recorded when loans are sold in the secondary market. On a
 quarterly basis MSRs are valued based on available market information. We do
 not hedge the risk of changes in fair value.Changes in
 the carrying value of MSRs are as followed:For the year ended December 31,2009
 
 2008Balance at
 beginning of period
 
 $
 860
 
 $
 1,366Addition
 from loans sold with servicing retained
 
 
 108
 
 
 29Changes in
 valuation
 
 
 (359
 )
 
 (535
 )Fair value
 of MSRs at end of period
 
 
 609
 
 
 860Balance of
 underlying loans being serviced at December 31
 
 $
 78,167
 
 $
 93,617NOTE 8 - DEPOSITS

The following
is a summary of deposits by type at December 31:

2009
 
 2008Non-interest-bearing
 demand deposits
 
 $
 81,336
 
 $
 73,537Interest-bearing
 demand deposits
 
 
 150,650
 
 
 129,136Savings
 deposits
 
 
 33,450
 
 
 30,473Money market
 deposits
 
 
 193,130
 
 
 206,558Time
 deposits $100,000 and greater
 
 
 159,764
 
 
 193,928Other time
 deposits
 
 
 213,299
 
 
 216,126Total deposits
 
 $
 831,629
 
 $
 849,758Brokered
 certificates of deposit included above:
 
 $
 48,940
 
 $
 113,863At December
31, 2009, the scheduled maturities of time deposits were as follows:

2010
 
 $
 273,1612011
 
 
 69,3242012
 
 
 19,2742013
 
 
 11,2912014
 
 
 13$
 373,063Deposits from
the Companys directors and officers held by the Bank at December 31, 2009 and
2008 amounted to $3,666 and $4,559, respectively.

66Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

A summary of
Federal Home Loan Bank advances at December 31 is as follows:

Year of
 Maturity
 
 
 2009
 
 Weighted
 Average
 Rate
 
 2008
 
 Weighted
 Average
 Rate2009
 
 $
 
 
 
 
 %
 $
 20,000
 
 
 1.62
 %2010
 
 
 5,000
 
 
 1.86
 
 
 
 
 
 2011
 
 
 70,000
 
 
 2.72
 
 
 65,000
 
 
 2.852012
 
 
 10,000
 
 
 2.81
 
 
 
 
 
 Total fixed maturity
 
 
 85,000
 
 
 2.68
 %
 
 85,000
 
 
 2.56
 %Advances with amortizing principal
 
 
 
 
 
 
 
 
 95
 
 
 3.64Total
 
 $
 85,000
 
 
 2.68
 %
 $
 85,095
 
 
 2.56
 %Maximum month-end amounts outstanding were $85,095 and $85,171 at
December 31, 2009 and 2008, respectively.

Each advance is payable at its maturity date, with a prepayment penalty
for fixed rate advances. Federal Home Loan Bank advances are secured by $44,984
of real estate mortgages, $35,252 of home equity lines, and $78,080 of
mortgage-backed and U.S. government sponsored agency securities. A $40 million
advance with a rate of 2.055% maturing in 2011 and a $25 million advance maturing
in 2011 are fixed rate. A $5 million advance maturing in 2011 is variable
priced at three month LIBOR plus 28 basis points, capped at 2.45%. Those
advances maturing in 2010 and 2012 are fixed rate.

NOTE 10 - FEDERAL FUNDS PURCHASED AND
REPURCHASE AGREEMENTS

Short-term
borrowings consisted of the following at December 31:

2009
 
 2008Federal
 funds purchased
 
 $
 
 
 $
 Securities
 sold under agreements to repurchase
 
 
 21,122
 
 
 30,174$
 21,122
 
 $
 30,174Average
 amounts outstanding during year
 
 $
 23,350
 
 $
 32,750Maximum
 month-end amounts outstanding
 
 
 33,757
 
 
 45,659Average
 interest rates on amounts outstanding at end of year
 
 
 0.50
 %
 
 1.18
 %Average
 interest rates on amounts outstanding during year
 
 
 0.71
 %
 
 2.38
 %67Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 11 - SUBORDINATED DEBENTURES

In 2001, the Company formed Baylake Capital Trust I (the Trust) as a
statutory business trust organized for the sole purpose of issuing $16,100 of
10% fixed rate cumulative trust-preferred securities and investing the proceeds
thereof in junior subordinated debentures of the Company, the sole asset of the
Trust.

On March 31, 2006, the Company redeemed its outstanding junior
subordinated indentures and trust preferred securities for a total of $16.5
million which constitutes the $16.1 million stated principal values of those
amounts plus $0.4 million in accrued interest.

The redemption of these securities were funded through the issuance of
$16.1 million of trust preferred securities and $0.5 million of trust common
securities issued under the name Baylake Capital Trust II (Trust II) that
will adjust quarterly at a rate equal to 1.35% over the three month LIBOR
(1.60% at December 31, 2009). Trust IIs ability to pay amounts due on the
trust-preferred securities is solely dependent upon the Company making payment
on the related subordinated debentures to the Trust. The Companys obligations
under the subordinated debentures include a conditional guarantee by the
Company of the Trusts obligations under the trust securities issued by the
trust. In addition, under the terms of the Debentures, the Company would be
precluded from paying dividends on the Companys common stock if the Company
was in default under the Debentures, if the Company exercised its right to
defer payments of interest on the Debentures or if certain related defaults
occurred. At December 31, 2009 the Company is current on its interest payments.

NOTE 12  CONVERTIBLE PROMISSORY NOTES

During the third and fourth quarters of 2009, the Company completed
three separate closings of a private placement of 10% Convertible Notes due
June 30, 2017 (the Convertible Notes). The Convertible Notes were offered and sold in reliance on the
exemption from registration under Section 4(2) of the Securities Act of 1933
and Rule 506 promulgated there under. The Company issued $5.35 million
principal amount of the Notes, at par, and received gross proceeds in the same
amount.

The Convertible Notes accrue interest at a fixed rate of 10% per annum upon
issuance and until maturity or earlier conversion or redemption. Interest is
payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of
each year. The Convertible Notes are convertible into shares of the Companys common stock
at a conversion ratio of one share of common stock for each $5.00 in aggregate
principal amount held on the record date of the conversion subject to certain
adjustments as described in the Convertible Notes. Prior to October 1, 2014, each holder of
the Convertible Notes may convert up to 100% (at the discretion of the holder) of the
original principal amount into shares of our common stock at the conversion
ratio. On October 1, 2014, one-half of the original principal amounts are
mandatorily convertible into common stock at the conversion ratio if conversion has not occurred.
The principal amount of any Convertible Note that has not been converted will
be payable at maturity on June 30, 2017. The Company is not obligated to
register the common stock issued on the conversion of the Convertible Notes.

The Company incurred debt issuance costs of $0.17 million. These costs
are capitalized and amortized to interest expense using the effective interest
method over the initial conversion term, which is October 1, 2014. The total
amount of Convertible Notes offered is $15.0 million. We anticipate a fourth closing during
the first quarter of 2010. Additionally, the offering expires on April 30,
2010.

68Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 13 - CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments
by regulators. Failure to meet capital requirements can initiate regulatory
action.

Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At December 31, 2009,
regulatory notifications categorized the Bank as well
capitalized, under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that
management believes have changed the Banks category.

Regulatory restrictions, which govern all state chartered banks,
preclude the payment of dividends without the prior written consent of the
Wisconsin Department of Financial Institutions Division of Banking (WDFI) if
dividends declared and paid by such bank in either of the two immediately
preceding years exceeded that banks net income for those years. During 2009
and 2008, no dividends were declared. During 2007, $4.5 million in dividends
were declared and $2.3 million in dividends were paid to the Company by the
Bank, which was in excess of the Banks net income for the year. In order to
pay dividends in the future, the Bank will need to seek prior approval from
WDFI, as well as the Federal Reserve Board. Future dividends will be subject to
improved earnings and the reduction of non-performing loans, among others.

The Companys and the Banks risk-based capital and leverage ratios at
December 31, 2009 and 2008 are presented below.

Actual
 
 For Capital
 Adequacy Purposes
 
 To Be Well
 Capitalized Under
 Prompt Corrective
 Action ProvisionsAmount
 
 Ratio
 
 Amount
 
 Ratio
 
 Amount
 
 Ratio2009Total Capital to risk-weighted assetsConsolidated
 
 $
 92,667
 
 
 12.18
 %
 $
 60,882
 
 
 8.00
 %
 
 N/A
 
 
 N/ABank
 
 
 90,321
 
 
 11.86
 %
 
 60,940
 
 
 8.00
 
 $
 76,175
 
 
 10.00
 %Tier 1 (Core) Capital to risk-weighted
 assetsConsolidated
 
 
 77,804
 
 
 10.22
 %
 
 30,441
 
 
 4.00
 
 
 N/A
 
 
 N/ABank
 
 
 80,798
 
 
 10.61
 %
 
 30,470
 
 
 4.00
 
 
 45,705
 
 
 6.00Tier 1 (Core) Capital to average assetsConsolidated
 
 
 77,804
 
 
 7.60
 %
 
 40,961
 
 
 4.00
 
 
 N/A
 
 
 N/ABank
 
 
 80,798
 
 
 7.89
 %
 
 40,978
 
 
 4.00
 
 
 51,222
 
 
 5.002008Total Capital to risk-weighted assetsConsolidated
 
 $
 80,787
 
 
 9.72
 %
 $
 66,471
 
 
 8.00
 %
 
 N/A
 
 
 N/ABank
 
 
 79,566
 
 
 9.56
 %
 
 66,524
 
 
 8.00
 
 $
 83,155
 
 
 10.00
 %Tier 1 (Core) Capital to risk-weighted
 assetsConsolidated
 
 
 70,362
 
 
 8.47
 %
 
 33,235
 
 
 4.00
 
 
 N/A
 
 
 N/ABank
 
 
 69,132
 
 
 8.31
 %
 
 33,262
 
 
 4.00
 
 
 49,893
 
 
 6.00Tier 1 (Core) Capital to average assetsConsolidated
 
 
 70,362
 
 
 6.68
 %
 
 42,110
 
 
 4.00
 
 
 N/A
 
 
 N/ABank
 
 
 69,132
 
 
 6.56
 %
 
 42,161
 
 
 4.00
 
 
 52,701
 
 
 5.0069Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 14  COMMITMENTS AND CONTINGENCIES

The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include off balance-sheet credit
instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amounts for these
items represents the exposure to loss, before considering customer collateral
or ability to repay. Such financial instruments are recorded when they are
funded. Instruments, such as standby letters of credit, that are considered
financial guarantees in accordance with ASC 460-10 are recorded at fair value.
The Company does not use forward loan sale commitments.

The Companys exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contract or notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.

Contract or
 Notional Amount
 at December 31,2009
 
 2008Financial
 instruments whose contract amounts represent credit risk:Commitments to extend credit
 
 $
 168,195
 
 $
 177,487Standby letters of credit
 
 
 14,550
 
 
 16,325Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on managements credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable; inventory; property, plant, and equipment;
and income-producing commercial properties. Fixed rate commitments totaled
$9,543 and $9,716 at December 31, 2009 and 2008, respectively, with rates
ranging from 3.00% to 9.25% in 2009 and 3.33% to 9.25% in 2008.

Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of customers to a third party. These are
primarily issued to support private borrowing arrangements and expire in
decreasing amounts through 2017, with a majority expiring by December 31, 2013.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The Company does
not require collateral as support for the commitments. Collateral is secured as
commitments are funded.

In 2009, 2008 and 2007, impairment charges of $20, $2,539, and $0 were
taken, respectively, on standby letters of credit which were issued by the Company on behalf
of customers to accommodate their borrowings with third parties. The provision
for impairment charges relates to the establishment of a liability for the
Companys expected losses on outstanding letters of credit. The Company
continues to monitor the financial condition of the borrowers on an ongoing
basis, and if they continue to deteriorate, may need to provide additional
reserves with respect to the off-balance commitment. The balance of the letters
of credit totaled $6,831 at December 31, 2009 and 2008. At
December 31, 2009 and 2008, the carrying value recorded by the Company as a
liability for those guarantees was $2,977 and $2,957, respectively.

Loss contingencies, including claims and
legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of
loss can be reasonably estimated.

The Company does not use interest rate contracts (e.g. swaps) or other
derivatives to manage interest rate risk and does not have any of these instruments
outstanding as of and for the years ended December 31, 2009, 2008, and 2007.

70Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 15 - RETIREMENT PLANS

The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. The discretionary employer
contributions paid and expensed under all plans totaled $504, $1,103, and
$1,184 in 2009, 2008 and 2007, respectively. Certain officers and directors of
the Company and its subsidiaries are covered by nonqualified deferred
compensation plans. Payments to be made under these plans are accrued over the
anticipated years of service of the individuals covered. Amounts charged to
expense were $431 in 2009, $(512) in 2008, and $467 in 2007. The aggregate
amount of deferred compensation included in other liabilities in the
consolidated balance sheets is $3,385 and $3,100 in 2009 and 2008,
respectively. The Company has established the Baylake Bank Supplemental
Executive Retirement Plan (Plan) which is intended to provide certain
management and highly compensated employees of the Company who have contributed
and are expected to continue to contribute to the Companys success, deferred
compensation in addition to that available under the Companys other retirement
programs. Costs amounting to $305, $(640), and $246 are included in the amounts
charged to expense for 2009, 2008, and 2007, respectively. The Company has
ceased contributions to the Plan for the foreseeable future.

NOTE 16 - INCOME TAXES

Income tax
expense (benefit) consists of the following:

For the year ended December 31,2009
 
 2008
 
 2007Current
 income taxesFederal
 
 $
 (2,927
 )
 $
 (1,792
 )
 $
 (215
 )State
 
 
 54
 
 
 (142
 )
 
 4(2,873
 )
 
 (1,934
 )
 
 (211
 )Deferred
 income taxesFederal
 
 
 3,446
 
 
 (4,254
 )
 
 (1,636
 )State
 
 
 314
 
 
 (1,672
 )
 
 (569
 )3,760
 
 
 (5,926
 )
 
 (2,205
 )Income tax expense (benefit)
 
 $
 887
 
 $
 (7,860
 )
 $
 (2,416
 )The provision for income taxes
differs from the amount of income tax determined by applying the statutory
federal income tax rate to pretax income as a result of the following
differences:

For the year ended December 31,2009
 
 2008
 
 2007Income tax expense (benefit) based on
 statutory rate (34%)
 
 $
 1,773
 
 $
 (6,010
 )
 $
 (712
 )State income tax expense (benefit) net of
 federal tax expense (benefit)
 
 
 243
 
 
 (1,103
 )
 
 (427
 )Effect of tax-exempt interest income
 
 
 (744
 )
 
 (935
 )
 
 (833
 )Life insurance death benefit and earnings
 
 
 (213
 )
 
 (11
 )
 
 (294
 )Equity in income of UFS subsidiary
 
 
 (126
 )
 
 (80
 )
 
 (189
 )Other
 
 
 (46
 )
 
 279
 
 
 39Expense (benefit) based on effective tax
 rates
 
 $
 887
 
 $
 (7,860
 )
 $
 (2,416
 )71Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 16 - INCOME TAXES(continued)

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

The following is a summary of the significant components of the
Companys deferred tax assets and liabilities as of December 31, 2009 and 2008:

2009
 
 2008Deferred tax assetsAllowance for loan losses
 
 $
 3,764
 
 $
 5,318Off-balance sheet credit losses
 
 
 
 
 
 1,160Deferred loan fees
 
 
 141
 
 
 190Deferred compensation
 
 
 1,653
 
 
 1,600Non accrual loans
 
 
 216
 
 
 2,311Accrued vacation pay
 
 
 367
 
 
 362OREO property valuation
 
 
 1,087
 
 
 1,330Net unrealized loss on securities available
 for sale
 
 
 333
 
 
 1,218Donations
 
 
 146
 
 
 47Deferred tax credits  AMT
 
 
 1,485
 
 
 680Federal net operating loss carryforwards
 (NOLs)
 
 
 1,603
 
 
 1,100State net operating loss carryforwards
 (NOLs)
 
 
 1,993
 
 
 1,487Other than temporary impairment of
 securities
 
 
 
 
 
 745Other
 
 
 83
 
 
 65Total deferred tax assets before valuation
 allowance
 
 
 12,871
 
 
 17,613Valuation allowance
 
 
 (658
 )
 
 (659
 )Net deferred tax assets after valuation
 allowance
 
 
 12,213
 
 
 16,954Deferred tax liabilitiesDepreciation
 
 
 1,914
 
 
 1,927FHLB stock dividends
 
 
 791
 
 
 791Mortgage loan servicing
 
 
 22
 
 
 63Net unrealized gain on securities available
 for sale
 
 
 
 
 
 Equity in UFS subsidiary
 
 
 489
 
 
 524Prepaid expenditures
 
 
 117
 
 
 110Other
 
 
 24
 
 
 38Total deferred tax liabilities
 
 
 3,357
 
 
 3,453Net deferred tax asset
 
 $
 8,856
 
 $
 13,50172Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 16 - INCOME TAXES(continued)

The Company has federal net operating loss carryforwards of approximately $4.7 million and $3.2
 million and state net operating loss carryforwards of $38.2 million and $28.5 million at December 31, 2009
 and December 31, 2008, respectively.  The federal net operating loss carryforwards will expire in varying amounts
 between 2028 and 2029.  The state net operating losses expire annually through 2024.

The Company carries a valuation allowance to reduce deferred tax assets
related to state net operating loss carryforwards to an amount which the
Company believes the benefit will more likely than not be realized. The Company
will continue to assess the amount of tax benefits it may realize.

During the fourth quarter of 2008, the Company changed its approach for
treating UFS income as a temporary difference instead of a permanent
difference. The effect of this change was not material to the Companys
consolidated financial condition and results of operations.

Income tax expense recorded in the consolidated statement of income
involves the interpretation and application of certain accounting
pronouncements and federal and state tax codes. The Company undergoes
examination by various regulatory taxing agencies. Such agencies may require
that changes in the amount of tax expense be recognized when their
interpretations differ from those of management, based on their judgment about
information available to them at the time of their examination. Management does not accrued any interest or penalties for unrecognized tax benefits.

A roll-forward of the activity in the Companys remaining accrual for
uncertain tax positions is as follows:

For the year ended December 31,2009
 
 2008Gross tax
 liability, beginning of year
 
 $
 354
 
 $
 639Reduction in
 tax liability due to adoption of ASC 740-10
 
 
 
 
 
 Adjusted tax
 liability, beginning of year
 
 
 354
 
 
 639Current
 period change in tax benefits
 
 
 
 
 
 Reduction in
 tax liability settlement
 
 
 
 
 
 (108
 )Settlement
 payment
 
 
 (177
 )
 
 (177
 )Gross tax
 liability, end of year
 
 $
 177
 
 $
 354The gross tax liability, at December 31, 2009, is related to income
earned by our subsidiary located in the state of Nevada. Due to the State of
Wisconsin Department of Revenues (WDOR) change in position on the taxability
of income from Nevada subsidiaries, and based on the Companys analysis of ASC
740-10, there was an accrued liability of $177 and $354 at December 31, 2009
and 2008, respectively. On November 10, 2008, the Company entered into a settlement
agreement with the WDOR related to this issue. The Company anticipates that
corresponding tax benefits will be decreased by approximately $177 during 2010
as a result of the WDOR settlement, thus reducing the gross tax liability to
zero.

The Company and its subsidiaries are subject to U.S. federal and
Wisconsin state income tax. In February 2009, the State of Wisconsin passed legislation that
requires tax reporting on a consolidated basis (known as combined reporting)
effective January 1, 2009. The Company and its subsidiaries file a
consolidated federal income tax return, separate Company 2008 Wisconsin income tax returns, and a combined 2009 Wisconsin tax return as
appropriate. They are no longer subject to examination by U.S. Federal taxing
authorities for years before 2006 and for Wisconsin state income taxes through
2004. The Company does not expect the total amount of unrecognized tax benefits to
significantly increase or decrease in the next twelve months.


The Company recognizes interest and/or penalties related to income tax
matters in income tax expense. Included in the $177 referred to above is $52 of
interest, net of federal tax benefit.

73Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands except per share data)NOTE 17 - EARNINGS PER SHARE

Earnings (loss) per share is based on the weighted average number of
shares outstanding for the year. A reconciliation of the basic and diluted
earnings per share amounts is as follows:

For the year ended December 31,2009
 
 2008
 
 2007BasicNet income (loss)
 
 $
 4,329
 
 $
 (9,817
 )
 $
 166Weighted average common shares outstanding
 
 
 7,911,539
 
 
 7,911,469
 
 
 7,851,508Basic earnings (loss) per common share
 
 $
 0.55
 
 $
 (1.24
 )
 $
 0.02DilutedNet income (loss)
 
 $
 4,329
 
 $
 (9,817
 )
 $
 166Weighted average common shares outstanding
 for basic earnings per share
 
 
 7,911,539
 
 
 7,911,469
 
 
 7,851,508Add: Dilutive effects of assumed exercises
 of stock options
 
 
 
 
 
 
 
 
 1,271Add: Dilutive effects of convertible
 promissory notes
 
 
 
 
 
 
 
 
 Average shares and dilutive potential
 common shares
 
 
 7,911,539
 
 
 7,911,469
 
 
 7,852,779Diluted earnings (loss) per common share
 
 $
 0.55
 
 $
 (1.24
 )
 $
 0.02Additional common stock option shares that
 have not been included due to their antidilutive effect
 
 
 73,628
 
 
 126,628
 
 
 166,700Additional common stock convertible
 debenture shares that have not been included due to their antidilutive effect
 
 
 1,070,000
 
 
 
 
 
 NOTE 18 - STOCK OPTION PLAN

The Company has a non-qualified stock option plan (the Plan) under
which certain officers and key salaried employees may purchase shares of the
Companys stock at an established exercise price. Unless earlier terminated,
these options will expire ten years from the date of grant. The options vest
over a five-year period, becoming exercisable 20% per year, commencing one year
from date of grant. Total compensation cost (benefit), net of income tax, that has been charged
against income for the plan was $2, $(36), and $21 for 2009, 2008, and 2007,
respectively. The total income tax benefit was $0, $(8), and $8 for the
respective periods.

There were no stock options granted in 2009, 2008 or 2007.

74Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands except per share data)NOTE 18 - STOCK OPTION PLAN(continued)

Activity in
the stock option plan during 2009 follows:

Shares
 
 Weighted
 Average
 Exercise
 Price
 
 Weighted
 Average
 Remaining
 Contractual
 Term
 
 Aggregate
 Intrinsic
 ValueOutstanding
 at beginning of year
 
 
 126,628
 
 $
 16.53
 
 
 
 
 $Granted
 
 
 
 
 
 
 
 
 
 
 
 Exercised
 
 
 
 
 
 Forfeited or
 expired
 
 
 (53,000
 )
 
 15.25
 
 
 
 
 
 Outstanding at end of year
 
 
 73,628
 
 $
 17.40
 
 
 1.45
 
 $
 Exercisable
 at end of year
 
 
 73,628
 
 $
 17.40
 
 
 1.45
 
 $
 Fully vested
 and expected to vest
 
 
 73,628
 
 $
 17.40
 
 
 1.45
 
 $
 Activity in
the stock option plan during 2008 follows:

Shares
 
 Weighted
 Average
 Exercise
 Price
 
 Weighted
 Average
 Remaining
 Contractual
 Term
 
 Aggregate
 Intrinsic
 ValueOutstanding
 at beginning of year
 
 
 212,134
 
 $
 16.60
 
 
 
 
 $Granted
 
 
 
 
 
 
 
 
 
 
 
 Exercised
 
 
 
 
 
 
 
 
 
 
 
 Forfeited or
 expired
 
 
 (85,506
 )
 
 16.75Outstanding
 at end of year
 
 
 126,628
 
 $
 16.50
 
 
 1.42
 
 $
 Exercisable
 at end of year
 
 
 124,628
 
 $
 16.54
 
 
 1.38
 
 $
 Fully vested
 and expected to vest
 
 
 126,628
 
 $
 16.50
 
 
 1.42
 
 $
 Activity in
the stock option plan during 2007 follows:

Shares
 
 Weighted
 Average
 Exercise
 Price
 
 Weighted
 Average
 Remaining
 Contractual
 Term
 
 Aggregate
 Intrinsic
 ValueOutstanding
 at beginning of year
 
 
 387,325
 
 $
 15.10
 
 
 
 
 $
 Granted
 
 
 
 
 
 
 
 
 
 
 
 Exercised
 
 
 (110,005
 )
 
 10.78
 
 
 
 
 
 Forfeited or
 expired
 
 
 (65,186
 )
 
 17.48
 
 
 
 
 
 Outstanding
 at end of year
 
 
 212,134
 
 $
 16.60
 
 
 2.80
 
 $
 Exercisable
 at end of year
 
 
 203,370
 
 $
 16.72
 
 
 2.62
 
 $
 Fully vested
 and expected to vest
 
 
 211,886
 
 $
 16.60
 
 
 2.80
 
 $
 Information
related to the stock option plan during each year follows:

2009
 
 2008
 
 2007Intrinsic
 value of options exercised
 
 $
 
 
 $
 
 
 $
 239Cash
 received from option exercises
 
 
 
 
 
 
 
 
 1,184Tax benefit
 realized from option exercises
 
 
 
 
 
 
 
 
 94As of December
31, 2009, there was no unrecognized compensation cost related to nonvested
stock options granted under the Plan.

75Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 19 - CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY

CONDENSED BALANCE SHEETSDecember 31

2009
 
 2008ASSETSCash and cash equivalents
 
 $
 2,112
 
 $
 1,208Receivable from subsidiary
 
 
 19
 
 
 28Deferred income taxes
 
 
 16
 
 
 15Unamortized debt offering costs
 
 
 162
 
 
 Income tax receivable
 
 
 49
 
 
 Investment in subsidiaries
 
 
 93,692
 
 
 83,826Total assets
 
 $
 96,050
 
 $
 85,077LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesOther payables
 
 $
 
 
 $
 20Interest Payable
 
 
 2
 
 
 3Debentures
 
 
 16,100
 
 
 16,100Convertible promissory notes
 
 
 5,350
 
 
 Total liabilities
 
 
 21,452
 
 
 16,121Stockholders equity
 
 
 74,598
 
 
 68,954Total liabilities and stockholders equity
 
 $
 96,050
 
 $
 85,07776Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 19 - CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY (continued)

CONDENSED STATEMENTS OF OPERATIONSYears ended December 31

2009
 
 2008
 
 2007IncomeDividends from subsidiaries
 
 $
 
 
 $
 
 
 $
 4,500Interest income
 
 
 18
 
 
 37
 
 
 87Total income
 
 
 18
 
 
 37
 
 
 4,587ExpensesInterest
 
 
 529
 
 
 794
 
 
 1,089Other
 
 
 107
 
 
 116
 
 
 70Total expenses
 
 
 636
 
 
 910
 
 
 1,159Income (loss) before equity in
 undistributed net income of subsidiaries
 
 
 (618
 )
 
 (873
 )
 
 3,428Equity in undistributed net income (loss)
 of subsidiaries (dividends in excess of earnings)
 
 
 4,705
 
 
 (9,241
 )
 
 (3,627
 )Income (loss) before income taxes
 
 
 4,087
 
 
 (10,114
 )
 
 (199
 )Income tax benefit
 
 
 (242
 )
 
 (297
 )
 
 (365
 )Net income (loss)
 
 $
 4,329
 
 $
 (9,817
 )
 $
 16677Table of Contents

BAYLAKE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2009, 2008 and 2007(Dollar amounts in thousands)NOTE 19 - CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY (continued)

CONDENSED STATEMENT OF CASH FLOWSYears ended December 31

2009
 
 2008
 
 2007Cash flows from operating activities:Net income (loss)
 
 $
 4,329
 
 $
 (9,817
 )
 $
 166Adjustments to reconcile net income to net
 cash provided by operating activities:Undistributed (earnings) loss of subsidiary
 (dividends in excess of earnings)
 
 
 (4,705
 )
 
 9,241
 
 
 3,627Stock Compensation Expense
 
 
 2
 
 
 (44
 )
 
 21Amortization of debt issue costs
 
 
 12
 
 
 
 
 
 Net amortization of securities
 
 
 
 
 
 
 
 
 (1
 )Net change in intercompany receivable
 
 
 9
 
 
 2,203
 
 
 (2,205
 )Tax benefit from exercise of stock options
 
 
 
 
 
 8
 
 
 (94
 )Other changes, net
 
 
 (69
 )
 
 34
 
 
 92Net cash provided by (used in) operating
 activities
 
 
 (422
 )
 
 1,625
 
 
 1,606Cash flows from investing activities:Proceeds from sale of securities
 
 
 
 
 
 
 
 
 1,000Cash flows from financing activities:Proceeds from issuance of convertible
 promissory notes
 
 
 5,350
 
 
 
 
 
 Debt issuance costs
 
 
 (174
 )
 
 
 
 
 Surplus contributed to Bank
 
 
 (3,850
 )
 
 
 
 
 Proceeds from exercise of stock options
 
 
 
 
 
 
 
 
 1,184Tax benefit (expense) from exercise of
 stock options
 
 
 
 
 
 (8
 )
 
 94Treasury stock repurchases
 
 
 
 
 
 
 
 
 (1,823
 )Dividend reinvestment plan
 
 
 
 
 
 265
 
 
 1,096Dividends paid
 
 
 
 
 
 (1,262
 )
 
 (5,022
 )Net cash used in financing activities
 
 
 1,326
 
 
 (1,005
 )
 
 (4,471
 )Net change in cash and cash equivalents
 
 
 904
 
 
 620
 
 
 (1,865
 )Beginning cash and cash equivalents
 
 
 1,208
 
 
 588
 
 
 2,453Ending cash and cash equivalents
 
 $
 2,112
 
 $
 1,208
 
 $
 58878Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

ITEM
9A(T). CONTROLS AND PROCEDURES

Disclosures Controls and Procedures:Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of
December 31, 2009. Based on such evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act.

There are inherent limitations in the effectiveness of any system of
internal control over financial reporting, including the possibility of human
error and circumvention or overriding of controls. Accordingly, even an
effective system of internal control over financial reporting can provide only
reasonable assurance with respect to financial statement preparation.
Projections of any evaluation of effectiveness to future periods are subject to
the risks that controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies or procedures may
deteriorate.

Managements Report on Internal Control over
Financial Reporting: The report of our management on
our internal control over financial reporting appears on page 47 of this Annual
Report on Form 10-K.

Changes in Internal Control Over Financial
Reporting:There have not been any changes in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that have occurred during the
quarter ended December 31, 2008, that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.

ITEM
9B. OTHER INFORMATION

None.

PART III

ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the sections titled Proposal No. 1,
Election of Directors, Information on Executive Officers and Compliance
with Section 16(a) of the Exchange Act contained in the definitive proxy
statement for our 2010 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM
11. EXECUTIVE COMPENSATION

The information set forth under the sections titled Director Fees and
Benefits, Compensation Discussion and Analysis, Board of Directors
Compensation Committee Report on Management Compensation, and Compensation
Committee Interlocks and Insider Participation contained in the definitive
proxy statement for our 2010 Annual Meeting of Stockholders is incorporated
herein by reference.

ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information set forth under the section titled Ownership of
Baylake Common contained in the definitive proxy statement for our 2010 Annual
Meeting of Stockholders is incorporated herein by reference.

79Table of Contents

Equity compensation plan information:

The following table sets forth information regarding options and shares
reserved for future issuance under the equity compensation plans as of December
31, 2009.

Plan
 Category
 
 Number of securities to
 be issued upon exercise
 of outstanding options,
 warrants and rights
 (a)
 
 Weighted-average
 exercise price of
 outstanding options,
 warrants and rights
 (b)
 
 Number of securities
 remaining available for
 future issuance under
 equity compensation
 plans (excluding
 securities reflected in
 column (a))
 (c)Equity compensation plans approved by
 security holders
 
 
 63,628
 
 $
 17.91
 
 
 Equity compensation plans not approved by
 security holders **
 
 
 10,000
 
 
 14.15
 
 
 Total
 
 
 73,628
 
 $
 17.40
 
 
 ** These options represent options granted with the same terms and
conditions as those granted under the 1993 Stock Option Plan, as amended, but
after expiration of that Plan. The total number of options granted was less
than the total authorized under the Plan, which was adopted with shareholder approval.
We previously announced that we do not intend to grant further stock options.

ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

Information set forth in the section titled Certain Transactions with
Management in the definitive proxy statement for our 2010 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information set forth in the section titled Principal Accountant Fees
and Services in the definitive proxy statement for our 2010 Annual Meeting of
Stockholders is incorporated herein by reference.

80Table of Contents

PART IV

ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1 and 2

The consolidated financial statements and supplementary data contained
in Item 8 of this report are filed as part of this report. All schedules are
omitted because of the absence of the conditions under which they are required
or because the required information is included in the consolidated financial
statements or related notes.

(a) 3

See Item 15(b)
below

(b) Exhibits
Required by Item 601 of Regulation S-K

(c) Financial
Statement Schedules

All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements
contained in Part II, Item 8 of this Form 10-K.

Reference is
made to the Exhibit Index following the signatures for exhibits filed as part
of this report.

SIGNATURES

Pursuant to
the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

BAYLAKE
 CORP.By:
 /s/Robert J.
 CeraRobert J.
 CeraPresident
 and Chief Executive Officer andDirector
 (Principal Executive Officer)By:
 /s/Kevin L.
 LaLuzerneKevin L.
 LaLuzerneChief
 Financial Officer and Treasurer(Principal
 Financial and Accounting Officer)Date: March 15, 2010

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby designates and appoints Robert J. Cera and Kevin L.
LaLuzerne, and each of them, any one of whom may act without the joinder of the
other, as such persons true and lawful attorney-in-fact and agents (the
Attorneys-in-Fact) with full power of substitution and resubstitution, for
such person and in such persons name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
the Securities and Exchange Commission and any state securities commission,
granting unto said Attorneys-in-Fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and conforming all
that said Attorneys-in-Fact and agents or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.

81Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ Thomas
 L. Herlache
 
 /s/ Richard
 A. BraunThomas L.
 Herlache, Director
 Richard A.
 Braun, DirectorDirector
 
 Co-Chairman
 of the Board/s/ Kevin L.
 LaLuzerne
 
 /s/ Robert
 W. AgnewKevin L.
 LaLuzerne, Chief Financial Officer
 Robert W.
 Agnew, Directorand
 Treasurer (Principal Financial and
 Co-Chairman
 of the BoardAccounting
 Officer)/s/ Dee
 Geurts-Bengtson
 
 /s/ Robert
 J. CeraDee
 Geurts-Bengtson, Director
 Robert J.
 Cera, President and Chief ExecutiveOfficer and
 Director (Principal ExecutiveOfficer)/s/ George
 Delveaux, Jr.
 
 /s/ Roger G.
 FerrisGeorge
 Delveaux, Jr., Director
 Roger G.
 Ferris, Director/s/ Joseph
 J. Morgan
 
 /s/ William
 ParsonsJoseph J.
 Morgan, Director
 William
 Parsons, Director/s/ Terrence
 R. Fulwiler
 
 /s/ Paul Jay
 SturmTerrence R.
 Fulwiler, Director
 Paul Jay
 Sturm, Director/s/ Louis J. Rick
 JeanquartLouis J. Rick
 Jeanquart, Director* Each of the
above signatures is affixed as of March 15, 2010.

82Table of Contents

Exhibit No.
 
 Description3.1
 
 Articles of
 Incorporation, as amended through July 3, 2001, incorporated by reference to
 Exhibit 4.1 from the Companys Registration Statement on Form S-3 (File No.
 333-118857) filed on September 8, 20043.2
 
 Articles of
 Amendment to Articles of Incorporation, incorporated by reference to Exhibit
 3.1 from the Companys Quarterly Report on Form 10-Q for the quarter ended
 June 30, 20073.3
 
 Composite
 Articles of Incorporation, incorporated by reference to Exhibit 3.2 from the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 20073.4
 
 Bylaws, as
 amended through February 21, 1996, incorporated by reference to Exhibit 4.2
 from the Companys Registration Statement on Form S-3 (File No. 333-118857)
 filed on September 8, 20044.1
 
 Advances,
 Collateral Pledge, and Security Agreement dated as of August 8, 1997 between
 Baylake Bank and Federal Home Loan Bank of Chicago, incorporated by reference
 to Exhibit 4.1 from the Companys Annual Report on Form 10-K for the fiscal
 year ended December 31, 200610.1
 
 Baylake
 Banks Deferred Compensation Program with Thomas L. Herlache*, incorporated
 by reference to Exhibit 10.3 from the Companys Annual Report on Form 10-K
 for the fiscal year ended December 31, 199310.2
 
 Baylake
 Banks Deferred Compensation and Salary Continuation Agreement with Richard
 A. Braun*, incorporated by reference to Exhibit 10.5 from the Companys
 Annual Report on Form 10-K for the fiscal year ended December 31, 199310.3
 
 Deferred
 Compensation Plan for Selected Directors of Baylake Bank (Money Purchase
 Compensation Plan) dated December 19, 1995*, incorporated by reference to
 Exhibit 10.3 from the Companys Annual Report on Form 10-K for the fiscal
 year ended December 31, 200610.4
 
 Baylake
 Corp. Stock Purchase Plan*, incorporated by reference to Exhibit 4 from the
 Companys Form S-8 filed on February 10, 199810.5
 
 Baylake
 Corp. 1993 Stock Option Plan, as amended in 1998*, incorporated by reference
 to Exhibit 99.1 from the Companys Form S-8 filed on September 21, 199810.6
 
 Baylake Bank
 Supplemental Executive Retirement Plan*, incorporated by reference to Exhibit
 10.8 from the Companys Annual Report on Form 10-K for the fiscal year ended
 December 31, 200410.7
 
 Employment
 Agreement dated as of June 30, 2006 between Baylake Bank and Robert J. Cera*,
 incorporated by reference to Exhibit 10.7 from the Companys Annual Report on
 Form 10-K for the fiscal year ended December 31, 200610.8
 
 Separation
 Agreement dated January 30, 2007 between Baylake Bank and Steven Jennerjohn*,
 incorporated by reference to Exhibit 10.1 from the Companys Current Report
 on Form 8-K filed on February 15, 200783Table of Contents

10.9
 
 Executive
 Employee Salary Continuation Agreement for Thomas L. Herlache dated October
 1, 1999*, incorporated by reference to Exhibit 10.9 from the Companys Annual
 Report on Form 10-K for the Fiscal year ended December 31, 200610.10
 
 Preferred
 Compensation Agreement, incorporated by reference to Exhibit 10.1 from the
 Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2007*10.11
 
 Non-Qualified
 Retirement Trust incorporated by reference from the Companys Quarterly
 Report on Form 10-Q for the quarter ended March 31, 2007*10.12
 
 Amendments
 to Deferred Compensation Agreements with Thomas L. Herlache and Summary of
 Benefits for serving as Chairman, incorporated by reference from the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007*10.13
 
 Description
 of employment arrangement between the Company and Joseph L. Hoffmeyer,
 incorporated by reference to the Companys Current Report on For 8-K dated
 December 5, 2008*16.1
 
 Letter of
 Crowe Chizek and Company LLC regarding change in independent registered
 public accounting firm, incorporated by reference to Exhibit 16.1 of the
 Companys Current Report on Form 8-K filed on May 5, 200821.1
 
 List of
 Subsidiaries23.1
 
 Consent of
 Baker Tilly Virchow Krause, LLP23.2
 
 Consent of
 Crowe Horwath, LLP24.1
 
 Power of
 Attorney (contained on the Signature Page)31.1
 
 Certification
 of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
 Securities Exchange Act of 1934, as amended31.2
 
 Certification
 of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
 Securities Exchange Act of 1934, as amended32.1
 
 Certification
 of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities
 Exchange Act of 1934, as amended and 18 U.S.C. Section 135032.2
 
 Certification
 of the Chief Financial Officer pursuant to Rule 13a-14(b) under the
 Securities Exchange Act of 1934, as amended and 18 U.S.C. Section 1350* Designates compensation plans or agreements84