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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, 2008                 
|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 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 x | Smaller reporting company o
|(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,
2008, (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
$6.35 reported bid price on that date) held by non-affiliates (excludes a
total of 557,635 shares reported as beneficially owned by directors and
executive officers-does not constitute an admission as to affiliate status) was
approximately $46,697,284. As of March 9, 2009, 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 2009 Annual Meeting of Shareholders to be
filed within 120 days of the fiscal year ended December 31, 2008 |  | Part III                              

2







2008 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                                                                                     | 13      
|         | ITEM 2.  | Properties                                                                                                    | 13      
|         | ITEM 3.  | Legal Proceedings                                                                                             | 14      
|         | ITEM 4.  | Submission of Matters to a Vote of Security
  Holders                                                         | 14      
|         |          |                                                                                                               |         
|PART II  |          |                                                                                                               |         
|         | ITEM 5.  | Market for Registrants Common Equity,
  Related Stockholder Matters and Issuer Purchase of Equity Securities | 14      
|         | ITEM 6.  | Selected Financial Data                                                                                       | 17      
|         | ITEM 7.  | Managements Discussion and Analysis of
  Financial Condition and Results of Operations                       | 18      
|         | ITEM 7A. | Quantitative and Qualitative Disclosures
  about Market Risk                                                  | 46      
|         | ITEM 8.  | Financial Statements and Supplementary
Data                                                                   | 46      
|         | ITEM 9.  | Changes and Disagreements with Accountants
  on Accounting and Financial Disclosure.                          | 89      
|         | ITEM 9A  | Controls and Procedures                                                                                       | 89      
|         | ITEM 9B  | Other Information                                                                                             | 89      
|         |          |                                                                                                               |         
|PART III |          |                                                                                                               |         
|         | ITEM 10. | Directors and Executive Officers of the
  Registrant and Corporate Governance                                 | 89      
|         | ITEM 11. | Executive Compensation                                                                                        | 89      
|         | ITEM 12. | Security Ownership of Certain Beneficial
  Owners and Management And Related Stockholder Matters              | 89      
|         | ITEM 13. | Certain Relationships and Related
  Transactions, and Director independence                                   | 90      
|         | ITEM 14. | Principal Accountant Fees and
Services                                                                        | 90      
|         |          |                                                                                                               |         
|PART IV  |          |                                                                                                               |         
|         | ITEM 15. | Exhibits and Financial Statement
Schedules                                                                    | 91      
|         |          |                                                                                                               |         
|         |          | Signatures                                                                                                    | 91      

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Table of Contents

PART I

ITEM 1. BUSINESS

General

Baylake Corp. is a Wisconsin corporation organized in 1976, 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, 2008, we had total assets of approximately $1.1
billion. For additional financial information, see our Consolidated Financial
Statements and Notes at 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 this 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, food related
products and, to a lesser degree, lumber and furniture.

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, currently being
offered for sale; 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
39 banks (including Baylake Bank) and ATM processing services to approximately
48 banks, 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. Lending
activity has been 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 recreation industry, including restaurants
and lodging businesses, totaled approximately $135.9 million at December 31,
2008, or 18.6% of our loans 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-related businesses over
the last twenty four 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, 2008 were approximately
$728.7 million, consisting of 52.4% commercial real estate loans, 18.4%
residential real estate loans, 9.6% construction and land development real
estate loans, 15.2% commercial and industrial loans, 1.8% consumer and 2.7% tax
exempt loans.

Investments

We maintain a portfolio of investments, primarily consisting of U.S.
Treasury securities, U.S. Government approved 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, 2008, our total deposits were
approximately $849.8 million, including interest-bearing deposits of $776.2
million and non-interest bearing deposits of $73.6 million.

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 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 seasonal, with the season 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 Federal Reserve Board
under the BHCA. Under the BHCA, we are subject to examination by the Board of
Governors of the Federal Reserve System (the FRB) 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 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 examination and
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.

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
Wisconsin Department of Financial Institutions, Division of Banking (WDFI).

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-chartered bank, we are subject to supervision and
regulation by the 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 our 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.

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 comprised of 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 USA PATRIOT Act (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, 2008, we had 315 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 difficulty 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. In 2008, the
U.S. government, the FRB and other regulators have taken numerous
steps to increase liquidity and to restore investor confidence, including
investing in the equity of other banking organizations. In spite of this, asset
values have continued to decline, and access to liquidity continues to be very
limited.

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 2008 has been adverse for many
households and businesses in the United States. The business environment in the
markets in which we operate have been adversely affected and continue to
deteriorate. We can provide no assurance that the business environment in
Northeastern Wisconsin and the United States will not 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.

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.

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 52.4% of our loans are concentrated in commercial real estate
lending as of year-end 2008, compared to 50.9% as of December 31, 2007.
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 and inherent losses that may occur within the existing portfolio of
loans. 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.

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Continuing deterioration in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem
loans, and other factors, both within and outside 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 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 year 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.

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.

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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 line 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 FDICs deposit funds, our depositors and the public, rather than our
stockholders. We are also subject to regulation by the SEC. Failure to comply
with 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 may 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 Stability 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 include 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 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 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.

Effective January 1, 2007, the FDIC adopted a risk-based system for
assessment of deposit insurance premiums under which all institutions are
required to pay at least minimum annual premiums. In addition, in an effort to
replenish the Deposit Insurance Fund in the wake of the recent increase in bank
failures in the United States, the FDIC changed its rate structure in December
2008 to increase premiums effective for assessments in the first quarter of
2009. Further, in February 2009, the FDIC issued a proposed interim rule to
impose a special one-time 20 basis points (bps) assessment against all
financial institutions in the second quarter of 2009, payable in the third
quarter of 2009. This proposed rule is open to public comment and is subject to
change. The system categorizes institutions into one of four risk categories
depending on capitalization and supervisory rating criteria. Due to our banks
performance in 2008 and these changes to the FDIC rate structure, our FDIC
insurance expense could increase significantly for 2009 and have a material
adverse effect on our consolidated results of operation.

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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,
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 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.

Like many Wisconsin financial institutions, our bank has a subsidiary in
Nevada which holds and manages investments and other earning assets (Nevada
Subsidiary); the income on these assets has not been subject to Wisconsin tax.
The Wisconsin Department of Revenue (WDOR) instituted an audit program
specifically aimed at out-of-state subsidiaries. During 2007, WDOR performed an
audit of our subsidiary and subsequently issued a proposed assessment to us. We
recently negotiated a settlement with WDOR to resolve all open Wisconsin tax
matters through 2006 related to our Nevada Subsidiary. However, as a result of
recent combined reporting legislation passed in Wisconsin, we will be subject
to higher Wisconsin taxes going forward with respect to income generated by our
Nevada Subsidiary.

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Our regulatory capital ratios and those of our bank do not meet the
guidelines established by our regulators for well-capitalized institutions.

As a result of recent operating losses we have experienced, our
regulatory capital ratios, and those of our bank, fell below thresholds
established by our regulators for well capitalized institutions under the
regulatory framework for prompt corrective action. While our banks capital
ratios remain in excess of levels established for adequately capitalized
financial institutions, as a result of falling below the well capitalized level,
our bank will be required, among other things, to obtain the approval of its
regulator before further participating in the brokered deposit market, which
could have a material adverse impact on its liquidity and, in turn, 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 a 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.

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

If our stock price continues to decline, or remains 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 the 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.

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

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.

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 services. 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.

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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 results of operations or financial
position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 2008.

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 listed on the OTC Bulletin Board
(Trading symbol: bylk), 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 pershare |      
|2007 |  |                 | 1st Quarter |      | $ | 16.65 |  | $                       | 15.00 |  | $ | 0.16 |  | 
|     |  |                 | 2nd Quarter |      | $ | 15.45 |  | $                       | 13.75 |  | $ | 0.16 |  | 
|     |  |                 | 3rd Quarter |      | $ | 13.85 |  | $                       | 12.00 |  | $ | 0.16 |  | 
|     |  |                 | 4th Quarter |      | $ | 13.65 |  | $                       | 10.25 |  | $ | 0.16 |  | 
|     |  |                 |             |      |   |       |  |                         |       |  |   |      |  | 
|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  |  | $ |     |  | 

We had approximately 1,723 shareholders of record at March 10, 2009.
The number of shareholders does not 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.

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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 our banks undivided profits after all payments
of all necessary expenses, provided that our 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 the 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 versus 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 Wisconsin Department of Financial Institutions
as well as the Federal Reserve Board.

We did not sell any equity securities without registration during the
fourth quarter of 2008.

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.

In June 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, by no later than 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
stockholders equity. We repurchased the final 50,000 shares authorized under
this program prior to June 30, 2007. In July 2007, our Board of Directors
approved a reimplementation of this program, for an additional 300,000 shares,
through June 30, 2008. We repurchased 79,000 shares under this extended program
between July 1 and December 31, 2007. No shares were repurchased in 2008 and
this program expired on June 30, 2008.

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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


(LINE GRAPH)


|                   |  |                 |        |      |  |        |  |      |        |      |  |        |  |  |        |  |  |       | 
|------------------ |  | --------------- | ------ | ---- |  | ------ |  | ---- | ------ | ---- |  | ------ |  |  | ------ |  |  | ----- | 
|                   |  | At December 31, |       
|                   |  | 2003            |        | 2004 |  | 2005   |  | 2006 |        | 2007 |  | 2008   | 
|Baylake
 Corp.     |  |                 | 100.00 |      |  | 124.17 |  |      | 120.32 |      |  | 124.01 |  |  | 83.71  |  |  | 40.44 | 
|NASDAQ Bank
 Index |  |                 | 100.00 |      |  | 110.99 |  |      | 106.18 |      |  | 117.87 |  |  | 91.85  |  |  | 69.88 | 
|S&P 500            |  |                 | 100.00 |      |  | 108.99 |  |      | 112.26 |      |  | 127.55 |  |  | 132.06 |  |  | 81.23 | 

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Assumes $100 invested on
 December 31, 2003 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,                       |           |      |   |           |   |      |          
|                                                                        |  | 2008                                          |           | 2007 |   | 2006      |   | 2005 |           | 2004 |  
|                                                                        |  | (dollars in thousands, except per share data) |          
|                                                                       
|Results of operations:                                                  |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Interest and dividend income                                            |  | $                                             | 57,276    |      | $ | 69,668    |   | $    | 70,014    |      | $ | 61,538    |   | $ | 50,362    |  
|Interest expense                                                        |  |                                               | 28,227    |      |   | 38,753    |   |      | 36,378    |      |   | 26,660    |   |   | 16,357    |  
|Net interest income                                                     |  |                                               | 29,049    |      |   | 30,915    |   |      | 33,636    |      |   | 34,878    |   |   | 34,005    |  
|Provision for loan losses                                               |  |                                               | 17,961    |      |   | 9,761     |   |      | 903       |      |   | 3,217     |   |   | 1,599     |  
|Net interest income after provision for
 loan losses                    |  |                                               | 11,088    |      |   | 21,154    |   |      | 32,733    |      |   | 31,661    |   |   | 32,406    |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Non-interest income                                                     |  |                                               | 9,257     |      |   | 9,174     |   |      | 9,737     |      |   | 11,597    |   |   | 9,526     |  
|Non-interest expense:                                                   |  |                                               | 38,022    |      |   | 32,578    |   |      | 32,329    |      |   | 30,519    |   |   | 26,479    |  
|Income (loss) before provision (benefit)
 for income taxes              |  |                                               | (17,677   | )    |   | (2,250    | ) |      | 10,141    |      |   | 12,739    |   |   | 15,453    |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Income tax provision (benefit)                                          |  |                                               | (7,860    | )    |   | (2,416    | ) |      | 2,765     |      |   | 3,836     |   |   | 4,680     |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net income (loss)                                                       |  | $                                             | (9,817    | )    | $ | 166       |   | $    | 7,376     |      | $ | 8,903     |   | $ | 10,773    |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Per Share Data:(1)                                                      |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net income (loss) per share (basic)                                     |  | $                                             | (1.24     | )    | $ | 0.02      |   | $    | 0.95      |      | $ | 1.15      |   | $ | 1.41      |  
|Net income (loss) per share (diluted)                                   |  |                                               | (1.24     | )    |   | 0.02      |   |      | 0.94      |      |   | 1.14      |   |   | 1.40      |  
|Cash dividends per common share                                         |  |                                               |          |      |   | 0.64      |   |      | 0.64      |      |   | 0.61      |   |   | 0.57      |  
|Book value per share at end of period                                   |  |                                               | 8.72      |      |   | 10.18     |   |      | 10.50     |      |   | 10.09     |   |   | 9.91      |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Selected Financial Condition
 Data (at December 31):                    |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Total assets                                                            |  | $                                             | 1,062,913 |      | $ | 1,106,616 |   | $    | 1,111,684 |      | $ | 1,089,408 |   | $ | 1,047,748 |  
|Securities                                                              |  |                                               | 225,417   |      |   | 222,475   |   |      | 188,315   |      |   | 171,638   |   |   | 197,392   |  
|Gross loans                                                             |  |                                               | 728,722   |      |   | 760,210   |   |      | 819,568   |      |   | 812,296   |   |   | 757,228   |  
|Total deposits                                                          |  |                                               | 849,758   |      |   | 884,185   |   |      | 878,911   |      |   | 856,711   |   |   | 844,541   |  
|                                                                       
|Short-term borrowings (2)                                               |  |                                               | 30,174    |      |   | 27,174    |   |      | 4,480     |      |   | 1,315     |   |   | 1,284     |  
|                                                                       
|Other borrowings (3)                                                    |  |                                               | 85,095    |      |   | 85,172    |   |      | 115,179   |      |   | 125,185   |   |   | 100,192   |  
|Subordinated debentures                                                 |  |                                               | 16,100    |      |   | 16,100    |   |      | 16,100    |      |   | 16,100    |   |   | 16,100    |  
|Total shareholders equity                                              |  |                                               | 68,954    |      |   | 80,262    |   |      | 82,193    |      |   | 78,544    |   |   | 76,205    |  
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Performance Ratios:                                                     |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Return on average assets                                                |  |                                               | (0.91     | %)   |   | 0.02      | % |      | 0.67      | %    |   | 0.82      | % |   | 1.07      | %
|Return on average total shareholders
 equity                           |  |                                               | (12.35    | %)   |   | 0.21      | % |      | 9.33      | %    |   | 11.51     | % |   | 14.88     | %
|Dividend payout ratio                                                   |  |                                               |          |      |   | 3,030.48  | % |      | 67.67     | %    |   | 52.99     | % |   | 40.49     | %
|Net interest margin (4)                                                 |  |                                               | 3.11      | %    |   | 3.21      | % |      | 3.44      | %    |   | 3.60      | % |   | 3.76      | %
|Net interest spread (4)                                                 |  |                                               | 2.89      | %    |   | 2.80      | % |      | 3.05      | %    |   | 3.27      | % |   | 3.52      | %
|Non-interest income to average assets                                   |  |                                               | 0.86      | %    |   | 0.83      | % |      | 0.89      | %    |   | 1.07      | % |   | 0.94      | %
|Non-interest expense to average assets                                  |  |                                               | 3.53      | %    |   | 2.96      | % |      | 2.94      | %    |   | 2.81      | % |   | 2.63      | %
|Net overhead ratio (5)                                                  |  |                                               | 2.67      | %    |   | 2.12      | % |      | 2.06      | %    |   | 1.74      | % |   | 1.68      | %
|Average loan-to-average deposit ratio                                   |  |                                               | 87.18     | %    |   | 91.24     | % |      | 94.73     | %    |   | 94.16     | % |   | 93.63     | %
|Average interest-earning assets to average interest-bearing liabilities |  |                                               | 107.41    | %    |   | 110.58    | % |      | 111.09    | %    |   | 112.73    | % |   | 113.59    | %
|Efficiency ratio (6)                                                    |  |                                               | 97.54     | %    |   | 78.93     | % |      | 72.48     | %    |   | 63.88     | % |   | 52.23     | %
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Asset Quality Ratios:(7)                                                |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Non-performing loans to total loans                                     |  |                                               | 6.04      | %    |   | 4.94      | % |      | 3.40      | %    |   | 0.85      | % |   | 0.78      | %
|Allowance for loan losses to:                                           |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Gross loans                                                             |  |                                               | 1.86      | %    |   | 1.56      | % |      | 0.98      | %    |   | 1.18      | % |   | 1.38      | %
|Non-performing loans                                                    |  |                                               | 30.78     | %    |   | 31.53     | % |      | 29.46     | %    |   | 137.58    | % |   | 176.44    | %
|Net charge-offs to average loans                                        |  |                                               | 2.18      | %    |   | 0.74      | % |      | 0.29      | %    |   | 0.52      | % |   | 0.45      | %
|Non-performing assets to total assets                                   |  |                                               | 4.82      | %    |   | 3.86      | % |      | 3.02      | %    |   | 0.94      | % |   | 0.81      | %
|                                                                        |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Capital Ratios:(8)                                                      |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Shareholders equity to assets                                          |  |                                               | 6.49      | %    |   | 7.25      | % |      | 7.39      | %    |   | 7.21      | % |   | 7.27      | %
|Tier 1 risk-based capital                                               |  |                                               | 8.47      | %    |   | 10.07     | % |      | 10.00     | %    |   | 9.70      | % |   | 9.75      | %
|Total risk-based capital                                                |  |                                               | 9.72      | %    |   | 11.32     | % |      | 10.87     | %    |   | 10.73     | % |   | 10.95     | %
|Leverage ratio                                                          |  |                                               | 6.68      | %    |   | 8.34      | % |      | 8.53      | %    |   | 8.27      | % |   | 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
 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 OPERATIONS

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.

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Allowance for Loan Losses: 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 an allocated component on specific loans and an
unallocated component for loans without specific reserves. The components of
the ALL represent estimations pursuant to either SFAS No. 5, Accounting
for Contingencies, or SFAS No. 114, Accounting by Creditors for Impairment
of a Loan. The allocated component of the ALL for loan losses
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 unallocated component is based on our historical loss experience which is
updated quarterly. The unallocated component of the allowance for loan losses
also includes consideration of concentrations, changes in portfolio mix and
volume and other qualitative factors.

There are many factors affecting the ALL; some 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.

Foreclosed Assets: Foreclosed assets acquired
through or in lieu of loan foreclosure are initially recorded at fair value
when acquired, 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
valuation allowance is recorded through expense. Costs 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 letter 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 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 and liabilities are adequate and
properly recorded in the consolidated financial statements. See Note 16-Income
Tax Expense to our consolidated financial statements for further information.

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Income tax expense may be affected by developments in the state of
Wisconsin. Like many financial institutions that are located in Wisconsin, a
subsidiary of our bank located in the state of Nevada holds and manages various
investment securities. Because these subsidiaries are located outside
Wisconsin, income from their operations has not historically been subject to
Wisconsin state taxation. Although the WDOR issued favorable tax rulings
regarding Nevada subsidiaries of Wisconsin financial institutions at the time
such subsidiaries were formed, WDOR representatives have stated that the WDOR
intends to revoke those rulings and tax some or all these subsidiaries income,
even though there has been no intervening change in the law. The WDOR also
implemented a program in 2003 for the audit of Wisconsin financial institutions
that have formed and contributed assets to subsidiaries located in Nevada.

We continue to believe that we have reported income and paid Wisconsin
taxes correctly in accordance with applicable tax laws and the WDORs prior
longstanding interpretations thereof, including interpretations issued
specifically to it. However, in view of the WDORs subsequent change in
position (even if that change does not have a basis in law), the aggressive
stance taken by the WDOR, the settlements by many other banks, and the potential
effect that decisions by other similarly situated institutions may have on our
alternatives going forward, we determined that we would consider a settlement
proposal from the WDOR. In July 2007, WDOR notified us that they would be
auditing our tax returns for the years 2002 through 2006. During the third and
fourth quarter of 2007, a formal audit of our bank was commenced by WDOR. In
February 2008, the only proposed adjustment made during the course of the audit
was to reallocate income of the Nevada subsidiary to our bank and WDOR issued a
proposed assessment. However, no formal final assessment was issued.

Management, in coordination with outside counsel, negotiated a
settlement with WDOR to resolve all Wisconsin tax matters for all tax years
through and including 2006, and 2007 for all issues arising in connection with
our Nevada Subsidiary. This settlement amount agreed to by our bank will be
paid over three years in equal installments (the Settlement Payments). We
previously accrued more than a sufficient amount to cover the Settlement
Payments; accordingly, the Settlement Payments will not have a material impact
on our operations going forward. The first installment was paid to WDOR during
the fourth quarter of 2008.

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. We are evaluating this
legislation and have not yet determined its effect on the recorded value of our
deferred tax assets or its overall financial impact.

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 state bank in Wisconsin and a
member bank of the Federal Reserve 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 provision for loan losses, operating expenses, income taxes and, to a
lesser extent, non-interest income. Economic conditions, competition and the
monetary and fiscal policies of the Federal government in general,
significantly affect financial institutions, including us. During the latter
half of 2004 continuing through mid-year 2006, the FRB steadily increased
interest rates intending to stabilize the current economy and keep inflation
under control, since the general health of the United States economy was
strong. From mid-year 2006 through mid-year 2007, the FRB kept interest rates
stable. Since September 2007, however, the FRB has significantly decreased
interest rates. Net interest income decreased for 2007 due to our high level of
non-performing, non-accrual loans and reduced interest income. 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 initiated strategic changes to our
bank operations intended to enhance utilization of resources and the
effectiveness of customer services within our market areas. We have developed
an internal customer relationship management system (CRM) to more effectively
manage and market to our internal customer base.

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Throughout the
first three quarters of 2008, our regulatory capital ratios and those of our
bank were in excess of the levels established by regulatory agencies for well
capitalized financial institutions. 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. We continue our emphasis on improving
asset quality, especially related to our level of non-performing commercial
loans.

Performance Summary

The following
is a brief summary of some of the factors that affected our operating results
in 2008. See the remainder of this section for a more thorough discussion.

We reported a
net loss of $9.8 million for the year ended December 31, 2008, a decrease of
$10.0 million compared to $0.2 million earned in 2007. Both basic and diluted
loss per share were $1.24 for 2008 compared to $0.02 basic and
diluted earnings per share for 2007. Return on average assets for the year
ended December 31, 2008 was -.91% and 0.02% for the year ended December 31,
2007. The return on average equity was -12.35% for 2008 and 0.21% for 2007. No
cash dividends were declared in 2008, compared to $0.64 per share in 2007. Key
factors behind these results were:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Net interest income and net interest margin were impacted in 2008 by
 a decreasing interest rate environment for most of the year, thereby
 decreasing interest spread.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | § | Tax-equivalent net interest income was $30.5 million for 2008, a
 decrease of $1.9 million or 5.9% from $32.4 million for 2007. Tax-equivalent
 interest income decreased $12.4 million, while interest expense decreased
 $10.5 million. The decrease in tax-equivalent net interest income was
 attributable to unfavorable volume variances with balance sheet reduction and
 differences in the mix of average earning assets and average interest-bearing
 liabilities negatively impacting tax-equivalent net interest income by $1.9
 million. The net interest margin for 2008 was 3.11%, compared to 3.21% in
 2007. The 10 bps decrease in net interest margin largely resulted from a 9
 bps increase in interest rate spread caused by a 106 bps decrease in the
 return on interest-bearing assets which was more than offset by a 115 bps
 decrease in the cost of interest-earning liabilities.
| | § | Total loans were $728.7 million at December 31, 2008, a decrease of
 $31.5 million, or 4.1%, from December 31, 2007. Commercial real estate loans
 decreased $5.2 million (1.3%) and represented 52.4% of total loans at
 December 31, 2008, compared to 50.9% at year-end 2007. Total deposits were
 $849.8 million at December 31, 2008, a decrease of $34.4 million, or 3.9%,
 from year-end 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | § | Charge-offs increased from a year ago. Net loan charge-offs were
 $16.2 million in 2008, an increase of $10.2 million over 2007 results. Net
 loan charge-offs for commercial loans represented $11.2 million of the $16.2
 million total in 2008. Net loan charge-offs represented 2.18% of average
 loans in 2008 compared to 0.74% in 2007. The provision for loan losses
 increased to $18.0 million for 2008 compared to $9.8 million in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | § | Non-interest income was $9.3 million for 2008, an increase of $0.1
 million or 0.9% from 2007 results. A $0.4 million increase in net gains from
 sales of securities, an increase in equity earnings of our UFS subsidiary of
 $0.3 million, a $0.4 million increase in fees for services to customers and a
 settlement favoring the Company of $0.5 million were offset by a $0.8 million
 lower increase in the cash surrender value of life insurance. In addition,
 fees from loan servicing and net gains from sales of loans declined $0.3
 million each during 2008.                                                                                                                                                                                                                                                                                                                                 
| | § | Non-interest expense was $38.0 million for 2008, an increase of $5.4
 million over 2007 results. This was primarily the result of a provision on a
 standby letter of credit of $2.5 million, a provision for other than
 temporary impairment of securities of $1.9 million and increases in the areas
 of operation of foreclosed properties and loan and collection expenses of
 $3.1 million and $0.2 million, respectively, offset by a decline of $2.3
 million in salaries and employee benefits due to management restructuring,
 reduced staffing levels and reduced bonus expense.                                                                                                                                                                                                                                                                                                                  
| | § | Provision for income taxes resulted in a tax benefit of $7.9 million
 versus a tax benefit of $2.4 million for 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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STATEMENT OF OPERATIONS ANALYSIS

2008 compared to
2007

Net Interest Income

Net interest income represents the difference between interest earned
on interest-earning assets and 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, 2008, 2007 and 2006.

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-bearing assets, which was more than offset by a 115 bps decrease in
the cost of interest-earning liabilities in 2008.

We had positioned the balance sheet to be slightly asset sensitive
(which means that assets will re-price 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%, attributable to
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
compared to 2007, to 3.09%, 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 (comprised of
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, as 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 decrease related to the lower yields on such loans. Balances of
securities and short-term investments increased $31.4 million on average. 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.

Average interest-bearing liabilities decreased $0.2 million from 2007,
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 is primarily
attributable to a decrease in demand deposits. Average non-interest bearing
demand deposits decreased by $20.9 million, or 22.3%. Average interest-bearing
deposits declined $7.5 million, or 1.0%, to $780.5 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 $0.2 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-earning deposits. Average
wholesale-funding sources decreased by $7.3 million during 2008. For 2008,
interest expense on wholesale funding sources decreased by $2.5 million from
declining rates versus 2007 results.

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Table of Contents

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

|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|------------------------------------------- |  | ----------------------- | --------- | -------- | - | ------------- |  | -------------------- | - | -------- | --------- | ------------- | - | -------------------- |  | -------- | - | ------------- | --------- |  | - | ------ |  | ----- | -
|                                            |  | Year ended December 31, |          
|                                            |  | 2008                    |           | 2007     |   | 2006          | 
|                                            |  | Average
 Balance (1)    |           | Interest |   | Average
 Rate |  | Average
 Balance (1) |   | Interest |           | Average
 Rate |   | Average
 Balance (1) |  | Interest |   | Average
 Rate |          
|                                            |  | (dollars in thousands)  |          
|ASSETS:                                     |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Earning Assets                              |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Loans (2)(3)(4)                             |  | $                       | 743,930   |          |   | 46,640        |  | 6.27                 | % | $        | 804,493   |               |   | 61,165               |  | 7.60     | % | $             | 818,086   |  |   | 61,909 |  | 7.57  | %
|U.S. Treasuries                             |  |                         |          |          |   |              |  | 0.00                 | % |          |          |               |   |                     |  | 0.00     | % |               | 72        |  |   | 3      |  | 4.17  | %
|US government approved agencies             |  |                         | 151,622   |          |   | 7,122         |  | 4.70                 | % |          | 135,372   |               |   | 5,898                |  | 4.36     | % |               | 136,226   |  |   | 5,928  |  | 4.35  | %
|State and municipal obligations (2)         |  |                         | 55,268    |          |   | 3,368         |  | 6.09                 | % |          | 52,330    |               |   | 3,225                |  | 6.16     | % |               | 39,728    |  |   | 2,573  |  | 6.48  | %
|Other Securities                            |  |                         | 21,488    |          |   | 1,400         |  | 6.52                 | % |          | 12,635    |               |   | 598                  |  | 4.73     | % |               | 10,671    |  |   | 450    |  | 4.22  | %
|Federal funds sold                          |  |                         | 7,003     |          |   | 149           |  | 2.13                 | % |          | 3,211     |               |   | 159                  |  | 4.95     | % |               | 5,694     |  |   | 290    |  | 5.09  | %
|Other money market instruments              |  |                         | 2,988     |          |   | 76            |  | 2.55                 | % |          | 3,373     |               |   | 159                  |  | 4.71     | % |               | 1,983     |  |   | 89     |  | 4.49  | %
|Total earning assets                        |  | $                       | 982,299   |          | $ | 58,755        |  | 5.98                 | % | $        | 1,011,414 |               | $ | 71,204               |  | 7.04     | % | $             | 1,012,460 |  | $ | 71,242 |  | 7.04  | %
|Non-interest earning assets                 |  |                         | 96,137    |          |   |               |  |                      |   |          | 90,376    |               |   |                      |  |          |   |               | 85,640    |  |   |        |  |       |  
|Total assets                                |  | $                       | 1,078,436 |          |   |               |  |                      |   | $        | 1,101,790 |               |   |                      |  |          |   | $             | 1,098,100 |  |   |        |  |       |  
|LIABILITIES AND STOCKHOLDERS EQUITY        |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Interest bearing Liabilities                |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|NOW accounts                                |  | $                       | 123,404   |          | $ | 1,556         |  | 1.26                 | % | $        | 110,322   |               | $ | 2,798                |  | 2.54     | % | $             | 103,740   |  | $ | 2,353  |  | 2.27  | %
|Savings accounts                            |  |                         | 232,495   |          |   | 4,312         |  | 1.85                 | % |          | 262,026   |               |   | 9,125                |  | 3.48     | % |               | 263,018   |  |   | 8,970  |  | 3.41  | %
|Time deposits> $100M                        |  |                         | 211,476   |          |   | 9,322         |  | 4.41                 | % |          | 212,133   |               |   | 10,420               |  | 4.91     | % |               | 218,116   |  |   | 9,558  |  | 4.38  | %
|Time deposits<$100M                         |  |                         | 213,147   |          |   | 8,671         |  | 4.07                 | % |          | 203,547   |               |   | 9,587                |  | 4.71     | % |               | 183,755   |  |   | 7,604  |  | 4.14  | %
|Total interest-bearing deposits             |  |                         | 780,522   |          |   | 23,861        |  | 3.06                 | % |          | 788,028   |               |   | 31,930               |  | 4.05     | % |               | 768,629   |  |   | 28,485 |  | 3.71  | %
|Federal funds purchased                     |  |                         | 2,888     |          |   | 86            |  | 2.98                 | % |          | 9,067     |               |   | 497                  |  | 5.48     | % |               | 7,496     |  |   | 394    |  | 5.26  | %
|Repurchase agreements                       |  |                         | 29,861    |          |   | 695           |  | 2.33                 | % |          | 7,981     |               |   | 387                  |  | 4.85     | % |               | 1,207     |  |   | 48     |  | 3.98  | %
|FHLB advances                               |  |                         | 85,145    |          |   | 2,791         |  | 3.28                 | % |          | 93,504    |               |   | 4,850                |  | 5.19     | % |               | 117,702   |  |   | 5,745  |  | 4.88  | %
|Subordinated debentures                     |  |                         | 16,100    |          |   | 794           |  | 4.93                 | % |          | 16,100    |               |   | 1,089                |  | 6.76     | % |               | 16,365    |  |   | 1,705  |  | 10.42 | %
|Long term debt                              |  |                         |          |          |   |              |  |                     |   |          |          |               |   |                     |  |         |   |               |          |  |   |       |  |      |  
|Total interest-bearing liabilities          |  | $                       | 914,516   |          | $ | 28,227        |  | 3.09                 | % | $        | 914,680   |               | $ | 38,753               |  | 4.24     | % | $             | 911,399   |  | $ | 36,377 |  | 3.99  | %
|Demand deposits                             |  |                         | 72,852    |          |   |               |  |                      |   |          | 93,706    |               |   |                      |  |          |   |               | 94,938    |  |   |        |  |       |  
|Accrued expenses and other
 liabilities     |  |                         | 11,546    |          |   |               |  |                      |   |          | 12,587    |               |   |                      |  |          |   |               | 12,672    |  |   |        |  |       |  
|Stockholders equity                        |  |                         | 79,522    |          |   |               |  |                      |   |          | 80,817    |               |   |                      |  |          |   |               | 79,091    |  |   |        |  |       |  
|Total liabilities and
 shareholders equity |  | $                       | 1,078,436 |          |   |               |  |                      |   | $        | 1,101,790 |               |   |                      |  |          |   | $             | 1,098,100 |  |   |        |  |       |  
|Net interest income and rate spread         |  |                         |           |          | $ | 30,528        |  | 2.89                 | % |          |           |               | $ | 32,451               |  | 2.80     | % |               |           |  | $ | 34,865 |  | 3.05  | %
|Net interest margin                         |  |                         |           |          |   |               |  | 3.11                 | % |          |           |               |   |                      |  | 3.21     | % |               |           |  |   |        |  | 3.44  | %

| |     |                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Average
 balances were generally computed using daily balances.                                                                         
| | (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.
| | (3) | Nonaccrual
 loans and loans held for sale have been included in the average balances.                                                   
| | (4) | Interest
 income includes loan fees, net of amortization.                                                                               

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Table 2: Rate/Volume Analysis (1)

|                                     |  |                                                   |        |                                                   |   |         |   |        |         |      |   |        |   |   |        |   |   |        |  
|------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------------------------------- | - | ------- | - | ------ | ------- | ---- | - | ------ | - | - | ------ | - | - | ------ | -
|                                     |  | 2008 compared to 2007
 Increase (Decrease) due to |        | 2007 compared to 2006
 Increase (Decrease) due to |  
|                                     |  | Volume                                            |        | Rate                                              |   | Net     |   | Volume |         | Rate |   | Net    |  
|                                     |  | (dollars in thousands)                            |       
|Interest
 income:                    |  |                                                   |        |                                                   |   |         |   |        |         |      |   |        |   |   |        |   |   |        |  
|Loans (2)                            |  | $                                                 | (3,306 | )                                                 | $ | (11,219 | ) | $      | (14,525 | )    | $ | (1,070 | ) | $ | 326    |   | $ | (744   | )
|U.S.
 treasuries                     |  |                                                   |       |                                                   |   |        |   |        |        |      |   | (3     | ) |   |       |   |   | (3     | )
|US
 government approved agencies     |  |                                                   | 556    |                                                   |   | 668     |   |        | 1,224   |      |   | (37    | ) |   | 7      |   |   | (30    | )
|State and
 municipal obligations (2) |  |                                                   | 135    |                                                   |   | 8       |   |        | 143     |      |   | 782    |   |   | (130   | ) |   | 652    |  
|Other
 securities                    |  |                                                   | 391    |                                                   |   | 411     |   |        | 802     |      |   | 89     |   |   | 59     |   |   | 148    |  
|Federal funds
 sold                  |  |                                                   | 87     |                                                   |   | (97     | ) |        | (10     | )    |   | (123   | ) |   | (8     | ) |   | (131   | )
|Other money
 market instruments      |  |                                                   | (12    | )                                                 |   | (71     | ) |        | (83     | )    |   | 65     |   |   | 5      |   |   | 70     |  
|Total
 earning assets                |  |                                                   | (2,149 | )                                                 |   | (10,300 | ) |        | (12,449 | )    |   | (297   | ) |   | 259    |   |   | (38    | )
|Interest
 expense:                   |  |                                                   |        |                                                   |   |         |   |        |         |      |   |        |   |   |        |   |   |        |  
|NOW accounts                         |  |                                                   | 225    |                                                   |   | (1,467  | ) |        | (1,242  | )    |   | 155    |   |   | 290    |   |   | 445    |  
|Savings
 accounts                    |  |                                                   | (701   | )                                                 |   | (4,112  | ) |        | (4,813  | )    |   | (34    | ) |   | 189    |   |   | 155    |  
|Time
 deposits                       |  |                                                   | 303    |                                                   |   | (2,317  | ) |        | (2,014  | )    |   | 601    |   |   | 2,244  |   |   | 2,845  |  
|Federal
 funds purchased             |  |                                                   | (185   | )                                                 |   | (226    | ) |        | (411    | )    |   | 85     |   |   | 18     |   |   | 103    |  
|Repurchase
 agreements               |  |                                                   | 448    |                                                   |   | (140    | ) |        | 308     |      |   | 326    |   |   | 13     |   |   | 339    |  
|FHLB
 advances                       |  |                                                   | (302   | )                                                 |   | (1,757  | ) |        | (2,059  | )    |   | (1,238 | ) |   | 343    |   |   | (895   | )
|Subordinated
 debentures             |  |                                                   |       |                                                   |   | (295    | ) |        | (295    | )    |   | (27    | ) |   | (589   | ) |   | (616   | )
|Long term
 debt                      |  |                                                   |       |                                                   |   |        |   |        |        |      |   |       |   |   |       |   |   |       |  
|Total
 interest-bearing liabilities  |  |                                                   | (212   | )                                                 |   | (10,314 | ) |        | (10,526 | )    |   | (132   | ) |   | 2,508  |   |   | 2,376  |  
|Net interest
 income                 |  | $                                                 | (1,937 | )                                                 | $ | 14      |   | $      | (1,923  | )    | $ | (165   | ) | $ | (2,249 | ) | $ | (2,414 | )

| |     |                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The change
 in interest due to both rate and volume has been allocated proportional 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.              

Provision for Loan
Losses

The PFLL is the cost of providing an allowance for probable and
inherent losses. The allowance 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 SFAS 114. 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 repayment
risk, employment and inflation statistics, concentration risk based on industry
type, new product growth and portfolio growth.

Net loan charge-offs for the
year ended December 31, 2008 were $16.2 million compared to net charge-offs of
$6.0 million for the same period in 2007. Net charge-offs to average loans were
2.18% for 2008 compared to 0.74% in 2007. For 2008, non-performing loans
increased by $6.5 million, 17.3% to $44.1 million from $37.6 million at
December 31, 2007. 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.

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Our management believes that the PFLL taken for the year ended December
31, 2008 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 UFS subsidiary and service charges are the
primary components of non-interest income. Total non-interest income for 2008
was $9.3 million, a $0.1 million or 0.9% increase from 2007. The non-interest
income to average assets ratio was 0.86% for the year ended December 31, 2008
compared to 0.83% for the same period in 2007.

In 2008, gains from sales of loans were curtailed by a slowdown in
refinancing activity throughout the industry as well as a slowdown in the Small
Business Administration loan sales activity. Loan servicing fees decreased $0.3
million and gains from sales of loans decreased $0.3 million from 2007 to 2008.
The decrease is the result of a decline in the outstanding portfolio balance of
the loans being serviced.  Secondary market loan production declined 40.9% from
2007 to 2008 ($40.8 million in 2007 versus $24.1 million in 2008).

Service charges on deposit accounts increased $0.4 million in 2008 due
in part to the continuation of the High Performance Checking program (HPC).
This has resulted in additional overdraft income
and increased service charges on commercial checking accounts, as the earnings credit rate has decreased
 partially offset by a reduction
in the number of service charge paying personal checking accounts. In addition, interchange income on debit card transactions
increased from $0.5 million in 2007 to $0.6 million in 2008.

For 2008, a gain of $0.1 million was realized on the sale of vacant
land to an unrelated third party.

Non-Interest Expense

Non-interest expense in 2008 increased to $38.0 million, a $5.4 million
or 16.7% increase compared to 2007, primarily as a result of a provision for
impairment of standby letters of credit, an other than temporary impairment of
securities charge, an increase in expenses related to the operation of
foreclosed properties and costs related to loans and collections, offset by a
decrease in salary and employee benefit expenses.

Salaries and employee benefits expense is the largest component of
non-interest expense, totaling $16.4 million in 2008, a decrease of $2.3
million, or 12.4%, from 2007 as a result of management restructuring and
reduced staffing. The number of full-time equivalent employees decreased from
327 in 2007 to 315 in 2008, a decrease of 3.7%. In addition, due to our
disappointing financial results in 2008 and 2007, there were no management
incentive bonuses earned in either year.

Also, contributing to the decrease in salary and employee benefits were
lower expenses related to the Baylake Bank Supplemental Executive Retirement
Plan (Plan), which is intended to provide certain management and highly
compensated employees of the Bank who have contributed and are expected to
continue to contribute to our success with deferred compensation, in addition
to that available under our other retirement programs. Costs associated with
the Plan amounted to $0.2 million for 2008, a decline of $0.6 million from 2007
due to the decision by the Bank to forego a contribution to the Plan in 2008,
of which a significant portion would have been accrued for during 2007. No
contribution is planned in 2009 based on our 2008 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 2009.

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Net occupancy expense for 2008 totaled $2.5 million, reflecting a
minimal increase compared to 2007. The increase was primarily due to normal
occupancy-related expense increases.

Data processing and courier expense in 2008 reflected a decrease of
$0.1 million, or 6.9% compared to 2007. Management estimates that data
processing expense should continue to show minimal increases in the future with
adjustments related only to any volume-related increases incurred. Outsourcing
of courier responsibilities contributed to the reduction in 2008.

Foreclosed property expenses are netted against income received from
such properties in the determination of net foreclosed property expense.
Foreclosed property reflected a net expense from the operation of such real
estate of $4.2 million in 2008. Provision for valuation reductions of
foreclosed properties were charged to 2008 operations in the amount of $3.6
million, reflecting a decline in perceived market values of properties obtained
by us in collection efforts. A net loss of $0.1 million was recognized
on the sale of foreclosed properties in 2008.

The provision for impairment loss on the letters of credit in 2008 of
$2.5 million relates to a liability for our exposure on a standby letter of
credit. The letter of credit supports secondary market financing on behalf of
the borrower. We believe the collateral and cash flows will be sufficient to
support the balance of the standby letter of credit at December 31, 2008. 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.

Other operating expenses in 2008 increased 7.4% to $5.8 million
compared to $5.4 million in 2007. Included in other operating expenses is FDIC
insurance expense of $0.9 million for 2008 compared to $0.5 million for 2007.
FDIC insurance consists 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) between 1.15% and 1.50%, as opposed to the prior fixed
reserve ratio of 1.25%. For 2008, 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 at least 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 2007 was offset by a portion of our
one-time assessment credit with the remaining portion of the credit applied to
our FDIC assessment in the first two quarters of 2008. Payments for the FICO
portion will continue as long as FICO obligations remain outstanding. Due to
the Banks performance in 2008, a change to the FDICs rate structure in December
2008 that will impact assessments for the first quarter of 2009 and decreases
in the DIF due to recent bank failures resulting in a recently proposed 20 bps special assessment to be levied against all financial institutions in
the second quarter of 2009, we expect FDIC insurance expense to increase
significantly in 2009.

Loan and collection expenses were $0.2 million higher in 2008 than in
2007. 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 were outsourced during 2008 and 2007, services
that had been provided by our internal legal staff in prior years. These
external legal costs totaled $0.7 million in 2008 compared to $0.8 million
in 2007. In 2009, loan and collection costs are expected to continue at a
comparable level, unless and until the volume of nonperforming loans declines
further.

Costs related to other outside services totaled $1.0 million in 2008,
$0.1 million lower than in 2007. The primary component of this expense was $0.3
million in both 2008 and 2007 related to the High Performance Checking program,
including mailing, consulting fees, and material costs. This program was discontinued
in October of 2008; therefore no further costs associated with the program are
anticipated.

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Table of Contents

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,
2008 and 2007 in the amount of $193.8 million and $207.8 million, respectively.
These are further explained in Note 13 of the Notes to our Consolidated
Financial Statements.

Provision for Income Taxes

Income tax benefit totaled $7.9 million in 2008, compared to income tax
benefit of $2.4 million in 2007. The increased tax benefit in 2008 reflected
the increase in our loss before income taxes in 2008 compared to 2007.

See Note 1, Summary of Significant Accounting Policies, and Note 16,
Income Tax Expense, of the Notes to our 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.

2007 compared to
2006

Net Interest Income

Net interest income in the consolidated statements of operations (which
excludes the tax equivalent adjustment) was $30.9 million, compared to $33.6
million in 2006. Net interest income in 2007 was negatively impacted by the
high level of non-performing loans for which interest income is not recognized.
Tax equivalent adjustments of $1.6 million for 2007 and $1.3 million for
2006 resulted in  tax-equivalent net interest income of $32.5 million and
$34.9 million, respectively. The decrease in 2007 net interest income was also
impacted by increased wholesale funding costs. The net interest margin for 2007
was 3.21% compared to 3.44% in 2006. The 23 bps decrease in net interest margin
is attributable to a 25 bps decrease in interest rate spread resulting from a
higher cost of interest-bearing liabilities in 2007.

As shown in the rate/volume analysis in Table 2, volume changes
resulted in a $0.2 million decrease to tax equivalent net interest income in
2007, while rate changes resulted in a $2.2 million decrease, for a total
decrease of $2.4 million. The decrease and composition of earning assets
resulted in a $0.3 million decrease to tax equivalent net interest income in
2007 offset by a $0.1 million decrease and composition change in
interest-bearing liabilities. Rate changes on earning assets increased interest
income by $0.3 million but were more than offset by rate changes on
interest-bearing liabilities that increased interest expense by $2.5 million,
for an unfavorable net rate impact of $2.2 million.

For 2007, the yield on earning assets remained unchanged from 2006 at
7.04%. The average loan yield was 7.60% in 2007 versus 7.57% in 2006.
Competitive pricing on new and refinanced loans, as well as tightened credit
underwriting standards, dampened efforts for improvements in loan yields in
2007.

For 2007, the cost of interest-bearing liabilities increased 25 bps
compared to 2006, to 4.24%, resulting in part from a higher average interest
rate environment through the first half of 2007. The combined average cost of
interest-bearing deposits was 4.05%, up 34 bps from 2006, primarily resulting
from an average increase in the short-term interest rate environment during
2007, as well as by an increase in the mix of deposits towards higher-cost time
deposit accounts. This increase was partially offset by the cost of wholesale
funding (federal funds purchased; repurchase agreements; FHLB advances and
subordinated debentures) which decreased by 14 bps to 5.39% for 2007 and was
impacted favorably by a decreasing interest rate environment for wholesale
funding costs during 2007 on reduced borrowings.

28

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Average earning assets remained at $1.0 billion in 2007, the same as in
2006. Average loans outstanding also remained stable at $804.5 million and $818.1 million at year
end 2007 and 2006, respectively. Average loans to average total assets decreased to 73.0% in
2007 from 74.5% in 2006. For 2007, tax equivalent interest income on loans
decreased $1.1 million related to the decline in average outstanding balances,
offset by a $0.3 million increase related to a slight improvement in the yields
on such loans. Balances of securities and short-term investments increased
$12.5 million on average. Tax equivalent interest income on securities and
short-term investments increased $0.7 million from volume changes, and
decreased $0.1 million from the impact of the rate environment, for a net $0.7
million increase to tax equivalent interest income.

Average interest-bearing liabilities increased $3.3 million, or 0.4%,
from 2006, while net free funds (the total of demand deposits, accrued
expenses, other liabilities and stockholders equity less non-interest earning
assets) decreased $4.2 million. The decrease in net free funds is attributable
to an increase in non-interest earning assets. Average non-interest bearing
demand deposits decreased by $1.2 million, or 1.3%. Average interest-bearing
deposits grew $19.4 million, or 2.5%, to $788.0 million. This growth resulted from
increases in interest-bearing demand deposits and time deposits less than
$100,000 offset by a decline in savings deposits and time deposits greater than
$100,000. Interest expense on interest-bearing deposits increased $2.7 million
from the impact of the rate environment and $0.7 million from volume and mix
changes, resulting in an aggregate increase of $3.4 million in interest expense
on interest-earning deposits. Average wholesale-funding sources decreased by
$16.1 million during 2007. For 2007, interest expense on wholesale funding
sources decreased by $0.9 million due to volume changes and by $0.2 million
from declining rates, for an aggregate decrease of $1.1 million versus 2006
results.

BALANCE SHEET ANALYSIS

Loans

Gross loans outstanding declined to $728.7 million at December 31,
2008, a 4.1% decrease from December 31, 2007. This follows a 7.2% decrease from
the end of 2006.

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) |        
|                                        |  | 2008                                       |         | 2007       |       | 2006   |   | 2005       |   | 2004   |   
|                                        |  | Amount                                     |         | % of Total |       | Amount |   | % of Total |   | Amount |    | % of Total |         | Amount |       | % of Total |   | Amount  |   | % of Total |   
|                                        |  |                                            |         |            |       |        |   |            |   |        |    |            |         |        |       |            |   |         |   |            |    |   |         |   |       |   
|Amount of loans by type                 |  |                                            |         |            |       |        |   |            |   |        |    |            |         |        |       |            |   |         |   |            |    |   |         |   |       |   
|                                        |  |                                            |         |            |       |        |   |            |   |        |    |            |         |        |       |            |   |         |   |            |    |   |         |   |       |   
|Real estate-mortgage                    |  |                                            |         |            |       |        |   |            |   |        |    |            |         |        |       |            |   |         |   |            |    |   |         |   |       |   
|Commercial                              |  | $                                          | 381,765 |            | 52.4  | %      | $ | 386,981    |   | 50.9   | %  | $          | 464,843 |        | 56.7  | %          | $ | 467,956 |   | 57.6       | %  | $ | 424,712 |   | 56.1  | % 
|1-4 Family residential                  |  |                                            | 134,436 |            | 18.4  | %      |   | 119,932    |   | 15.8   | %  |            | 143,873 |        | 17.6  | %          |   | 148,736 |   | 18.3       | %  |   | 134,350 |   | 17.8  | % 
|Construction                            |  |                                            | 69,838  |            | 9.6   | %      |   | 93,047     |   | 12.2   | %  |            | 94,082  |        | 11.5  | %          |   | 85,729  |   | 10.6       | %  |   | 80,384  |   | 10.6  | % 
|Commercial, financial and
 agricultural |  |                                            | 110,432 |            | 15.2  | %      |   | 127,549    |   | 16.8   | %  |            | 82,619  |        | 10.1  | %          |   | 80,260  |   | 9.9        | %  |   | 83,787  |   | 11.1  | % 
|                                        |  |                                            |         |            |       |        |   |            |   |        |    |            |         |        |       |            |   |         |   |            |    |   |         |   |       |   
|Consumer installment                    |  |                                            | 12,876  |            | 1.8   | %      |   | 14,388     |   | 1.9    | %  |            | 14,893  |        | 1.8   | %          |   | 14,263  |   | 1.8        | %  |   | 13,936  |   | 1.8   | % 
|Municipal loans                         |  |                                            | 19,858  |            | 2.7   | %      |   | 18,663     |   | 2.5    | %  |            | 19,633  |        | 2.4   | %          |   | 15,785  |   | 1.9        | %  |   | 20,457  |   | 2.7   | % 
|Less: deferred fees, net of costs       |  |                                            | (483    | )          | (0.1  | )%     |   | (350       | ) | (0.1   | )% |            | (375    | )      | (0.1  | )%         |   | (433    | ) | (0.1       | )% |   | (398    | ) | (0.1  | %)
|Total loans (net of unearned
 income)   |  | $                                          | 728,722 |            | 100.0 | %      | $ | 760,210    |   | 100.0  | %  | $          | 819,568 |        | 100.0 | %          | $ | 812,296 |   | 100.0      | %  | $ | 757,228 |   | 100.0 | % 

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Commercial real estate loans totaled $381.8 million at year-end 2008
and comprised 52.4% of the loan portfolio, secured by farmland, multifamily
property, and nonfarm/nonresidential real estate property. 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 a borrowers 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 $110.4 million at year-end 2008, a decline of $17.1 million or 13.4%
since year-end 2007. 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 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 2008 compared to
growth experienced in years prior to 2006. The credit risk related to our
banks commercial 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 $23.2 million or 24.9% to $69.8
million at December 31, 2008 from December 31, 2007. 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, 2008, there existed one industry group
concentration in our loans that exceeded 10% of total loans. At year-end 2008,
loans on non-residential real estate rental properties located throughout our
market area totaled $99.7 million or 13.7% of total loans.

In addition, loans to tourism-related businesses remain a significant
part of the business and loans in other sectors are affected by the
tourism-driven economy of Door County. As a result, a decrease in tourism could
adversely affect one or more industry groups in our loan portfolio, which could
have a corresponding adverse effect on our earnings. Additionally, a decline in
tourism may have an indirect effect on our operations because other types of
business (grocery and convenience stores, for example) rely on tourism to
provide cash flow for their operations. Loans to individuals who are employed
by tourism related business could also be affected in the event of a downturn
in the industry.

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Although growth was slow in 2008 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 2008, residential real estate mortgage loans totaled
$134.4 million and comprised 18.4% of the loan portfolio. These loans increased
$14.5 million or 12.1% during 2008. Given current trends, we do not anticipate
growth in mortgage loans during 2009. 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 exceeds these limits.

We offer adjustable-rate mortgage loans based upon market demands. At
year-end 2008, those loans totaled $28.9 million, an increase of $8.5 million
over 2007. 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.

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, 2008,
these loans totaled $80.1 million compared to $89.7 million at December 31,
2007.

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
2008, we sold $22.6 million in mortgage loans through the secondary programs
compared to $36.6 million in 2007.

Installment loans to individuals totaled $12.9 million, or 1.8% of the
total loan portfolio at December 31, 2008 compared to $14.4 million, or 1.9%,
at December 31, 2007. 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 $19.9 million at December 31, 2008 compared to
$18.7 million at year-end 2007. 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,
2008. Those loans with expected maturities over one year are further scheduled
by fixed rate or variable rate interest sensitivity.

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Table 4: Loan Maturity and Interest Rate
Sensitivity

|                                         |  |                        |         |           |   |               |  |       |         |  |   |         | 
|---------------------------------------- |  | ---------------------- | ------- | --------- | - | ------------- |  | ----- | ------- |  | - | ------- | 
|                                         |  | Maturity               |        
|December
 31, 2008                       |  | 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    |  | $                      | 31,716  |           | $ | 58,940        |  | $     | 43,780  |  | $ | 134,436 | 
|Construction                             |  |                        | 46,049  |           |   | 19,045        |  |       | 4,744   |  |   | 69,838  | 
|Commercial
 real estate                  |  |                        | 136,083 |           |   | 175,444       |  |       | 69,755  |  |   | 381,282 | 
|Commercial,
 financial and agricultural  |  |                        | 35,625  |           |   | 40,212        |  |       | 34,595  |  |   | 110,432 | 
|Tax-exempt                               |  |                        | 6,982   |           |   | 3,394         |  |       | 9,482   |  |   | 19,858  | 
|Consumer                                 |  |                        | 8,273   |           |   | 4,462         |  |       | 141     |  |   | 12,876  | 
|Total                                    |  | $                      | 264,728 |           | $ | 301,497       |  | $     | 162,497 |  | $ | 728,722 | 

|                    |  |                      |  |  |            |         |               |   |         |  |  |  | 
|------------------- |  | -------------------- |  |  | ---------- | ------- | ------------- | - | ------- |  |  |  | 
|                    |  | Interest sensitivity | 
|                    |  |                      |  |  | Fixed rate |         | Variable rate |   |         |  | 
|Due after
 one year |  |                      |  |  | $          | 276,754 |               | $ | 187,240 |  |  |  | 

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.

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 statement 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 2007 we shifted our management philosophy to focus on being substantially
more proactive than in the past with respect to managing the credit risk
inherent in our loan portfolio. In January 2007 we created the position of
Chief Credit Officer (CCO) to be responsible for overseeing the credit
underwriting, loan processing and documentation, problem loan monitoring,
credit review and collection areas.

When the CCO was hired, we initiated a review of our written loan
policy, which provides guidelines for loan origination applicable to all bank
officers with lending authority, and we began implementing significant
enhancements and improvements to the policy. 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% 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%, unless private mortgage insurance is purchased by
 the borrower. Loan terms have a maximum amortization period of 25 years.
 Hazard insurance is required on collateral securing the loan and appropriate legal
 work is performed to verify our lien position.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 CCO was also 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 have negatively impacted the performance of our loan portfolio for
2008 both in earnings and collateral-to-value ratios.

On a quarterly basis, management reviews the adequacy of the ALL. Based
on an estimation computed pursuant to the requirements of Financial Accounting
Standards Board (FASB) Statement No. 5, Accounting for Contingencies, and
FASB Statements No. 114 and 118, 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 FASB Statement No. 114, 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 2008, $18.0 million was added to the ALL and charged to
operating expense, compared to $9.8 million in 2007. Of the $18.0 million
charge taken in 2008, $3.2 million was taken during the third quarter and $13.6
million was taken during the fourth quarter.

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.

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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. We continue to monitor
both credits and believe that the remaining ALL of $4.3 million relating to
these credits is appropriate and adequate based on all information available to
us as of the date of this Report.

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 utilize 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. We determine General Reserves  Other by taking into account other
factors, such as the concentration of loans in a particular industry or
geographic area, adjustments for economic indicators, and so on. 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.

All of the factors we take into account in determining loan loss
provisions 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.

When comparing the period-to-period changes, our provision of $0.3
million in the first quarter of 2008 increased our ALL to $12.0 million at
March 31, 2008. In the second quarter, a provision of $0.9 million and net
charge-offs of $0.6 million were realized increasing the ALL to $12.3 million
at June 30, 2008. During the third quarter of 2008, net charge-offs of $2.9
million were taken, partially offsetting a loan loss provision charged to
earnings of $3.2 million. This resulted in an ALL balance of $12.6 million at
September 30, 2008. Net charge-offs of $12.6 million were taken in the fourth
quarter, offset by a provision of $13.6 million, resulting in an ALL balance of
$13.6 million at year-end 2008.

Table 5: Quarterly Allowance for Loan Loss
Components

|                                            |  |                        |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|------------------------------------------- |  | ---------------------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                            |  | As of                  |       
|                                            |  | 12/31/07               |        | 03/31/08 |   | 06/30/08 |  | 09/30/08 |        | 12/31/08 |  
|                                            |  | (dollars in thousands) |       
|Component 1
  Specific credit allocation   |  | $                      | 6,051  |          | $ | 6,339    |  | $        | 6,826  |          | $ | 6,855  |  | $ | 6,019  | 
|Component 2
  General reserves: historical |  |                        | 4,721  |          |   | 4,508    |  |          | 4,366  |          |   | 4,591  |  |   | 6,408  | 
|General
 reserves: other                    |  |                        | 1,068  |          |   | 1,167    |  |          | 1,135  |          |   | 1,157  |  |   | 1,064  | 
|Unallocated                                 |  |                        |       |          |   |         |  |          |       |          |   | 1      |  |   | 70     | 
|Allowance for Loan Losses                   |  | $                      | 11,840 |          | $ | 12,014   |  | $        | 12,327 |          | $ | 12,604 |  | $ | 13,561 | 

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Management believes the ALL is at an appropriate level to absorb
probable and inherent losses in the loan portfolio at December 31, 2008.
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.

As Table 6 indicates, the ALL at December 31, 2008 was $13.6 million
compared with $11.8 million at year-end 2007. Loans decreased 4.1% in 2008,
while the allowance as a percent of gross loans increased to 1.9% from 1.6% at
year-end 2007. Net commercial mortgage loan charge-offs represented 69.0% of
the total net charge-offs for 2008. Net commercial loan charge-offs represented
13.3% of the total net charge-offs in 2008 while residential real
estate-mortgage loan net charge-offs represented 2.6% of the total net
charge-offs for 2008. Although net loan charge-offs increased significantly in
2008, the ALL as a percent of total loans increased as a result of the higher
amount of increased PFLL. 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, |        
|                                                                     |  | 2008                     |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|                                                                     |  | (dollars in thousands)   |        
|                                                                    
|Daily average amount of loans                                        |  | $                        | 743,930 |      | $ | 804,494 |   | $    | 818,086 |      | $ | 789,316 |   | $ | 740,605 |  
|Loans, end
 of period                                                |  | $                        | 728,722 |      | $ | 760,210 |   | $    | 819,568 |      | $ | 812,296 |   | $ | 757,228 |  
|                                                                    
|ALL, at beginning of year                                            |  | $                        | 11,840  |      | $ | 8,058   |   | $    | 9,551   |      | $ | 10,445  |   | $ | 12,159  |  
|Loans charged off:                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                 |  |                          | 587     |      |   | 437     |   |      | 204     |      |   | 537     |   |   | 226     |  
|Real estate-construction                                             |  |                          | 2,355   |      |   | 25      |   |      | 624     |      |   |        |   |   | 3       |  
|Real estate-commercial                                               |  |                          | 11,289  |      |   | 2,154   |   |      | 1,341   |      |   | 3,363   |   |   | 1,039   |  
|Commercial/agricultural loans                                        |  |                          | 2,301   |      |   | 3,627   |   |      | 847     |      |   | 651     |   |   | 2,781   |  
|Consumer loans                                                       |  |                          | 135     |      |   | 215     |   |      | 401     |      |   | 320     |   |   | 240     |  
|                                                                     |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total loans
 charged off                                             |  | $                        | 16,667  |      | $ | 6,458   |   | $    | 3,417   |      | $ | 4,871   |   | $ | 4,289   |  
|                                                                     |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries
 of loans previously charged off:                         |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                 |  |                          | 164     |      |   | 63      |   |      | 409     |      |   | 392     |   |   | 79      |  
|Real estate-construction                                             |  |                          |        |      |   |        |   |      |        |      |   |        |   |   | 1       |  
|Real estate-commercial                                               |  |                          | 78      |      |   | 113     |   |      | 127     |      |   | 91      |   |   | 79      |  
|Commercial/agricultural loans                                        |  |                          | 143     |      |   | 206     |   |      | 134     |      |   | 163     |   |   | 741     |  
|Consumer loans                                                       |  |                          | 42      |      |   | 97      |   |      | 351     |      |   | 114     |   |   | 76      |  
|                                                                     |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total loans
 recovered                                               |  |                          | 427     |      |   | 479     |   |      | 1,021   |      |   | 760     |   |   | 976     |  
|Net loans
 charged off (NCOs)                                      |  |                          | 16,240  |      |   | 5,979   |   |      | 2,396   |      |   | 4,111   |   |   | 3,313   |  
|Additions to allowance for loan losses
 charged to operating expense |  |                          | 17,961  |      |   | 9,761   |   |      | 903     |      |   | 3,217   |   |   | 1,599   |  
|ALL, at end
 of year                                                 |  | $                        | 13,561  |      | $ | 11,840  |   | $    | 8,058   |      | $ | 9,551   |   | $ | 10,445  |  
|Ratio of NCOs during period to average
 loans outstanding            |  |                          | 2.18    | %    |   | 0.74    | % |      | 0.29    | %    |   | 0.52    | % |   | 0.45    | %
|Ratio of ALL
 to NCOs                                                |  |                          | 0.8     | %    |   | 2.0     | % |      | 3.4     | %    |   | 2.3     | % |   | 3.2     | %
|Ratio of ALL
 to total loans end of period                           |  |                          | 1.86    | %    |   | 1.56    | % |      | 0.98    | %    |   | 1.18    | % |   | 1.38    | %

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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.

Table 7: Allocation of the Allowance for Loan
Losses

|                                     |  |                        |        |                    |  |        |   |                   |        |        |  |                   |   |        |       |                   |  |        |   |                   |       |  |  |       |   |   |        |  |  |       |  
|------------------------------------ |  | ---------------------- | ------ | ------------------ |  | ------ | - | ----------------- | ------ | ------ |  | ----------------- | - | ------ | ----- | ----------------- |  | ------ | - | ----------------- | ----- |  |  | ----- | - | - | ------ |  |  | ----- | -
|                                     |  | As of December 31,     |       
|                                     |  | (dollars in thousands) |       
|                                     |  | 2008                   |        | 2007               |  | 2006   |   | 2005              |        | 2004   | 
|                                     |  | Amount                 |        | % of total 
 loans |  | Amount |   | % of total
 loans |        | Amount |  | % of total
 loans |   | Amount |       | % of total
 loans |  | Amount |   | % of total
 loans |      
|Commercial, financial & agricultural |  | $                      | 6,375  |                    |  | 15.2   | % | $                 | 3,405  |        |  | 16.8              | % | $      | 2,082 |                   |  | 10.1   | % | $                 | 2,317 |  |  | 9.9   | % | $ | 1,982  |  |  | 11.1  | %
|Commercial real estate               |  |                        | 4,726  |                    |  | 52.3   | % |                   | 5,367  |        |  | 50.8              | % |        | 4,280 |                   |  | 56.6   | % |                   | 5,633 |  |  | 57.5  | % |   | 6,374  |  |  | 56.0  | %
|Real estate                          |  |                        |        |                    |  |        |   |                   |        |        |  |                   |   |        |       |                   |  |        |   |                   |       |  |  |       |   |   |        |  |  |       |  
|Construction                         |  |                        | 806    |                    |  | 9.6    | % |                   | 1,774  |        |  | 12.2              | % |        | 597   |                   |  | 11.5   | % |                   | 454   |  |  | 10.6  | % |   | 998    |  |  | 10.6  | %
|Residential                          |  |                        | 1,308  |                    |  | 18.4   | % |                   | 987    |        |  | 15.8              | % |        | 755   |                   |  | 17.6   | % |                   | 482   |  |  | 18.3  | % |   | 539    |  |  | 17.8  | %
|Consumer                             |  |                        | 259    |                    |  | 1.8    | % |                   | 306    |        |  | 1.9               | % |        | 342   |                   |  | 1.8    | % |                   | 243   |  |  | 1.8   | % |   | 198    |  |  | 1.8   | %
|Tax exempt loans                     |  |                        | 17     |                    |  | 2.7    | % |                   |       |        |  | 2.5               | % |        |      |                   |  | 2.4    | % |                   |      |  |  | 1.9   | % |   |       |  |  | 2.7   | %
|Not specifically Allocated           |  |                        | 70     |                    |  |        |   |                   | 1      |        |  |                   |   |        | 2     |                   |  |        |   |                   | 422   |  |  |       |   |   | 354    |  |  |       |  
|Total allowance                      |  | $                      | 13,561 |                    |  | 100.0  | % | $                 | 11,840 |        |  | 100.0             | % | $      | 8,058 |                   |  | 100.0  | % | $                 | 9,551 |  |  | 100.0 | % | $ | 10,445 |  |  | 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.

Table 8 details non-performing loans and non-performing assets by type
for 2008 and the preceding four years.

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Table 8: Nonperforming Loans and Foreclosed
properties

|                                             |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|-------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                             |  | December 31,           |       
|                                             |  | 2008                   |        | 2007 |   | 2006   |   | 2005 |        | 2004 |  
|                                             |  | (dollars in thousands) |       
|                                            
|Nonaccrual
 loans                            |  | $                      | 43,687 |      | $ | 37,555 |   | $    | 27,352 |      | $ | 6,942  |   | $ | 5,920  |  
|Accruing
 loans past due 90 days or more     |  |                        |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|Restructured
 loans                          |  |                        | 367    |      |   |       |   |      | 496    |      |   |       |   |   |       |  
|Total non-performing loans (NPLs)            |  | $                      | 44,054 |      | $ | 37,555 |   | $    | 27,848 |      | $ | 6,942  |   | $ | 5,920  |  
|Foreclosed properties/operating subsidiaries |  |                        | 7,143  |      |   | 5,167  |   |      | 5,760  |      |   | 3,333  |   |   | 2,572  |  
|Total
 non-performing assets (NPAs)          |  | $                      | 51,197 |      | $ | 42,722 |   | $    | 33,608 |      | $ | 10,275 |   | $ | 8,492  |  
|                                             |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Ratios:                                      |  |                        |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|NPLs to
 total loans                         |  |                        | 6.04   | %    |   | 4.94   | % |      | 3.40   | %    |   | 0.85   | % |   | 0.78   | %
|NPAs to
 total assets                        |  |                        | 4.82   | %    |   | 3.86   | % |      | 3.02   | %    |   | 0.94   | % |   | 0.81   | %
|ALL to NPLs                                  |  |                        | 30.78  | %    |   | 31.53  | % |      | 28.94  | %    |   | 137.58 | % |   | 176.44 | %

Non-performing loans at December 31, 2008 were $44.1 million compared
to $37.6 million at December 31, 2007. Management believes collateral is
currently sufficient to collect the net carrying value of those loans in the
event of foreclosure or repossession. 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.

Table 9: Quarterly Nonaccrual and
Restructured Loans

|                                                     |  |                        |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|---------------------------------------------------- |  | ---------------------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                                     |  | Quarters Ended         |       
|                                                     |  | 12/31/07               |        | 03/31/08 |   | 06/30/08 |  | 09/30/08 |        | 12/31/08 |  
|                                                     |  | (dollars in thousands) |       
|Nonaccrual Loans                                     |  | $                      | 37,555 |          | $ | 37,243   |  | $        | 36,312 |          | $ | 38,234 |  | $ | 43,687 | 
|Loans
 restructured in a troubled debt restructuring |  |                        |       |          |   |         |  |          |       |          |   |       |  |   | 367    | 
|Total Nonperforming Loans                            |  | $                      | 37,555 |          | $ | 37,243   |  | $        | 36,312 |          | $ | 38,234 |  | $ | 44,054 | 

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.

Table 10: Foregone Loan Interest

|                                                   |  |                          |       |      |   |       |   |   |       |  
|-------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | -
|                                                   |  | Years ended December 31, |      
|                                                   |  | 2008                     |       | 2007 |   | 2006  |  
|                                                   |  | (dollars in thousands)   |      
|Interest
 income in accordance with original terms |  | $                        | 2,887 |      | $ | 3,971 |   | $ | 2,555 |  
|Interest
 income recognized                        |  |                          | (213  | )    |   | (565  | ) |   | (670  | )
|Reduction in
 interest income                      |  | $                        | 2,674 |      | $ | 3,406 |   | $ | 1,885 |  

Foreclosed properties, which represent properties that we acquired
through foreclosure or in satisfaction of debt, consisted of 28 properties
totaling $7.1 million at end of year 2008. This compared to 14 properties
totaling $5.2 million at year-end 2007. Management actively seeks to ensure
that properties held are administered to minimize any risk of loss.

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Activity for
foreclosed properties for 2008, 2007 and 2006, including costs of operation are
shown in Table 11:

Table 11: Foreclosed Properties Summary

|                                                       |  |                          |        |      |   |        |   |   |      |  
|------------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ | - | - | ---- | -
|                                                       |  | Years ended December 31, |       
|                                                       |  | 2008                     |        | 2007 |   | 2006   |  
|                                                      
|Income from
 operation of foreclosed properties        |  | $                        | 153    |      | $ | 64     |   | $ | 43   |  
|Expense from
 operation of foreclosed properties       |  |                          | (4,228 | )    |   | (966   | ) |   | (495 | )
|Net gains
 (losses) from sale of foreclosed properties |  |                          | (119   | )    |   | (232   | ) |   | 76   |  
|                                                      
|Cost of
 operation and sale of foreclosed properties   |  | $                        | (4,194 | )    | $ | (1,134 | ) | $ | (376 | )

Investment Portfolio

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

Table 12: Investment Portfolio

|                                                              |  |                        |         |      |   |         |  |   |         | 
|------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                              |  | December 31,           |        
|                                                              |  | 2008                   |         | 2007 |   | 2006    | 
|                                                              |  | (dollars in thousands) |        
|Securities
 Available for Sale (AFS):                         |  |                        |         |      |   |         |  |   |         | 
|U.S.
 Treasury and U.S. government approved agency securities |  | $                      | 4,489   |      | $ | 29,222  |  | $ | 58,412  | 
|Obligations
 of states and political subdivisions             |  |                        | 53,854  |      |   | 55,741  |  |   | 49,695  | 
|Mortgage-backed
 securities                                   |  |                        | 152,118 |      |   | 118,848 |  |   | 79,655  | 
|Private
 placement and corporate bonds                        |  |                        | 15,130  |      |   | 15,141  |  |   | 999     | 
|Other equity
 securities                                      |  |                        | 2,679   |      |   | 3,419   |  |   | 1,487   | 
|Total amortized cost                                          |  | $                      | 228,270 |      | $ | 222,371 |  | $ | 190,248 | 
|Total fair value and carrying value                           |  | $                      | 225,417 |      | $ | 222,475 |  | $ | 188,315 | 

Securities are classified as available for sale. Gains or losses on
disposition of securities are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.

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 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, 2008 and 2007 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. Premium amortization and discount accretion are recognized
as adjustments to interest income using the interest method. Realized gains or
losses on disposition are based on the net proceeds and the adjusted carrying
amount of the securities sold using the specific identification method.

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No securities gains were realized in 2006. In November 2007, our
investment subsidiary sold agency securities with a total market value of $30.0
million. In 2008, the Bank sold 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.

During the first quarter of 2009, as of the date of this Report,
securities with a market value of $29.9 million were sold and $21.5 million of
other securities were purchased to take advantage of opportunities in the
market.

Table 13: 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                                               |  | $                                                                  |       |                                       |  |                                       |   | $               |       |        |  |      |   | $      |       |       |  |       |   | $     |       |  |  |     |   | $ |        |  |  |     |  
|U.S. government approved agency securities                  |  |                                                                    |       |                                       |  |                                       |   |                 | 1,005  |        |  | 4.53  | % |        | 3,099  |       |  | 5.33   | % |       | 501    |  |  | 5.55 | % |   | 4,605   |  |  | 5.18 | %
|Mortgage-backed securities                                  |  |                                                                    | 23,445 |                                       |  | 3.98                                   | % |                 | 87,564 |        |  | 4.89  | % |        | 42,661 |       |  | 5.06   | % |       | 1,463  |  |  | 4.89 | % |   | 155,133 |  |  | 4.79 | %
|Tax exempt obligations of states and political subdivisions |  |                                                                    | 141    |                                       |  | 4.90                                   | % |                 | 3,093  |        |  | 4.49  | % |        | 26,498 |       |  | 4.00   | % |       | 23,915 |  |  | 4.01 | % |   | 53,647  |  |  | 4.04 | %
|Private placement and corporate bonds                       |  |                                                                    |       |                                       |  |                                       |   |                 |       |        |  |      |   |        |       |       |  |       |   |       | 9,353  |  |  | 7.59 | % |   | 9,353   |  |  | 7.59 | %
|                                                            |  |                                                                    |        |                                       |  |                                        |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |        |  |  |      |   |   |         |  |  |      |  
|Other                                                       |  |                                                                    | 2,679  |                                       |  | 3.87                                   | % |                 |       |        |  |      |   |        |       |       |  |       |   |       |       |  |  |     |   |   | 2,679   |  |  | 3.87 | %
|Total carrying value                                        |  | $                                                                  | 26,265 |                                       |  | 3.97                                   | % | $               | 91,662 |        |  | 5.80  | % | $      | 72,258 |       |  | 4.68   | % | $     | 35,232 |  |  | 5.02 | % | $ | 225,417 |  |  | 4.72 | %

Securities averaged $231.4 million in 2008 compared with $203.7 million
in 2007. In 2008, taxable securities comprised approximately 76.1% of the total
average investments compared to 74.3% in 2007. Tax-exempt securities for 2008
accounted for 23.9% of the total average investments compared to 25.7% in 2007.

Goodwill

Goodwill is not amortized but is subject to impairment tests on an
annual basis or more frequently if deemed appropriate. For 2008, 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.

Deposits

Deposits are our largest source of funds. Average total deposits for
2008 were $853.4 million, a decrease of 3.2% from 2007. At December 31, 2008,
deposits were $849.8 million, a decrease of $34.4 million (3.9%) from $884.2
million at December 31, 2007. While average brokered deposits increased $9.8
million, (8.4%) between 2007 and 2008, total brokered deposits decreased $17.0
million to $113.9 million at year-end 2008 from $130.9 million at year-end
2007. 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 14: Average Deposits Distribution

|                                                               |  |                        |         |            |       |        |  |            |         |        |       |            |  |   |         |  |       |   | 
|-------------------------------------------------------------- |  | ---------------------- | ------- | ---------- | ----- | ------ |  | ---------- | ------- | ------ | ----- | ---------- |  | - | ------- |  | ----- | - | 
|                                                               |  | 2008                   |         | 2007       |       | 2006   | 
|                                                               |  | Amount                 |         | % of Total |       | Amount |  | % of Total |         | Amount |       | % of Total | 
|                                                               |  | (dollars in thousands) |        
|Noninterest-bearing demand deposits                            |  | $                      | 72,852  |            | 8.5   | %      |  | $          | 93,706  |        | 10.6  | %          |  | $ | 94,938  |  | 11.0  | % | 
|Interest-bearing demand deposits                               |  |                        | 123,404 |            | 14.5  | %      |  |            | 110,322 |        | 12.5  | %          |  |   | 103,740 |  | 12.0  | % | 
|Savings deposits                                               |  |                        | 232,495 |            | 27.2  | %      |  |            | 262,026 |        | 29.7  | %          |  |   | 263,018 |  | 30.4  | % | 
|Other time deposits (excluding brokered
 deposits)             |  |                        | 194,648 |            | 22.8  | %      |  |            | 184,479 |        | 20.9  | %          |  |   | 167,552 |  | 19.4  | % | 
|Time deposits $100,000 and over (excluding
 brokered deposits) |  |                        | 104,123 |            | 12.2  | %      |  |            | 115,120 |        | 13.1  | %          |  |   | 84,307  |  | 9.8   | % | 
|Brokered certificates of deposit                               |  |                        | 125,852 |            | 14.8  | %      |  |            | 116,081 |        | 13.2  | %          |  |   | 150,012 |  | 17.4  | % | 
|Total deposits                                                 |  | $                      | 853,374 |            | 100.0 | %      |  | $          | 881,734 |        | 100.0 | %          |  | $ | 863,567 |  | 100.0 | % | 

Table 15: Maturity Distribution-Certificates
of Deposit and Other Time Deposits of $100,000 or More

|                                       |  |                         |   |                     |  |       |  |   |       |  |  |  |   |         |  | 
|-------------------------------------- |  | ----------------------- | - | ------------------- |  | ----- |  | - | ----- |  |  |  | - | ------- |  | 
|                                       |  | December 31, 2008       |  
|                                       |  | Certificates of Deposit |   | Other Time Deposits |  | Total | 
|                                       |  | (Dollars in thousands)  |  
|Three months
 or less                  |  |                         | $ | 28,805              |  |       |  | $ | 903   |  |  |  | $ | 29,708  |  | 
|Over three
 months through six months  |  |                         |   | 43,205              |  |       |  |   | 613   |  |  |  |   | 43,818  |  | 
|Over six
 months through twelve months |  |                         |   | 57,593              |  |       |  |   | 1,705 |  |  |  |   | 59,298  |  | 
|Over twelve
 months                    |  |                         |   | 56,193              |  |       |  |   | 4,911 |  |  |  |   | 61,104  |  | 
|Total                                  |  |                         | $ | 185,796             |  |       |  | $ | 8,132 |  |  |  | $ | 193,928 |  | 

As shown in Table 14, non-interest bearing demand deposits in 2008
averaged $72.9 million, down 22.3% from $93.7 million in 2007. This $20.8
million decrease reflects the shift from non-interest bearing to
interest-bearing accounts. As of December 31, 2008, non-interest-bearing demand
deposits totaled $73.6 million compared to $94.1 million at year-end 2007.

Interest-bearing deposits generally consist of interest-bearing
checking, savings deposits, money market accounts, individual retirement
accounts (IRAs) and certificates of deposit (CDs). In 2008,
interest-bearing deposits averaged $780.5 million, a decrease of 1.0% from
2007. Average balances of NOW accounts, savings deposits and money market
accounts decreased $16.4 million (4.4%) as a result of customer preference to
longer 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 in average deposits $10.2 million (5.5%),
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 $11.0 million (9.6%). 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. This reduced growth resulted in
average brokered deposits increasing $9.8 million, (8.4%) in 2008 compared to
2007.

Emphasis will be placed on generating additional core deposits in 2009
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 and subordinated debentures, were $131.4
million at December 31, 2008, an increase of $2.9 million, (2.3%), from $128.5
million at December 31, 2007.

Table 16: Short-term Borrowings

|                                                                             |  |                        |        |      |   |        |   |   |        |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                             |  | December 31,           |       
|                                                                             |  | 2008                   |        | 2007 |   | 2006   |  
|                                                                             |  | (Dollars in thousands) |       
|Federal funds purchased and securities sold
 under agreements to repurchase: |  |                        |        |      |   |        |   |   |        |  
|Balance end of year                                                          |  | $                      | 30,174 |      | $ | 27,174 |   | $ | 4,480  |  
|Average amounts outstanding during year                                      |  | $                      | 32,750 |      | $ | 17,048 |   | $ | 8,703  |  
|Maximum month-end amounts outstanding                                        |  | $                      | 45,659 |      | $ | 41,107 |   | $ | 29,778 |  
|Average interest rates on amounts
 outstanding at end of year                |  |                        | 1.15   | %    |   | 4.73   | % |   | 5.28   | %
|Average interest rates on amounts
 outstanding during year                   |  |                        | 2.38   | %    |   | 5.18   | % |   | 5.08   | %

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, 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.

Contractual Obligations

As of December 31, 2008, we were contractually obligated under
long-term agreements as follows:

Table 17: 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 |  | $                      | 410,054 |                  | $ | 285,507      |  | $            | 108,825 |                   | $ | 15,722 |  | $ |       | 
|Subordinated debentures                                     |  |                        | 16,100  |                  |   |             |  |              |        |                   |   |       |  |   | 16,100 | 
|FHLB advances                                               |  |                        | 85,095  |                  |   | 20,095       |  |              | 65,000  |                   |   |       |  |   |       | 
|Operating leases                                            |  |                        | 61      |                  |   | 35           |  |              | 26      |                   |   |       |  |   |       | 
|Totals                                                      |  | $                      | 511,310 |                  | $ | 305,637      |  | $            | 173,851 |                   | $ | 15,722 |  | $ | 16,100 | 

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Further discussion of these contractual obligations, see Note 5, Bank
Premises and Equipment and Note 10, Subordinated Debentures to Consolidated
Financial Statements.

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, and net proceeds from borrowings and the offerings of
subordinated debentures, in addition to the issuance of our common stock. 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 Federal Reserve Board.

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 have been a primary source of liquidity at our
bank. Principal payments on investments totaling $28.8 million were made in
2008 and $91.8 million in investments were purchased in 2008. At December 31,
2008, the carrying value of investment securities maturing within one year was
$26.3 million, or 11.7% of the total investment securities portfolio. This
compares to 11.6% of our investment securities with one year or less maturities
as of December 31, 2007. At the end of 2008, the investment portfolio contained
$159.7 million of U.S. Treasury, U.S. government approved agency securities and
mortgage backed securities representing 70.7% of the total investment
portfolio. These securities tend to be highly marketable and had a fair value
approximately $3.1 million below amortized cost at year-end 2008.

Deposit growth is another source of liquidity for our bank. As a
financing activity reflected in the 2008 Consolidated Statements of Cash Flows,
deposit reduction consumed $34.4 million in cash during 2008. Our banks
overall average deposit base declined $28.4 million or 3.2% during 2008.
Deposit growth is the most stable source of liquidity for our bank, although
brokered deposits are inherently less stable than locally generated core
deposits. In addition, as a result of our bank recently falling below the well
capitalized regulatory capital threshold, it will become more difficult for us
to obtain brokered deposits in the future. 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 $7.0 million in 2008 compared to $3.2
million in 2007. 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, 2008, our bank had $0.4 million in
federal funds sold.

The scheduled maturity of loans can provide a source of additional
liquidity. Our bank has $264.7 million of loans maturing within one year, or
36.3% 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.

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Within the classification of short-term borrowings at year-end 2008 and
2007, federal funds purchased and securities sold under agreements to
repurchase totaled $30.2 million. At December 31, 2008, 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, 2008, our bank had
$49.6 million available in the form of federal funds lines. Short-term and
long-term FHLB advances are another source of funds, totaling $85.1 million at
year-end 2008. At December 31, 2008, our bank had $6.8 million in the form of
additional available FHLB advances.

Our banks liquidity resources were sufficient in 2008 to fund the
growth in investments and meet other cash needs when necessary.

Management expects that deposit growth will continue to 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 2008, 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.

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 differentials (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 decreases 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 2009 based on financial data at December 31, 2008, for
the various rate shock levels indicated.

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Table 18: Net Interest Income Sensitivity
Analysis

|                                             |  |                        |        |                                               |  |                                               |       |   |  |  |  |      |    | 
|-------------------------------------------- |  | ---------------------- | ------ | --------------------------------------------- |  | --------------------------------------------- | ----- | - |  |  |  | ---- | -- | 
|Potential impact on 2009 net interest income |  | Net Interest Income    |       
|                                             |  | Amount                 |        | Potential Change in Net 
 Interest Income ($) |  | Potential Change in Net 
 Interest Income (%) |      
|                                             |  | (Dollars in thousands) |       
|+ 200 bps                                    |  | $                      | 26,892 |                                               |  | ($                                            | 2,464 | ) |  |  |  | (8.4 | %) | 
|+ 100 bps                                    |  | $                      | 28,023 |                                               |  | ($                                            | 1,333 | ) |  |  |  | (4.5 | %) | 
|Base                                         |  | $                      | 29,356 |                                               |  |                                               |      |   |  |  |  |     |    | 
|- 100 bps                                    |  | $                      | 31,340 |                                               |  | $                                             | 1,984 |   |  |  |  | 6.8  | %  | 
|- 200 bps                                    |  | $                      | 30,519 |                                               |  | $                                             | 1,163 |   |  |  |  | 4.0  | %  | 

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

Based on our model at December 31, 2008, the effect on an immediate 100
bps increase in interest rates would decrease our net interest income by 4.5%
or approximately $1.3 million. The effect of an immediate 100 bps decrease in
rates would increase our net interest income by 6.8% or approximately $2.0
million.

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 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.

Capital Resources

Stockholders equity at December 31, 2008 decreased $11.3 million or
14.1% to $69.0 million, compared to $80.3 million at the end of 2007.
Accumulated other comprehensive loss increased to $1.6 million at year-end 2008
versus accumulated other comprehensive loss of $0.1 million at year-end 2007.
The ratio of stockholders equity to assets at December 31, 2008 was 6.5%,
compared to 7.3% at year-end 2007.

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, 2008, all $16.1 million of the Trust Preferred
Securities qualify as Tier 1 Capital.

No cash dividends were declared in 2008 while cash dividends declared
in 2007 were $0.64 per share.

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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.

Throughout 2007 and 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. There are no conditions
or events since December 31, 2008 that management believes have changed our
category.

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.

Table 19: Selected Quarterly Financial Data

The following is selected financial data summarizing the results of
operations for each quarter in the years ended December 31, 2008 and 2007:

|                                    |  |                                       |        |         |   |              |   |             |        |   |    |         |  
|----------------------------------- |  | ------------------------------------- | ------ | ------- | - | ------------ | - | ----------- | ------ | - | -- | ------- | -
|                                    |  | 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
 (benefit) for income tax |  |                                       | 211    |         |   | (584         | ) |             | (1,317 | ) |    | (6,170  | )
|Net income
 (loss)                  |  |                                       | 1,165  |         |   | 95           |   |             | (1,174 | ) |    | (9,903  | )
|                                    |  |                                       |        |         |   |              |   |             |        |   |    |         |  
|Basic
 earnings (loss) per share    |  | $                                     | 0.15   |         | $ | 0.01         |   | ($          | 0.15   | ) | ($ | 1.25    | )
|Diluted
 earnings (loss) per share  |  | $                                     | 0.15   |         | $ | 0.01         |   | ($          | 0.15   | ) | ($ | 1.25    | )

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|                                  |  |                                       |        |         |   |              |  |             |        |  |    |        |  
|--------------------------------- |  | ------------------------------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | -- | ------ | -
|                                  |  | 2007 Quarter Ended                    |       
|                                  |  | March 31                              |        | June 30 |   | September 30 |  | December 31 |       
|                                  |  | (In thousands, except per share data) |       
|Interest
 income                  |  | $                                     | 17,651 |         | $ | 17,367       |  | $           | 17,515 |  | $  | 17,136 |  
|Interest
 expense                 |  |                                       | 9,806  |         |   | 9,893        |  |             | 9,784  |  |    | 9,270  |  
|Net interest
 income              |  |                                       | 7,845  |         |   | 7,474        |  |             | 7,731  |  |    | 7,866  |  
|Provision
 for loan losses        |  |                                       | 5,985  |         |   |             |  |             | 500    |  |    | 3,276  |  
|Net interest
 income after PLL    |  |                                       | 1,860  |         |   | 7,474        |  |             | 7,231  |  |    | 4,590  |  
|Non-interest
 income              |  |                                       | 2,245  |         |   | 2,417        |  |             | 2,032  |  |    | 2,484  |  
|Non-interest
 expense             |  |                                       | 8,466  |         |   | 8,248        |  |             | 7,651  |  |    | 8,217  |  
|Income
 before income tax expense |  |                                       | (4,361 | )       |   | 1,643        |  |             | 1,612  |  |    | (1,143 | )
|Provision
 for income tax         |  |                                       | (2,064 | )       |   | 229          |  |             | 225    |  |    | (804   | )
|Net income                        |  |                                       | (2,297 | )       |   | 1,414        |  |             | 1,387  |  |    | (339   | )
|                                  |  |                                       |        |         |   |              |  |             |        |  |    |        |  
|Basic
 earnings per share         |  | ($                                    | 0.29   | )       | $ | 0.18         |  | $           | 0.18   |  | ($ | 0.04   | )
|Diluted
 earnings per share       |  | ($                                    | 0.29   | )       | $ | 0.18         |  | $           | 0.18   |  | ($ | 0.04   | )

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.

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

Information required by this item is set forth in Item 7 under the
caption Interest Rate Sensitivity Management and is incorporated in this
schedule by reference.

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, 2007. 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, 2008, the Company maintained
effective internal control over financial reporting based on those criteria.

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

BAYLAKE CORP.
March 17, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Baylake
Corp. (the Company) as of December 31, 2008, and the related consolidated
statements of operations, changes in stockholders equity and cash flows for
the year then ended. We have also audited the Companys internal control over
financial reporting as of December 31, 2008, 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 effectiveness
of 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 audit also
included performing 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.

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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, 2008, and the consolidated results of its
operations, changes in stockholders equity and its cash flows for the year
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, 2008, based on criteria established in COSO.

| |                                  
| | ---------------------------------
| | /s/Virchow, Krause &
Company, LLP
| | Virchow, Krause &
Company, LLP   

Milwaukee,
Wisconsin 
March 17, 2009

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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 balance sheet of Baylake
Corp. as of December 31, 2007, and the related consolidated statements of
operations, changes in stockholders equity and cash flows for each of the two
years in the period ended December 31, 2007. 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 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 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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Baylake
Corp. as of December 31, 2007, and the results of its operations and its cash
flows for each of the two years in the period 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 FASB Interpetation (FIN) 48, Accounting for Uncertainy in
Income Taxes and FASB Statement 156, Accounting for Servicing of Financial
Assets.

| |                   
| | ------------------
| | Crowe
 Horwath LLP

Oak Brook,
Illinois
March 29, 2008

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|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.
CONSOLIDATED
 BALANCE SHEETS 
December 31, 2008 and 2007 (Dollar amounts in thousands, except per
 share data)
|                                                                                                                            

|                                                                                                                                                                               |  |      |           |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                                                                                               |  | 2008 |           | 2007 |  
|ASSETS                                                                                                                                                                         |  |      |           |      |   |           |  
|Cash and due from financial institutions                                                                                                                                       |  | $    | 23,085    |      | $ | 46,381    |  
|Federal funds sold                                                                                                                                                             |  |      | 397       |      |   |          |  
|Securities available for sale                                                                                                                                                  |  |      | 225,417   |      |   | 222,475   |  
|Loans held for sale                                                                                                                                                            |  |      | 368       |      |   | 741       |  
|Loans, net of allowance of $13,561 and $11,840                                                                                                                                 |  |      | 715,161   |      |   | 748,370   |  
|Cash value of life insurance                                                                                                                                                   |  |      | 23,435    |      |   | 23,404    |  
|Premises, held for sale                                                                                                                                                        |  |      | 2,006     |      |   | 673       |  
|Premises and equipment, net                                                                                                                                                    |  |      | 24,451    |      |   | 26,597    |  
|Federal Home Loan Bank stock                                                                                                                                                   |  |      | 6,792     |      |   | 6,792     |  
|Foreclosed properties, net                                                                                                                                                     |  |      | 7,143     |      |   | 5,167     |  
|Goodwill                                                                                                                                                                       |  |      | 6,108     |      |   | 6,108     |  
|Deferred income taxes                                                                                                                                                          |  |      | 13,501    |      |   | 6,338     |  
|Accrued interest receivable                                                                                                                                                    |  |      | 3,968     |      |   | 5,394     |  
|Other assets                                                                                                                                                                   |  |      | 11,081    |      |   | 8,176     |  
|                                                                                                                                                                               |  |      |           |      |   |           |  
|Total assets                                                                                                                                                                   |  | $    | 1,062,913 |      | $ | 1,106,616 |  
|                                                                                                                                                                               |  |      |           |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |      |           |      |   |           |  
|Deposits                                                                                                                                                                       |  |      |           |      |   |           |  
|Non-interest-bearing                                                                                                                                                           |  | $    | 73,537    |      | $ | 94,120    |  
|Interest-bearing                                                                                                                                                               |  |      | 776,221   |      |   | 790,065   |  
|Total deposits                                                                                                                                                                 |  |      | 849,758   |      |   | 884,185   |  
|                                                                                                                                                                               |  |      |           |      |   |           |  
|Federal Home Loan Bank advances                                                                                                                                                |  |      | 85,095    |      |   | 85,172    |  
|Federal funds purchased and repurchase agreements                                                                                                                              |  |      | 30,174    |      |   | 27,174    |  
|Subordinated debentures                                                                                                                                                        |  |      | 16,100    |      |   | 16,100    |  
|Accrued expenses and other liabilities                                                                                                                                         |  |      | 12,832    |      |   | 12,461    |  
|Dividends payable                                                                                                                                                              |  |      |          |      |   | 1,262     |  
|Total liabilities                                                                                                                                                              |  |      | 993,959   |      |   | 1,026,354 |  
|                                                                                                                                                                               |  |      |           |      |   |           |  
|Common stock, $5 par value, authorized 50,000,000; issued-8,132,552
 shares in 2008, 8,106,973 shares in 2007; outstanding-7,911,539 shares in 2008,
 7,885,960 shares in 2007 |  |      | 40,662    |      |   | 40,535    |  
|Additional paid-in capital                                                                                                                                                     |  |      | 11,977    |      |   | 11,875    |  
|Retained earnings                                                                                                                                                              |  |      | 21,499    |      |   | 31,316    |  
|Treasury stock (221,013 shares in 2008 and 2007)                                                                                                                               |  |      | (3,549    | )    |   | (3,549    | )
|Accumulated other comprehensive income (loss)                                                                                                                                  |  |      | (1,635    | )    |   | 85        |  
|Total stockholders equity                                                                                                                                                     |  |      | 68,954    |      |   | 80,262    |  
|                                                                                                                                                                               |  |      |           |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $    | 1,062,913 |      | $ | 1,106,616 |  

See accompanying notes to the consolidated
financial statements.

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|                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------
|BAYLAKE
 CORP. 
 CONSOLIDATED STATEMENTS OF OPERATIONS 
 Years ended December 31, 2008, 2007, and 2006 
 (Dollar amounts in thousands, except per share data)
|                                                                                                                                                             

|                                                                    |  |      |         |      |   |        |   |   |        | 
|------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | - | - | ------ | 
|                                                                    |  | 2008 |         | 2007 |   | 2006   |  
|Interest and dividend income                                        |  |      |         |      |   |        |   |   |        | 
|Loans, including fees                                               |  | $    | 46,304  |      | $ | 60,727 |   | $ | 61,556 | 
|Taxable securities                                                  |  |      | 8,523   |      |   | 6,495  |   |   | 6,382  | 
|Tax exempt securities                                               |  |      | 2,223   |      |   | 2,128  |   |   | 1,697  | 
|Federal funds sold and other                                        |  |      | 226     |      |   | 318    |   |   | 379    | 
|Total interest and dividend income                                  |  |      | 57,276  |      |   | 69,668 |   |   | 70,014 | 
|Interest expense                                                    |  |      |         |      |   |        |   |   |        | 
|Deposits                                                            |  |      | 23,861  |      |   | 31,930 |   |   | 28,486 | 
|Federal funds purchased and repurchase agreements                   |  |      | 781     |      |   | 884    |   |   | 442    | 
|Federal Home Loan Bank advances and other debt                      |  |      | 2,791   |      |   | 4,850  |   |   | 5,745  | 
|Subordinated debentures                                             |  |      | 794     |      |   | 1,089  |   |   | 1,705  | 
|Total interest expense                                              |  |      | 28,227  |      |   | 38,753 |   |   | 36,378 | 
|                                                                    |  |      |         |      |   |        |   |   |        | 
|Net interest income                                                 |  |      | 29,049  |      |   | 30,915 |   |   | 33,636 | 
|                                                                    |  |      |         |      |   |        |   |   |        | 
|Provision for loan losses                                           |  |      | 17,961  |      |   | 9,761  |   |   | 903    | 
|                                                                    |  |      |         |      |   |        |   |   |        | 
|Net interest income after provision for loan losses                 |  |      | 11,088  |      |   | 21,154 |   |   | 32,733 | 
|Non-interest income                                                 |  |      |         |      |   |        |   |   |        | 
|Fees from fiduciary activities                                      |  |      | 756     |      |   | 956    |   |   | 1,025  | 
|Fees from loan servicing                                            |  |      | 720     |      |   | 1,019  |   |   | 1,092  | 
|Fees for other services to customers                                |  |      | 5,673   |      |   | 5,253  |   |   | 4,988  | 
|Gains from sales of loans                                           |  |      | 325     |      |   | 630    |   |   | 825    | 
|Net change in valuation of servicing rights                         |  |      | (535    | )    |   | (595   | ) |   |       | 
|Securities gains, net                                               |  |      | 765     |      |   | 352    |   |   |       | 
|Net gains (losses) from sale and disposal of premises and
equipment |  |      | 39      |      |   | (7     | ) |   | 287    | 
|Increase in cash surrender value of life insurance                  |  |      | 31      |      |   | 863    |   |   | 922    | 
|Income in equity of UFS subsidiary                                  |  |      | 830     |      |   | 556    |   |   | 512    | 
|Other income                                                        |  |      | 653     |      |   | 147    |   |   | 86     | 
|Total non-interest income                                           |  |      | 9,257   |      |   | 9,174  |   |   | 9,737  | 
|Non-interest expenses                                               |  |      |         |      |   |        |   |   |        | 
|Salaries and employee benefits                                      |  |      | 16,353  |      |   | 18,662 |   |   | 19,414 | 
|Occupancy expense                                                   |  |      | 2,471   |      |   | 2,456  |   |   | 2,373  | 
|Equipment expense                                                   |  |      | 1,372   |      |   | 1,517  |   |   | 1,658  | 
|Data processing and courier                                         |  |      | 1,210   |      |   | 1,299  |   |   | 1,269  | 
|Operation of other real estate                                      |  |      | 4,194   |      |   | 1,134  |   |   | 376    | 
|Provision for impairment of standby letters of credit               |  |      | 2,539   |      |   |       |   |   | 27     | 
|Other than temporary impairment of securities                       |  |      | 1,900   |      |   |       |   |   |       | 
|Loan and collection expense                                         |  |      | 1,185   |      |   | 1,006  |   |   | 777    | 
|Other outside services                                              |  |      | 988     |      |   | 1,104  |   |   | 1,040  | 
|Other operating expenses                                            |  |      | 5,810   |      |   | 5,400  |   |   | 5,395  | 
|Total non-interest expenses                                         |  |      | 38,022  |      |   | 32,578 |   |   | 32,329 | 
|Income (loss) before provision for income taxes                     |  |      | (17,677 | )    |   | (2,250 | ) |   | 10,141 | 
|Provision for (benefit from) income taxes                           |  |      | (7,860  | )    |   | (2,416 | ) |   | 2,765  | 
|                                                                    |  |      |         |      |   |        |   |   |        | 
|Net income (loss)                                                   |  | $    | (9,817  | )    | $ | 166    |   | $ | 7,376  | 
|                                                                    |  |      |         |      |   |        |   |   |        | 
|Basic earnings (loss) per common share                              |  | $    | (1.24   | )    | $ | 0.02   |   | $ | 0.95   | 
|Diluted earnings (loss) per common share                            |  | $    | (1.24   | )    | $ | 0.02   |   | $ | 0.94   | 

See accompanying notes to the consolidated
financial statements.

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|                                                          
|----------------------------------------------------------
|BAYLAKE CORP.                                             
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|Years ended December 31, 2008, 2007 and 2006              
|(Dollar amounts in thousands, except per share data)      
|                                                          
|                                                          

|                                                                                                              |  |              |           |        |                  |                          |               |   |        |             |   |                                                  |   |   |        |   |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------ | ---------------- | ------------------------ | ------------- | - | ------ | ----------- | - | ------------------------------------------------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                                                              |  |              |           |        |                  | AdditionalPaid-inCapital |               |   |        |             |   | Accumulated
 Other
 Comprehensive
 Income (loss) |   |   |       
|                                                                                                              |  |              |           |        |                  |                          |               |   |        |             |   |                                                  |  
|                                                                                                              |  | Common Stock |           |        | RetainedEarnings |                          | TreasuryStock |   |        | TotalEquity |  
|                                                                                                              |  | Shares       |           | Amount |                  |                          |               |   |        |            
|                                                                                                              |  |              |           |        |                  |                          |               |   |        |             |   |                                                  |   |   |        |   |   |        |   |   |        |  
|Balance, January 1, 2006                                                                                      |  |              | 7,782,427 |        | $                | 39,028                   |               | $ | 9,466  |             | $ | 32,461                                           |   | $ | (625   | ) | $ | (1,786 | ) | $ | 78,544 |  
|                                                                                                              |  |              |           |        |                  |                          |               |   |        |             |   |                                                  |   |   |        |   |   |        |   |   |        |  
|Prior year adjustment to recognize mortgage servicing rights
 understatement, net of tax of $188 (see Note 1) |  |              |          |        |                  |                         |               |   |       |             |   | 289                                              |   |   |       |   |   |       |   |   | 289    |  
|Net income for the year                                                                                       |  |              |          |        |                  |                         |               |   |       |             |   | 7,376                                            |   |   |       |   |   |       |   |   | 7,376  |  
|Net changes in unrealized gain on securities available for sale, net
 of ($315) deferred taxes                |  |              |          |        |                  |                         |               |   |       |             |   |                                                 |   |   |       |   |   | 557    |   |   | 557    |  
|Total comprehensive income                                                                                    |  |              |           |        |                  |                          |               |   |        |             |   |                                                  |   |   |        |   |   |        |   |   | 7,933  |  
|Stock compensation expense recognized, net of $19 deferred
taxes                                              |  |              |          |        |                  |                         |               |   | 48     |             |   |                                                 |   |   |       |   |   |       |   |   | 48     |  
|Common stock issued under Dividend Reinvestment Plan                                                          |  |              | 17,024    |        |                  | 85                       |               |   | 183    |             |   |                                                 |   |   |       |   |   |       |   |   | 268    |  
|Treasury stock repurchases                                                                                    |  |              | (68,854   | )      |                  |                         |               |   |       |             |   |                                                 |   |   | (1,101 | ) |   |       |   |   | (1,101 | )
|Stock options exercised                                                                                       |  |              | 99,544    |        |                  | 498                      |               |   | 434    |             |   |                                                 |   |   |       |   |   |       |   |   | 932    |  
|Tax benefit from exercise of stock options                                                                    |  |              |          |        |                  |                         |               |   | 272    |             |   |                                                 |   |   |       |   |   |       |   |   | 272    |  
|Cash dividends declared ($0.64 per share)                                                                     |  |              |          |        |                  |                         |               |   |       |             |   | (4,992                                           | ) |   |       |   |   |       |   |   | (4,992 | )
|Balance, December 31, 2006                                                                                    |  |              | 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                                                          |  |              | 74,814    |        |                  | 373                      |               |   | 723    |             |   |                                                 |   |   |       |   |   |       |   |   | 1,096  |  
|Treasury stock repurchases                                                                                    |  |              | (129,000  | )      |                  |                         |               |   |       |             |   |                                                 |   |   | (1,823 | ) |   |       |   |   | (1,823 | )

See accompanying notes to the consolidated financial statements.

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|                                                          
|----------------------------------------------------------
|BAYLAKE CORP.                                             
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|Years ended December 31, 2008, 2007 and 2006              
|(Dollar amounts in thousands, except per share data)      
|                                                          
|                                                          

|                                                                                             |  |              |           |        |                  |                          |               |   |        |             |   |                                            |   |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------ | ---------------- | ------------------------ | ------------- | - | ------ | ----------- | - | ------------------------------------------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                                             |  |              |           |        |                  |                          |               |   |        |             |   | AccumulatedOtherComprehensiveIncome (loss) |   |   |       
|                                                                                             |  |              |           |        |                  | AdditionalPaid-inCapital |               |   |        |             |   |                                            |   |  
|                                                                                             |  | Common Stock |           |        | RetainedEarnings |                          | TreasuryStock |   |        | TotalEquity |  
|                                                                                             |  | Shares       |           | Amount |                  |                          |               |   |        |            
|                                                                                             |  |              |           |        |                  |                          |               |   |        |             |   |                                            |   |   |        |   |   |        |   |   |        |  
|Tax benefit from exercise of stock options                                                   |  |              |          |        |                  |                         |               |   | 94     |             |   |                                           |   |   |       |   |   |       |   |   | 94     |  
|Cumulative effect adjustments                                                                |  |              |           |        |                  |                          |               |   |        |             |   |                                            |   |   |        |   |   |        |   |   |        |  
|Adjustment for adoption of FIN 48                                                            |  |              |          |        |                  |                         |               |   |       |             |   | 980                                        |   |   |       |   |   |       |   |   | 980    |  
|Adjustment for adoption of SFAS No. 156, net of $74 tax                                      |  |              |          |        |                  |                         |               |   |       |             |   | 117                                        |   |   |       |   |   |       |   |   | 117    |  
|                                                                                             |  |              |           |        |                  |                          |               |   |        |             |   |                                            |   |   |        |   |   |        |   |   |        |  
|Cash dividends declared ($0.64 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 | )
|Changes in unrealized loss 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                                                                     |  |              |           |        |                  |                          |               |   |        |             |   |                                            |   |   |        |   |   |        |   |   | (1,720 | )
|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 |  

See accompanying notes to the consolidated financial statements.

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|                                             
|---------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|Years ended December 31, 2008, 2007, and 2006
|(Dollar amounts in thousands)                
|                                             
|                                             

|                                                                                          |  |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                          |  | 2008 |         | 2007 |   | 2006    |  
|Cash flows from operating activities:                                                     |  |      |         |      |   |         |   |   |         |  
|Reconciliation of net income (loss) to net
 cash provided by operating activities:        |  |      |         |      |   |         |   |   |         |  
|Net income (loss)                                                                         |  | $    | (9,817  | )    | $ | 166     |   | $ | 7,376   |  
|Adjustments to reconcile net income (loss)
 to net cash provided to operating activities: |  |      |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                             |  |      | 1,394   |      |   | 1,534   |   |   | 1,609   |  
|Amortization of debt issuance costs                                                       |  |      |        |      |   |        |   |   | 475     |  
|Amortization of core deposit intangible                                                   |  |      | 52      |      |   | 52      |   |   | 52      |  
|Provision for losses on loans                                                             |  |      | 17,961  |      |   | 9,761   |   |   | 903     |  
|Provision for impairment of letters of
 credit                                            |  |      | 2,539   |      |   |        |   |   | 27      |  
|Other than temporary impairment of
 securities                                            |  |      | 1,900   |      |   |        |   |   |        |  
|Net amortization of securities                                                            |  |      | (124    | )    |   | 112     |   |   | 125     |  
|Increase in cash surrender value of life
 insurance                                       |  |      | (31     | )    |   | (863    | ) |   | (922    | )
|Net realized gain on sale of securities                                                   |  |      | (765    | )    |   | (352    | ) |   |        |  
|Net gain on sale of loans                                                                 |  |      | (325    | )    |   | (630    | ) |   | (825    | )
|Proceeds from sale of loans held for sale                                                 |  |      | 24,737  |      |   | 42,976  |   |   | 41,483  |  
|Origination of loans held for sale                                                        |  |      | (24,068 | )    |   | (42,198 | ) |   | (41,175 | )
|Net change in valuation of mortgage
 servicing rights                                     |  |      | 535     |      |   | 595     |   |   |        |  
|Provision for valuation allowance on
 foreclosed properties                               |  |      | 3,610   |      |   | 133     |   |   | 90      |  
|Net (gain) loss from sale and disposal of
 premises and equipment                         |  |      | (39     | )    |   | 7       |   |   | (287    | )
|Net (gain) loss from disposal of other real
 estate owned                                 |  |      | 119     |      |   | 232     |   |   | (76     | )
|Benefit from deferred tax expense                                                         |  |      | (5,926  | )    |   | (2,205  | ) |   | (840    | )
|Stock option compensation expense
 recognized                                             |  |      | (44     | )    |   | 21      |   |   | 48      |  
|Income in equity of UFS subsidiary                                                        |  |      | (830    | )    |   | (556    | ) |   | (512    | )
|Tax benefit (expense) from
 exercise/forfeiture of stock options                          |  |      | 8       |      |   | (94     | ) |   | (272    | )
|Changes in assets and liabilities:                                                        |  |      |         |      |   |         |   |   |         |  
|Accrued interest receivable and other
 assets                                             |  |      | (1,199  | )    |   | (454    | ) |   | (50     | )
|Accrued expenses and other liabilities                                                    |  |      | (2,168  | )    |   | (1,048  | ) |   | 3,258   |  
|Net cash provided by operating activities                                                 |  |      | 7,519   |      |   | 7,189   |   |   | 10,487  |  
|                                                                                          |  |      |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                     |  |      |         |      |   |         |   |   |         |  
|Proceeds from sale of securities
 available-for-sale                                      |  |      | 56,089  |      |   | 34,479  |   |   |        |  
|Principal payments on securities
 available-for-sale                                      |  |      | 28,760  |      |   | 26,454  |   |   | 20,029  |  
|Purchase of securities available-for-sale                                                 |  |      | (91,759 | )    |   | (92,816 | ) |   | (35,959 | )
|Proceeds from sale of other real estate owned                                             |  |      | 2,623   |      |   | 6,160   |   |   | 3,958   |  
|Proceeds from sale of premises and
 equipment                                             |  |      | 97      |      |   |        |   |   | 690     |  
|Loan originations and payments, net                                                       |  |      | 6,920   |      |   | 47,447  |   |   | (16,067 | )
|Proceeds from redemption of FHLB Stock                                                    |  |      |        |      |   |        |   |   | 1,289   |  
|Additions to premises and equipment                                                       |  |      | (639    | )    |   | (406    | ) |   | (5,041  | )
|Proceeds from life insurance death benefit                                                |  |      |        |      |   | 2,431   |   |   |        |  
|Net change in federal funds sold                                                          |  |      | (397    | )    |   |        |   |   |        |  
|Investment in bank-owned life insurance                                                   |  |      |        |      |   | (732    | ) |   | (503    | )
|Net cash provided by (used in) investing
 activities                                      |  |      | 1,694   |      |   | 23,017  |   |   | (31,604 | )

See accompanying notes to the consolidated financial statements.

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|                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                                        
|CONSOLIDATED STATEMENTS OF CASH FLOWS 
 Years ended December 31, 2008, 2007, and 2006 
 (Dollar amounts in thousands)
|                                                                                                                     

|                                                                 |  |      |         |      |   |         |   |   |          |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | -------- | -
|                                                                 |  | 2008 |         | 2007 |   | 2006    |  
|Cash flows from financing activities:                            |  |      |         |      |   |         |   |   |          |  
|Net change in deposits                                           |  | $    | (34,427 | )    | $ | 5,274   |   | $ | 22,200   |  
|Net change in federal funds purchased and
 repurchase agreements |  |      | 3,000   |      |   | 22,694  |   |   | 3,165    |  
|Proceeds from Federal Home Loan Bank
 advances                   |  |      | 85,000  |      |   | 50,000  |   |   | 100,000  |  
|Repayments on Federal Home Loan Bank
 advances                   |  |      | (85,077 | )    |   | (80,007 | ) |   | (110,006 | )
|Redemption of subordinated debt                                  |  |      |        |      |   |        |   |   | (16,100  | )
|Proceeds from issuance of subordinated debt                      |  |      |        |      |   |        |   |   | 16,100   |  
|Proceeds from exercise of stock options                          |  |      |        |      |   | 1,184   |   |   | 932      |  
|Tax benefit (expense) from
 exercise/forfeiture of options       |  |      | (8      | )    |   | 94      |   |   | 272      |  
|Treasury stock repurchases                                       |  |      |        |      |   | (1,823  | ) |   | (1,101   | )
|Dividend reinvestment plan                                       |  |      | 265     |      |   | 1,096   |   |   | 268      |  
|Cash dividends paid                                              |  |      | (1,262  | )    |   | (5,022  | ) |   | (4,982   | )
|Net cash provided by (used in) financing
 activities             |  |      | (32,509 | )    |   | (6,510  | ) |   | 10,748   |  
|                                                                 |  |      |         |      |   |         |   |   |          |  
|Net change in cash and cash equivalents                          |  |      | (23,296 | )    |   | 23,696  |   |   | (10,369  | )
|                                                                 |  |      |         |      |   |         |   |   |          |  
|Beginning cash and cash equivalents                              |  |      | 46,381  |      |   | 22,685  |   |   | 33,054   |  
|                                                                 |  |      |         |      |   |         |   |   |          |  
|Ending cash and cash equivalents                                 |  | $    | 23,085  |      | $ | 46,381  |   | $ | 22,685   |  
|                                                                 |  |      |         |      |   |         |   |   |          |  
|Supplemental cash flow information:                              |  |      |         |      |   |         |   |   |          |  
|Interest paid                                                    |  | $    | 30,119  |      | $ | 38,511  |   | $ | 35,926   |  
|Income taxes paid                                                |  |      | 47      |      |   | 1,589   |   |   | 2,345    |  
|                                                                 |  |      |         |      |   |         |   |   |          |  
|Supplemental noncash disclosures:                                |  |      |         |      |   |         |   |   |          |  
|Transfers from loans to foreclosed
 properties                   |  | $    | 8,328   |      | $ | 5,932   |   | $ | 6,399    |  
|Mortgage servicing rights resulting from
 sale of loans          |  |      | 29      |      |   | 116     |   |   | 180      |  
|Transfer of premises to premises held for
 sale                  |  |      | 1,357   |      |   |        |   |   |         |  

See accompanying notes to the consolidated financial statements.

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|                                                                                                              
|--------------------------------------------------------------------------------------------------------------
|BAYLAKE
 CORP.                                                                                                
|NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2008, 2007 and 2006 
 (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. The current book value of UFS is
approximately $8,745 per share. 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. There will not be a material impact to the carrying value of
the asset on Baylake Banks consolidated balance sheet. Income recognized by
the Company was $830, $556, and $512 for 2008, 2007, and 2006, respectively.
Amounts paid to UFS for data processing services by Baylake Bank were $1,107,
$1,208, and $1,157 in 2008, 2007, and 2006, 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 industrial businesses, as well as the commercial, agricultural and
tourism 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
reported in other comprehensive income, net of tax. 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, 2008, 2007 and 2006 
 (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
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.

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. Both cash and stock dividends are reported as
income.

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 nonaccrual 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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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(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. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in managements judgment, should be charged-off.

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 current factors.

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.

Servicing Rights: Servicing rights are
recognized separately when they are acquired through sales of loans. For sales
of loans prior to January 1, 2007, a portion of the cost of the loan was
allocated to the servicing right based on relative fair values. The Company
adopted SFAS No. 156 on January 1, 2007, and for sales of loans beginning in
2007, servicing rights are initially recorded at fair value with the income
statement effect recorded as a reduction to gain/loss on sale of loans. Fair
value is based on market prices for comparable servicing contracts, when
available, or alternatively, is 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.

Upon adoption of SFAS No. 156, the Company elected to measure all
classes of 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 servicing earnings in
the period in which the changes occur, and the changes in fair value are
indicated as net change in valuation of servicing rights on the statement of
operations. The fair values of servicing rights are subject to significant
fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

Prior to January 1, 2007, all 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, servicing assets were evaluated for impairment based upon the
fair value of the rights as compared to carrying amount. Impairment was determined
by stratifying rights 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.

Servicing fee income, which is reported on the 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. Servicing fees
totaled $510, $665 and $736 for the years ended December 31, 2008, 2007 and
2006, respectively. Late fees and ancillary fees related to loan servicing are
not material.

Loan servicing rights are carried in other assets on the balance sheet
and amount to $860 and $1,366 on loans serviced for others totaling $93,617 and
$115,698 in 2008 and 2007, respectively. Capitalized servicing rights totaled $29, $116, and $180, during 2008, 2007, and 2006,
respectively. Amortization of servicing rights, which is included in other
expense, totaled $357 during 2006. The decrease in fair value of servicing
rights recognized in income in 2008 and 2007 was $535 and $595, respectively.

The Company adopted Staff Accounting Bulletin (SAB) No. 108 issued by
the Securities and Exchange Commission on June 1, 2006. As a result of this
adoption, the Company recorded an adjustment to servicing rights in the amount
of $477, or $289 net of tax effect, which is reflected as an adjustment to the
opening balance of retained earnings in 2006.

Bank Owned Life Insurance: The Company has
purchased life insurance policies on certain key executives. Upon adoption of
EITF 06-5, which is discussed further below, 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 cash surrender value adjusted for other
charges or other amounts due that are probable at settlement. Prior to adoption
of EITF 06-5, the Company recorded owned life insurance at its cash surrender
value.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

In September 2006, the FASB Emerging Issues Task Force finalized Issue
No. 06-5, Accounting for Purchases of Life
Insurance  Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). EITF
06-5 requires that a policyholder consider contractual terms of a life insurance policy in
determining the amount that could be realized under the insurance contract. It
also requires that if the contract provides for a greater surrender value if
all individual policies in a group are surrendered at the same time, that the
surrender value be determined based on the assumption that policies will be
surrendered on an individual basis. Lastly, EITF 06-5 requires disclosure when
there are contractual restrictions on the Companys ability to surrender a
policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the
Companys consolidated financial condition or results of operation.

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 Assets: Assets acquired through or
instead of loan foreclosure are initially recorded at fair value when acquired,
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 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 and impairment, and any
such impairment is recognized in the period identified.

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 $99 and $150 at December
31, 2008 and 2007, respectively. Scheduled amortization expense related to the
core deposit intangible is $52 for 2009 and $47 in the 2010.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

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, 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 FASB Interpretation No. 45 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.

Advertising Expense: The Company expenses all
advertising costs as they are incurred. Total advertising costs for the years
ended December 31, 2008, 2007, and 2006 were $288, $291, and $273,
respectively.

Stock Based Compensation: Effective January 1,
2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-based Payments,
using the modified prospective transition method. Accordingly, the Company has
recorded stock-based employee compensation cost using the fair value method
starting in 2006.

Provision for Income Taxes: Income tax expense
is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and liabilities are
the expected future tax amounts for the temporary differences between carrying
amounts and tax basis of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the
amount expected to be realized.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(Fin 48), 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.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

In 2002, the Company purchased Bank Owned Life Insurance (BOLI) in two
separate issuances. 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.

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, |     
|                                                      |  | 2008                            |      | 2007 |  
|Gross tax liability, beginning of year                |  | $                               | 639  |      | $ | 1,552 |  
|Reduction in tax liability due to adoption
 of FIN 48 |  |                                 |     |      |   | (980  | )
|Adjusted tax liability, beginning of year             |  |                                 | 639  |      |   | 572   |  
|Current period change in tax benefits                 |  |                                 |     |      |   | 67    |  
|Reduction in tax liability settlement                 |  |                                 | (108 | )    |   |      |  
|Settlement payment                                    |  |                                 | (177 | )    |   |      |  
|Gross tax liability, end of year                      |  | $                               | 354  |      | $ | 639   |  

The gross tax liability, at December 31, 2008, 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 FIN
48, there was an accrued liability of $354 and $639 at December 31, 2008 and
2007, 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 2009 as a result of
the WDOR settlement.

The Company and its subsidiaries are subject to U.S. federal and
Wisconsin state income tax. The Company and its subsidiaries file a consolidated
federal income tax return and separate state income tax returns as appropriate.
They are no longer subject to examination by U.S. Federal taxing authorities
for years before 2004 and for Wisconsin state income taxes through 2001. They
do 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 $354 referred to above is $103
of interest, net of federal tax benefit.

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.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

Other Comprehensive Income: Comprehensive
income consists of net income or loss and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available
for sale, which is also recognized as a separate component of equity.

Recent Accounting Pronouncements: In September
2006, the FASB issued Statement No. 157, Fair
Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset. The standard was
effective for the Company beginning January 1, 2008. In February 2008, the FASB
issued Staff Position (FSP) 157-2, Effective
Date of FASB Statement No. 157. This FSP delays the effective date
of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value on a recurring basis (at
least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Liabilities.The statement provides companies with an option to
report selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types of assets and liabilities. The statement was effective for the Company on
January 1, 2008. The impact of adoption was not material.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments
Recorded at Fair Value
through Earnings(SAB 109). Previously, SAB 105, Application of Accounting Principles to Loan
Commitments, stated that in measuring the fair value of a derivative
loan commitment, a company should not incorporate the expected net future cash
flows related to the associated servicing of the loan. SAB 109 supersedes SAB
105 and indicates that the expected net future cash flows related to the
associated servicing of the loan should be included in measuring fair value of
all written loan commitments that are accounted for a fair value through
earnings. SAB 105 also indicated that internally-developed intangible assets
should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. SAB 109 was effective for derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The impact of adoption was not material.

In September 2006, the FASB Emerging Issues Task Force finalized Issue
No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements. This Issue requires that a liability be
recorded during the service period when a split-dollar life insurance agreement
continues after participants employment or retirement. The required accrued
liability will be based on either the post-employment benefit cost for the
continuing life insurance or based on the future death benefit depending on the
contractual terms of the underlying agreement. This Issue is effective for
fiscal years beginning after December 15, 2007. The impact of adoption on the
Companys consolidated financial statements was not material.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

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

In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the
Market for
That Asset Is Not Active.FSP 157-3 clarifies the application of
SFAS 157 in an inactive market and provides key considerations in determining
the fair value of an asset where the market is not active. FSP 157-3 was
effective immediately upon issuance. The adoption of FSP 157-3 did not have a
material impact on the Companys consolidated financial condition, results of
operations or liquidity.

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 $1,704 and $7,362 was required to meet
regulatory reserve and clearing requirements at year-end 2008 and 2007.
Effective October 1, 2008, these balances began earning interest.

Fair Value of Financial Instruments: Fair
values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in Note 19. Fair value estimates
involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments, and other factors, especially in the absence
of broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.

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 2008 and 2007 were 25,579 and 74,814
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.

Reclassifications: Some items in the prior
year consolidated financial statements were reclassified to conform to the
current presentation.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 2  FAIR VALUE ACCOUNTING

Statement 157 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 statement describes three levels of inputs that may be used to measure
fair value:

| |          |                                                                                                                                                                                                                                                              
| | -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1: | Quoted prices (unadjusted) or
 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, 2008 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. We are able to compare the valuation
model inputs and results to widely available published industry data for
reasonableness (Level 2 inputs).

The fair value of both Foreclosed Properties and 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,
 2008 |         | Quoted Prices in
 Active Markets
 For Identical Assets
 (Level 1) |   | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | SignificantUnobservableInputs(Level 3) |        
|Assets:                              |  |                    |         |                                                                   |   |                                                   |  |                                        |         |  |   |   | 
|Securities available for sale        |  | $                  | 225,417 |                                                                   | $ |                                                  |  | $                                      | 225,417 |  | $ |  | 

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 2  FAIR VALUE ACCOUNTING(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,
 2008 |        | Quoted Prices in
 Active Markets
 For Identical Assets
 (Level 1) |   | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |    
|Assets:                                  |  |                    |        |                                                                   |   |                                                   |  |                                              |     |  |   |        | 
|Servicing rights                         |  | $                  | 860    |                                                                   | $ |                                                  |  | $                                            | 860 |  | $ |       | 
|Impaired loans                           |  |                    | 26,299 |                                                                   |   |                                                  |  |                                              |    |  |   | 26,299 | 
|Foreclosed properties                    |  |                    | 7,143  |                                                                   |   |                                                  |  |                                              |    |  |   | 7,143  | 
|                                         |  | $                  | 34,302 |                                                                   | $ |                                                  |  | $                                            | 860 |  | $ | 33,442 | 

NOTE 3 - SECURITIES

The fair value of securities available for sale and the related
unrealized gains and losses as of December 31, 2008 and 2007 are as follows:

|                                                                  |  |             |         |                          |   |                           |  |   |        |  
|----------------------------------------------------------------- |  | ----------- | ------- | ------------------------ | - | ------------------------- |  | - | ------ | -
|                                                                  |  | 2008        |        
|                                                                  |  | Fair
 Value |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses | 
|U.S. Treasury and otherU.S. government approved 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 | )

|                                                                  |  |             |         |                          |   |                           |  |   |        |  
|----------------------------------------------------------------- |  | ----------- | ------- | ------------------------ | - | ------------------------- |  | - | ------ | -
|                                                                  |  | 2007        |        
|                                                                  |  | Fair
 Value |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses | 
|U.S. Treasury and otherU.S. government approved agency securities |  | $           | 29,268  |                          | $ | 104                       |  | $ | (58    | )
|Obligations of states and political
 subdivisions                 |  |             | 56,228  |                          |   | 612                       |  |   | (125   | )
|Mortgage-backed securities                                        |  |             | 118,696 |                          |   | 539                       |  |   | (691   | )
|Private placement and corporate bonds                             |  |             | 14,864  |                          |   |                          |  |   | (277   | )
|Other securities                                                  |  |             | 3,419   |                          |   |                          |  |   |       |  
|                                                                  |  | $           | 222,475 |                          | $ | 1,255                     |  | $ | (1,151 | )

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 3 - SECURITIES
(Continued)

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 were as follows:

|                       |  |      |        |      |   |        |  |   |   | 
|---------------------- |  | ---- | ------ | ---- | - | ------ |  | - | - | 
|                       |  | 2008 |        | 2007 |   | 2006   | 
|                       |  |      |        |      |   |        |  |   |   | 
|Proceeds               |  | $    | 56,089 |      | $ | 34,479 |  | $ |  | 
|Gross
 realized gains  |  |      | 774    |      |   | 353    |  |   |  | 
|Gross
 realized losses |  |      | 9      |      |   | 1      |  |   |  | 

The estimated market value of investments at December 31, 2008, by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

|                                        |  |                        |         | 
|--------------------------------------- |  | ---------------------- | ------- | 
|                                        |  | Estimated Fair 
 Value |        
|Due in one
 year or less                |  | $                      | 141     | 
|Due after
 one year through five years  |  |                        | 4,098   | 
|Due after
 five years through ten years |  |                        | 29,597  | 
|Due after
 ten years                    |  |                        | 33,769  | 
|                                        |  |                        | 67,605  | 
|Other equity
 securities                |  |                        | 2,679   | 
|Mortgage-backed
 securities             |  |                        | 155,133 | 
|                                        |  | $                      | 225,417 | 

Securities pledged to secure public deposits and borrowed funds had a
carrying value of $134,029 and $123,602 at December 31, 2008 and 2007,
respectively.

Securities with unrealized losses at December 31, 2008 and 2007,
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 |   | Total       |  
|Description
 of Securities                    |  | Fair
 Value          |         | Unrealized
 Loss   |   | Fair
 Value |   | Unrealized
 Loss |       | Fair
 Value |   | Unrealized
 Loss |  
|2008                                          |  |                      |         |                    |   |             |   |                  |       |             |   |                  |   |   |         |  |   |        |  
|U.S. Treasury and other                       |  |                      |         |                    |   |             |   |                  |       |             |   |                  |   |   |         |  |   |        |  
|U.S. government approved 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 | )
|                                              |  |                      |         |                    |   |             |   |                  |       |             |   |                  |   |   |         |  |   |        |  
|2007                                          |  |                      |         |                    |   |             |   |                  |       |             |   |                  |   |   |         |  |   |        |  
|U.S. Treasury and other                       |  |                      |         |                    |   |             |   |                  |       |             |   |                  |   |   |         |  |   |        |  
|U.S. government approved agency securities    |  | $                    | 16,672  |                    | $ | (58         | ) | $                |      |             | $ |                 |   | $ | 16,672  |  | $ | (58    | )
|Obligations states and political
subdivisions |  |                      | 13,892  |                    |   | (125        | ) |                  |      |             |   |                 |   |   | 13,892  |  |   | (125   | )
|Mortgage-backed securities                    |  |                      | 74,818  |                    |   | (691        | ) |                  |      |             |   |                 |   |   | 74,818  |  |   | (691   | )
|Private placement and corporate bonds         |  |                      | 2,811   |                    |   | (277        | ) |                  |      |             |   |                 |   |   | 2,811   |  |   | (277   | )
|Total temporarily impaired                    |  | $                    | 108,193 |                    | $ | (1,151      | ) | $                |      |             | $ |                 |   | $ | 108,193 |  | $ | (1,151 | )

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 3 - SECURITIES
(Continued)

At December 31, 2008, the mortgage-backed securities category with
continuous unrealized losses for twelve months or more comprises two
securities and the private placement and corporate bond category with
continuous unrealized losses for twelve months or more comprises one
security. At December 31, 2007, no securities in any category had continuous
unrealized losses for twelve months or more.

The Company evaluates 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 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 statement of operations. At December 31, 2008 and 2007, securities with
temporary unrealized losses had depreciated in value by approximately 11% and
1%, respectively, in aggregate, from the amortized cost basis. Unrealized
losses reflected in the preceding tables have not been included in results of
operations because the affected securities are of high credit quality and management has the intent and ability to
hold these securities until recovery or maturity. The losses on these
securities are expected to dissipate as they approach their maturity dates
and/or if interest rates decline.

At year end 2008 and 2007, 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 stockholders equity.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 4 - LOANS

Major
classifications of loans as of December 31, 2008 and 2007 are as follows:

|                                              |  |      |         |      |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                              |  | 2008 |         | 2007 |  
|                                              |  |      |         |      |   |         | 
|Commercial                                    |  | $    | 110,432 |      | $ | 127,549 | 
|Real estate                                   |  |      |         |      |   |         | 
|Residential                                   |  |      | 134,436 |      |   | 119,932 | 
|Commercial                                    |  |      | 381,765 |      |   | 386,981 | 
|Construction                                  |  |      | 69,838  |      |   | 93,047  | 
|Consumer                                      |  |      | 12,876  |      |   | 14,388  | 
|Municipal
 loans                              |  |      | 19,858  |      |   | 18,663  | 
|                                              |  |      | 729,205 |      |   | 760,560 | 
|Less:                                         |  |      |         |      |   |         | 
|Deferred loan origination fees, net of
 costs |  |      | 483     |      |   | 350     | 
|Allowance for loan losses                     |  |      | 13,561  |      |   | 11,840  | 
|                                              |  |      |         |      |   |         | 
|Net loans                                     |  | $    | 715,161 |      | $ | 748,370 | 

Loans having a carrying value of $49,948 and $27,407 are pledged as
collateral for borrowings from the Federal Home Loan Bank at December 31, 2008
and 2007, 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 2008
and 2007.

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

|                                                                     |  |                                         |        |  
|-------------------------------------------------------------------- |  | --------------------------------------- | ------ | -
|                                                                     |  | For the
 year ended
 December 31,
 2008 |       
|                                                                     |  |                                         |        |  
|Balance at
 beginning of year                                        |  | $                                       | 4,544  |  
|New loans made                                                       |  |                                         | 5,185  |  
|Repayments
 received                                                 |  |                                         | (4,028 | )
|Reclassification
 for loans related to former officers and directors |  |                                         | (178   | )
|Balance at end of year                                               |  | $                                       | 5,523  |  

Changes in the
allowance for loan losses were as follows:

|                                 |  |                                 |         |      |   |        |   |   |        |  
|-------------------------------- |  | ------------------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                 |  | For the year ended December 31, |        
|                                 |  | 2008                            |         | 2007 |   | 2006   |  
|Balance at
 beginning of year    |  | $                               | 11,840  |      | $ | 8,058  |   | $ | 9,551  |  
|Provision
 charged to operations |  |                                 | 17,961  |      |   | 9,761  |   |   | 903    |  
|Recoveries                       |  |                                 | 427     |      |   | 479    |   |   | 1,021  |  
|Loans
 charged off               |  |                                 | (16,667 | )    |   | (6,458 | ) |   | (3,417 | )
|Balance at
 end of year          |  | $                               | 13,561  |      | $ | 11,840 |   | $ | 8,058  |  

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE
4  LOANS(continued)

Information regarding impaired
loans is as follows:

|                                                          |  |              |        |      |   |        | 
|--------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                                          |  | December 31, |       
|                                                          |  | 2008         |        | 2007 |  
|                                                          |  |              |        |      |   |        | 
|Impaired loans with no allocated allowance
 for loan loss |  | $            | 17,755 |      | $ | 4,805  | 
|Impaired loans with allocated allowance for
 loan loss    |  |              | 26,299 |      |   | 32,754 | 
|Allowance allocated to impaired loans                     |  |              | 6,019  |      |   | 6,051  | 

|                                              |  |                                 |        |      |   |        |  |   |        | 
|--------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                              |  | For the year ended December 31, |       
|                                              |  |                                 |        |      |   |        |  |   |        | 
|                                              |  | 2008                            |        | 2007 |   | 2006   | 
|                                              |  |                                 |        |      |   |        |  |   |        | 
|Average impaired loans during the period      |  | $                               | 39,492 |      | $ | 34,231 |  | $ | 23,952 | 
|Interest income recognized during
 impairment |  |                                 | 213    |      |   | 565    |  |   | 364    | 
|Cash-basis interest income recognized         |  |                                 | 106    |      |   | 505    |  |   | 339    | 

Nonperforming loans were as
follows:

|                                                     |  |              |        |      |   |        | 
|---------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                                     |  | December 31, |       
|                                                     |  | 2008         |        | 2007 |  
|Loans past due over 90 days still on
 accrual        |  | $            |       |      | $ |       | 
|Loans restructured in a troubled debt
 restructuring |  |              | 367    |      |   |       | 
|Non-accrual loans                                    |  |              | 43,687 |      |   | 37,555 | 
|Total nonperforming loans                            |  | $            | 44,054 |      | $ | 37,555 | 

If these loans
had been current throughout their terms, interest income for the non-accrual
period would have approximated $2,887, $3,971 and $2,555 for 2008, 2007 and
2006, respectively.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 5 - PREMISES AND EQUIPMENT

|                              |  |             |        |      |   |        | 
|----------------------------- |  | ----------- | ------ | ---- | - | ------ | 
|                              |  | December31, |       
|                              |  | 2008        |        | 2007 |  
|                              |  |             |        |      |   |        | 
|Land                          |  | $           | 5,357  |      | $ | 6,715  | 
|Buildings and improvements    |  |             | 24,836 |      |   | 24,704 | 
|Equipment                     |  |             | 11,931 |      |   | 12,253 | 
|                              |  |             | 42,124 |      |   | 43,672 | 
|Less accumulated depreciation |  |             | 17,673 |      |   | 17,075 | 
|                              |  |             |        |      |   |        | 
|Premises and equipment        |  | $           | 24,451 |      | $ | 26,597 | 

Depreciation
expense was $1,394, $1,534, and $1,609 for 2008, 2007, and 2006, 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 2008, 2007, and 2006 was $38, $37, and
$39, respectively. Future minimum lease payments under the remaining lease
agreement that expires in 2010 is $61.

During 2008 and 2006, vacant property owned by the Company was sold
with realized gains totaling $63 and $190 respectively. At December 31, 2008,
approximately 12 acres of land were held for sale with a cost basis of $1,541.

During 2006, gains of $103 were realized on the sale of office space
under a condominium development arrangement. At year-end 2008, there is still
one unit 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, |       
|                                                           |  | 2008                            |        | 2007 |   | 2006   |  
|Beginning balance                                          |  | $                               | 5,167  |      | $ | 5,760  |   | $ | 3,333  |  
|Transfer of net realizable value to
 foreclosed properties |  |                                 | 8,328  |      |   | 5,932  |   |   | 6,399  |  
|Sale proceeds, net                                         |  |                                 | (2,623 | )    |   | (6,160 | ) |   | (3,958 | )
|Net gain (loss) from sale of foreclosed
 properties        |  |                                 | (119   | )    |   | (232   | ) |   | 76     |  
|Provision for foreclosed properties                        |  |                                 | (3,610 | )    |   | (133   | ) |   | (90    | )
|Total Foreclosed properties                                |  | $                               | 7,143  |      | $ | 5,167  |   | $ | 5,760  |  

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE
6  FORECLOSED PROPERTIES, NET(continued)

Changes in the valuation
allowance for losses on other real estate were as follows:

|                                        |  |                                 |       |      |   |      |   |   |      |  
|--------------------------------------- |  | ------------------------------- | ----- | ---- | - | ---- | - | - | ---- | -
|                                        |  | For the year ended December 31, |      
|                                        |  | 2008                            |       | 2007 |   | 2006 |  
|Beginning
 balance                      |  | $                               | 207   |      | $ | 108  |   | $ | 267  |  
|Provision
 charged to operations        |  |                                 | 3,610 |      |   | 133  |   |   | 90   |  
|Amounts
 related to properties disposed |  |                                 | (426  | )    |   | (34  | ) |   | (249 | )
|                                        |  |                                 |       |      |   |      |   |   |      |  
|Balance at
 end of year                 |  | $                               | 3,391 |      | $ | 207  |   | $ | 108  |  

NOTE
7 - GOODWILL

The change in balance for
goodwill during the year is as follows:

|                             |  |                                  |       |      |   |       | 
|---------------------------- |  | -------------------------------- | ----- | ---- | - | ----- | 
|                             |  | For the year ended
 December 31, |      
|                             |  | 2008                             |       | 2007 |  
|                             |  |                                  |       |      |   |       | 
|Beginning of
 year           |  | $                                | 6,108 |      | $ | 5,723 | 
|UFS stock
 options exercised |  |                                  |      |      |   | 385   | 
|Impairment                   |  |                                  |      |      |   |      | 
|                             |  |                                  |       |      |   |       | 
|End of year                  |  | $                                | 6,108 |      | $ | 6,108 | 

During 2007, additional goodwill resulted from the exercise of stock
options and subsequent redemption of the stock held by a key employee of UFS, a
data processing company in whom the Bank has an ownership interest. Refer to
Note 1.

NOTE 8 - DEPOSITS

|                                                                |  |      |         |      |   |         | 
|--------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|The
 following is a summary of deposits by type at December 31: |  |      |         |      |   |         | 
|                                                                |  |      |         |      |   |         | 
|                                                                |  | 2008 |         | 2007 |  
|                                                                |  |      |         |      |   |         | 
|Non-interest-bearing
 demand deposits                           |  | $    | 73,537  |      | $ | 94,120  | 
|Interest-bearing
 demand deposits                               |  |      | 129,136 |      |   | 118,122 | 
|Savings
 deposits                                               |  |      | 30,473  |      |   | 28,250  | 
|Money market
 deposits                                          |  |      | 206,558 |      |   | 208,027 | 
|Time
 deposits $100,000 and greater                             |  |      | 193,928 |      |   | 226,088 | 
|Other time
 deposits                                            |  |      | 216,126 |      |   | 209,578 | 
|Total deposits                                                  |  | $    | 849,758 |      | $ | 884,185 | 
|                                                                |  |      |         |      |   |         | 
|Brokered
 certificates of deposit included above:               |  | $    | 113,863 |      | $ | 130,856 | 

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 8  DEPOSITS
(continued)

At December
31, 2008, the scheduled maturities of time deposits were as follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2009 |  |   | 285,507 | 
|2010 |  |   | 100,042 | 
|2011 |  |   | 8,783   | 
|2012 |  |   | 9,717   | 
|2013 |  |   | 6,005   | 
|     |  | $ | 410,054 | 

Deposits from the Companys directors and officers held by the Bank at
December 31, 2008 and 2007 amounted to $4,559 and $4,688, respectively.

NOTE 9 - FEDERAL FUNDS PURCHASED AND
REPURCHASE AGREEMENTS

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

|                                                              |  |      |        |      |   |        |  
|------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                              |  | 2008 |        | 2007 |  
|Federal funds purchased                                       |  | $    |       |      | $ | 16,141 |  
|Securities sold under agreements to
 repurchase               |  |      | 30,174 |      |   | 11,033 |  
|                                                              |  | $    | 30,174 |      | $ | 27,174 |  
|                                                              |  |      |        |      |   |        |  
|Average amounts outstanding during year                       |  | $    | 32,750 |      | $ | 17,048 |  
|Maximum month-end amounts outstanding                         |  |      | 45,659 |      |   | 41,107 |  
|Average interest rates on amounts
 outstanding at end of year |  |      | 1.18   | %    |   | 4.73   | %
|Average interest rates on amounts
 outstanding during year    |  |      | 2.38   | %    |   | 5.18   | %

NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES

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

|                                   |  |   |        |  |                         |      |      |   |                         |  |  |      |   | 
|---------------------------------- |  | - | ------ |  | ----------------------- | ---- | ---- | - | ----------------------- |  |  | ---- | - | 
|Year of
 Maturity                  |  |   | 2008   |  | Weighted
 Average
 Rate |      | 2007 |   | Weighted
 Average
 Rate | 
|                                   |  |   |        |  |                         |      |      |   |                         |  |  |      |  
|2008                               |  | $ |       |  |                         |     |      | $ | 85,000                  |  |  | 4.40 | %
|2009                               |  |   | 20,000 |  |                         | 1.62 | %    |   |                        |  |  |     |  
|2010                               |  |   |       |  |                         |     |      |   |                        |  |  |     |  
|2011                               |  |   | 65,000 |  |                         | 2.85 | %    |   |                        |  |  |     |  
|Total fixed maturity               |  |   | 85,000 |  |                         | 2.56 | %    |   | 85,000                  |  |  | 4.40 | %
|Advances with amortizing principal |  |   | 95     |  |                         | 3.64 | %    |   | 172                     |  |  | 3.78 | %
|                                   |  |   |        |  |                         |      |      |   |                         |  |  |      |  
|Total                              |  | $ | 85,095 |  |                         | 2.56 | %    | $ | 85,172                  |  |  | 4.40 | %

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES(continued)

Maximum month-end amounts outstanding were $85,171 and $115,179 at
December 31, 2008 and 2007, 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 $49,948
of real estate mortgages and $71,122 of mortgage-backed and U.S. government
approved agency securities. A $40 million advance with a rate of 2.055%
maturing in 2011 is putable by the FHLB in March 2009. The advances in the
table above maturing in 2009 are at variable rates priced at three month LIBOR
plus 10 basis points and the interest rate is reset quarterly. Those advances
maturing in 2011 are fixed rate.

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
(2.82% at December 31, 2008). For banking regulatory purposes, these securities
are considered Tier 1 capital.

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.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 12 - 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 year-end 2008 and
2007, regulatory notifications categorized the Bank as adequately and well
capitalized, respectively, 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 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 needs 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.

The Companys and the Banks risk-based capital and leverage ratios at
December 31, 2008 and 2007 are presented below.

|                                              |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|--------------------------------------------- |  | ------ | ------- | ---------------------------- |  | ------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                              |  | Actual |         | For CapitalAdequacy Purposes |  | To Be Well
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |         | Ratio                        |  | Amount                                                              |   | Ratio |        | Amount |  | Ratio |  
|2008                                          |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total Capital to risk-weighted assets         |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  | $      | 80,787  |                              |  | 9.72                                                                | % | $     | 66,471 |        |  | 8.00  | % |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 79,566  |                              |  | 9.56                                                                | % |       | 66,524 |        |  | 8.00  |   | $ | 83,155 |  |  | 10.00 | %
|Tier 1 (Core) Capital to risk-weighted assets |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  |        | 70,362  |                              |  | 8.47                                                                | % |       | 33,235 |        |  | 4.00  |   |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 69,132  |                              |  | 8.31                                                                | % |       | 33,262 |        |  | 4.00  |   |   | 49,893 |  |  | 6.00  |  
|Tier 1 (Core) Capital to average assets       |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  |        | 70,362  |                              |  | 6.68                                                                | % |       | 42,110 |        |  | 4.00  |   |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 69,132  |                              |  | 6.56                                                                | % |       | 42,161 |        |  | 4.00  |   |   | 52,701 |  |  | 5.00  |  
|                                             
|2007                                          |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total Capital to risk-weighted assets         |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  | $      | 101,050 |                              |  | 11.32                                                               | % | $     | 71,421 |        |  | 8.00  | % |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 99,483  |                              |  | 11.13                                                               | % |       | 71,477 |        |  | 8.00  |   | $ | 89,346 |  |  | 10.00 | %
|Tier 1 (Core) Capital to risk-weighted
assets |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  |        | 89,882  |                              |  | 10.07                                                               | % |       | 35,710 |        |  | 4.00  |   |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 88,306  |                              |  | 9.88                                                                | % |       | 37,739 |        |  | 4.00  |   |   | 53,607 |  |  | 6.00  |  
|Tier 1 (Core) Capital to average assets       |  |        |         |                              |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                  |  |        | 89,882  |                              |  | 8.34                                                                | % |       | 43,125 |        |  | 4.00  |   |   | N/A    |  |  | N/A   |  
|Bank                                          |  |        | 88,306  |                              |  | 8.19                                                                | % |       | 43,153 |        |  | 4.00  |   |   | 53,941 |  |  | 5.00  |  

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|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (Dollar amounts in thousands)

NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive
income (loss) components and related tax effects were as follows:

|                                                                                          |  |                                 |        |      |   |       |   |   |      |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ----- | - | - | ---- | -
|                                                                                          |  | For the year ended December 31, |       
|                                                                                          |  | 2008                            |        | 2007 |   | 2006  |  
|                                                                                          |  |                                 |        |      |   |       |   |   |      |  
|Unrealized holding gains (losses) on
 securities available for sale arising during period |  | $                               | (4,092 | )    | $ | 2,389 |   | $ | 872  |  
|Reclassification adjustment for net gains
 realized in income                             |  |                                 | (765   | )    |   | (352  | ) |   |     |  
|Reclassification adjustment for other than
 temporary impairment realized in income       |  |                                 | 1,900  |      |   |      |   |   |     |  
|Net unrealized gains(losses)                                                              |  |                                 | (2,957 | )    |   | 2,037 |   |   | 872  |  
|Tax effect                                                                                |  |                                 | 1,237  |      |   | (723  | ) |   | (315 | )
|                                                                                          |  |                                 |        |      |   |       |   |   |      |  
|Other comprehensive income (loss)                                                         |  | $                               | (1,720 | )    | $ | 1,314 |   | $ | 557  |  

NOTE 14 - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK

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 commitments to extend credit,
standby letters of credit, and financial guarantees. The Company does not use
forward loan sale commitments.

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|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (Dollar amounts in thousands)

NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
(Continued)

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, |        
|                                                                     |  | 2008                                          |         | 2007 |  
|Financial
 instruments whose contract amounts represent credit risk: |  |                                               |         |      |   |         | 
|Commitments to extend credit                                         |  | $                                             | 177,487 |      | $ | 188,457 | 
|Standby letters of credit                                            |  |                                               | 16,325  |      |   | 19,386  | 

Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. 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
$9,716 and $14,712 at December 31, 2008 and 2007, respectively, with rates
ranging from 3.33% to 9.25% in 2008 and 3.0% to 12.0% in 2007.

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 2010. 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 2008, 2007 and 2006, impairment charges of $2,539, $0 and $27 were
taken 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 and $7,029 at December 31, 2008 and 2007,
respectively. At December 31, 2008 and 2007, the carrying value recorded by the
Company as a liability for those guarantees was $2,957 and $419, respectively.

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 outstanding at
December 31, 2008.

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|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (Dollar amounts in thousands)

NOTE 15 - POST-RETIREMENT PLANS

The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. The employer
contributions paid and expensed under all plans totaled $1,103 in 2008, $1,184
in 2007, and $1,173 in 2006.

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 $(512) in 2008, $467 in
2007, and $1,051 in 2006. The aggregate amount of deferred compensation
included in other liabilities in the consolidated balance sheets is $3,100 and
$3,845 in 2008 and 2007, respectively. In March 2005, the Company 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 by providing for deferred compensation in addition to that
available under the Companys other retirement programs. Costs amounting to
$(640), $246, and $799 are included in the amounts charged to expense for 2008,
2007, and 2006, respectively. The Company has ceased contributions to the Plan
for the foreseeable future.

NOTE 16 - INCOME TAX EXPENSE

Income tax expense (benefit) consists of the following:

|                              |  |                                 |        |      |   |        |   |   |       |  
|----------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ----- | -
|                              |  | For the year ended December 31, |       
|                              |  | 2008                            |        | 2007 |   | 2006   |  
|Current
 income taxes         |  |                                 |        |      |   |        |   |   |       |  
|Federal                       |  | $                               | (1,792 | )    | $ | (215   | ) | $ | 3,013 |  
|State                         |  |                                 | (142   | )    |   | 4      |   |   | 592   |  
|                              |  |                                 | (1,934 | )    |   | (211   | ) |   | 3,605 |  
|Deferred
 income taxes        |  |                                 |        |      |   |        |   |   |       |  
|Federal                       |  |                                 | (4,254 | )    |   | (1,636 | ) |   | (688  | )
|State                         |  |                                 | (1,672 | )    |   | (569   | ) |   | (152  | )
|                              |  |                                 | (5,926 | )    |   | (2,205 | ) |   | (840  | )
|Income tax
 expense (benefit) |  | $                               | (7,860 | )    | $ | (2,416 | ) | $ | 2,765 |  

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, |       
|                                                                         |  | 2008                            |        | 2007 |   | 2006   |  
|Income tax expense
 (benefit) based on statutory rate (34%)              |  | $                               | (6,010 | )    | $ | (712   | ) | $ | 3,448 |  
|State income
 tax expense (benefit) net of federal tax expense (benefit) |  |                                 | (1,103 | )    |   | (427   | ) |   | 253   |  
|                                                                         |  |                                 | (7,113 | )    |   | (1,139 | ) |   | 3,701 |  
|Effect of tax-exempt interest income                                     |  |                                 | (935   | )    |   | (833   | ) |   | (691  | )
|Life insurance death benefit and
earnings                                |  |                                 | (11    | )    |   | (294   | ) |   | (304  | )
|Equity in income of UFS subsidiary                                       |  |                                 | (80    | )    |   | (189   | ) |   | (174  | )
|Other                                                                    |  |                                 | 279    |      |   | 39     |   |   | 233   |  
|                                                                         |  |                                 |        |      |   |        |   |   |       |  
|Expense (benefit) based on effective tax
 rates                          |  | $                               | (7,860 | )    | $ | (2,416 | ) | $ | 2,765 |  

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|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (Dollar amounts in thousands)

NOTE 16 - INCOME TAX EXPENSE(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, 2008 and 2007:

|                                                      |  |      |        |      |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                      |  | 2008 |        | 2007 |  
|                                                      |  |      |        |      |   |        |  
|Deferred tax
 assets                                  |  |      |        |      |   |        |  
|Allowance for loan losses                             |  | $    | 5,318  |      | $ | 4,643  |  
|Off-balance sheet credit losses                       |  |      | 1,160  |      |   | 164    |  
|Deferred loan fees                                    |  |      | 190    |      |   | 137    |  
|Deferred compensation                                 |  |      | 1,600  |      |   | 1,927  |  
|Non accrual loans                                     |  |      | 2,311  |      |   | 1,919  |  
|Accrued vacation pay                                  |  |      | 362    |      |   | 344    |  
|OREO property valuation                               |  |      | 1,330  |      |   | 81     |  
|Net unrealized loss on securities available
 for sale |  |      | 1,218  |      |   |       |  
|Donations                                             |  |      | 47     |      |   | 90     |  
|Deferred tax credits  AMT                            |  |      | 680    |      |   |       |  
|Federal net operating loss carryforwards
 (NOLs)      |  |      | 1,100  |      |   |       |  
|State net operating loss carryforwards
 (NOLs)        |  |      | 1,487  |      |   | 794    |  
|Other than temporary impairment of
 securities        |  |      | 745    |      |   |       |  
|Other                                                 |  |      | 65     |      |   | 11     |  
|Gross deferred tax assets before valuation
 allowance |  |      | 17,613 |      |   | 10,110 |  
|Valuation allowance (state NOLs)                      |  |      | (659   | )    |   | (610   | )
|Net deferred tax assets                               |  |      | 16,954 |      |   | 9,500  |  
|Deferred tax
 liabilities                             |  |      |        |      |   |        |  
|Depreciation                                          |  |      | 1,927  |      |   | 1,976  |  
|FHLB stock dividends                                  |  |      | 791    |      |   | 791    |  
|Mortgage loan servicing                               |  |      | 63     |      |   | 177    |  
|Net unrealized gain on securities available
 for sale |  |      |       |      |   | 19     |  
|Equity in
 UFS subsidiary                             |  |      | 524    |      |   |       |  
|Prepaid
 expenditures                                 |  |      | 110    |      |   | 109    |  
|Other                                                 |  |      | 38     |      |   | 90     |  
|Gross deferred tax liabilities                        |  |      | 3,453  |      |   | 3,162  |  
|Net deferred tax asset                                |  | $    | 13,501 |      | $ | 6,338  |  

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|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (Dollar amounts in thousands)

NOTE 16 - INCOME TAX EXPENSE(continued)

At December 31, 2008, the Company has federal and state NOL
carryforwards of approximately $3.2 million and $28.5 million respectively. The
federal NOL carryforwards expire in 2028. At December 31, 2007, the Company had
no federal NOL carryforwards and $15.0 million of state NOL carryforwards.
These NOLs expire at various times through 2023.

The Company carries a valuation allowance to reduce deferred tax assets
related to state net operating loss carryforwards (NOLs) 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. The Company has not accrued any penalties for unrecognized tax
benefits.

As of January 1, 2007, the Company adopted Fin 48 as discussed in Note
1 and recorded an adjustment to beginning retained earnings in the amount of
$980.

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|                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------
|BAYLAKE CORP.                                                                                                                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008, 2007 and 2006
 (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, |          
|                                                                                                    |  | 2008                            |           | 2007 |   | 2006      | 
|Basic                                                                                               |  |                                 |           |      |   |           |  |   |           | 
|Net income (loss)                                                                                   |  | $                               | (9,817    | )    | $ | 166       |  | $ | 7,376     | 
|Weighted average common shares
outstanding                                                          |  |                                 | 7,911,469 |      |   | 7,851,508 |  |   | 7,802,208 | 
|                                                                                                    |  |                                 |           |      |   |           |  |   |           | 
|Basic earnings (loss) per common share                                                              |  | $                               | (1.24     | )    | $ | 0.02      |  | $ | 0.95      | 
|                                                                                                    |  |                                 |           |      |   |           |  |   |           | 
|Diluted                                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Net income (loss)                                                                                   |  | $                               | (9,817    | )    | $ | 166       |  | $ | 7,376     | 
|Weighted average common shares outstanding
 for basic earnings per share                            |  |                                 | 7,911,469 |      |   | 7,851,508 |  |   | 7,802,208 | 
|Add: Dilutive effects of assumed exercises
 of stock options                                        |  |                                 |          |      |   | 1,271     |  |   | 33,315    | 
|Average shares and dilutive potential
 common shares                                                |  |                                 | 7,911,469 |      |   | 7,852,779 |  |   | 7,835,523 | 
|                                                                                                    |  |                                 |           |      |   |           |  |   |           | 
|Diluted earnings (loss) per common
share                                                            |  | $                               | (1.24     | )    | $ | 0.02      |  | $ | 0.94      | 
|                                                                                                    |  |                                 |           |      |   |           |  |   |           | 
|Additional common stock option shares that
 have not been included due to their antidilutive effect |  |                                 | 126,628   |      |   | 166,700   |  |   | 60,000    | 

NOTE 18 - STOCK OPTION PLAN

The Company has a non-qualified stock option 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. Subsequent to the expiration of the Plan, options were granted in 2004
under the same terms as would have applied under the Plan. Total compensation
cost (benefit), net of income tax, that has been charged against income for the
plan was $(36), $21, and $48 for 2008, 2007, and 2006, respectively. The total
income tax benefit was $(8), $8, and $19 for the respective periods.

There were no stock options granted in 2008, 2007 or 2006.

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|                                                   
|---------------------------------------------------
|BAYLAKE CORP.                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS         
|December 31, 2008, 2007 and 2006                   
|(Dollar amounts in thousands except per share data)

NOTE 18 - STOCK OPTION PLAN(continued)

Activity in
the stock option plan during 2008 follows:

|                                   |  |        |         |                                    |   |                                               |  |                             |      |  |   |   | 
|---------------------------------- |  | ------ | ------- | ---------------------------------- | - | --------------------------------------------- |  | --------------------------- | ---- |  | - | - | 
|                                   |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | WeightedAverage
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |     
|                                  
|Outstanding
 at beginning of year  |  |        | 212,134 |                                    | $ | 16.60                                         |  |                             |      |  |   |   | 
|Granted                            |  |        |        |                                    |   |                                              |  |                             |      |  |   |   | 
|Exercised                          |  |        |        |                                    |   |                                              |  |                             |      |  |   |   | 
|Forfeited or
 expired              |  |        | (85,506 | )                                  |   | 16.75                                         |  |                             |      |  |   |   | 
|Outstanding
 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 |   | WeightedAverage
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |     
|Outstanding
 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 |  | $ |  | 

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|                                                   
|---------------------------------------------------
|BAYLAKE CORP.                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS         
|December 31, 2008, 2007 and 2006                   
|(Dollar amounts in thousands except per share data)

NOTE 18 - STOCK OPTION PLAN
(continued)

Activity in
the stock option plan during 2006 follows:

|                                  |  |        |         |                                    |   |                                               |  |                             |      |  |   |     | 
|--------------------------------- |  | ------ | ------- | ---------------------------------- | - | --------------------------------------------- |  | --------------------------- | ---- |  | - | --- | 
|                                  |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | WeightedAverage
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |     
|Outstanding
 at beginning of year |  |        | 486,869 |                                    | $ | 13.95                                         |  |                             |      |  |   |     | 
|Granted                           |  |        |        |                                    |   |                                              |  |                             |      |  |   |     | 
|Exercised                         |  |        |        |                                    |   |                                              |  |                             |      |  |   |     | 
|Forfeited or
 expired             |  |        | (99,544 | )                                  |   | 9.35                                          |  |                             |      |  |   |     | 
|Outstanding
 at end of year       |  |        | 387,325 |                                    | $ | 15.10                                         |  |                             | 3.00 |  | $ | 923 | 
|                                  |  |        |         |                                    |   |                                               |  |                             |      |  |   |     | 
|Exercisable
 at end of year       |  |        | 352,264 |                                    | $ | 15.24                                         |  |                             | 2.70 |  | $ | 835 | 

Information
related to the stock option plan during each year follows:

|                                            |  |      |   |      |   |       |  |   |     | 
|------------------------------------------- |  | ---- | - | ---- | - | ----- |  | - | --- | 
|                                            |  | 2008 |   | 2007 |   | 2006  | 
|Intrinsic
 value of options exercised       |  | $    |  |      | $ | 239   |  | $ | 648 | 
|Cash
 received from option exercises        |  |      |  |      |   | 1,184 |  |   | 932 | 
|Tax benefit
 realized from option exercises |  |      |  |      |   | 94    |  |   | 272 | 

As of December 31, 2008, there was $2 of total unrecognized
compensation cost related to nonvested stock options granted under the Plan.
The cost is expected to be recognized over a weighted-average period of 3
months.

NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS

The 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 debt, 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
long- term debt 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.

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS (continued)

|                                                         |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|-------------------------------------------------------- |  | ---------------- | ------- | ----------- | - | ---------------- |  | ----------- | ------- |  | - | ------- | 
|                                                         |  | December 31,     |        
|                                                         |  | 2008             |         | 2007        |  
|                                                         |  | Carrying
 Amount |         | Fair
 Value |   | Carrying
 Amount |  | Fair
 Value |        
|Financial assets                                         |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Cash and cash equivalents                                |  | $                | 23,085  |             | $ | 23,085           |  | $           | 46,381  |  | $ | 46,381  | 
|Federal funds sold                                       |  |                  | 397     |             |   | 397              |  |             |        |  |   |        | 
|Securities available for sale                            |  |                  | 225,417 |             |   | 225,417          |  |             | 222,475 |  |   | 222,475 | 
|Loans held for sale                                      |  |                  | 368     |             |   | 373              |  |             | 741     |  |   | 749     | 
|Loans, net                                               |  |                  | 715,161 |             |   | 721,569          |  |             | 748,370 |  |   | 746,084 | 
|Federal Home Loan Bank stock                             |  |                  | 6,792   |             |   | n/a              |  |             | 6,792   |  |   | n/a     | 
|Accrued interest receivable                              |  |                  | 3,968   |             |   | 3,968            |  |             | 5,394   |  |   | 5,394   | 
|                                                         |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Financial liabilities                                    |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Deposits                                                 |  |                  | 849,758 |             |   | 854,228          |  |             | 884,185 |  |   | 885,795 | 
|Federal funds purchased and repurchase
 agreements       |  |                  | 30,174  |             |   | 30,174           |  |             | 27,174  |  |   | 27,174  | 
|Federal Home Loan Bank advances                          |  |                  | 85,095  |             |   | 86,228           |  |             | 85,172  |  |   | 85,247  | 
|Subordinated debentures                                  |  |                  | 16,100  |             |   | 16,100           |  |             | 16,100  |  |   | 16,100  | 
|Accrued interest payable                                 |  |                  | 2,857   |             |   | 2,857            |  |             | 4,743   |  |   | 4,743   | 
|                                                         |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Off balance sheet credit related items
 Letter of credit |  |                  | 2,957   |             |   | 2,957            |  |             | 418     |  |   | 418     | 

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 20 - CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY

CONDENSED
BALANCE SHEETSDecember 31

|                                           |  |      |        |      |   |        | 
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ | 
|                                           |  | 2008 |        | 2007 |  
|ASSETS                                     |  |      |        |      |   |        | 
|Cash and cash equivalents                  |  | $    | 1,208  |      | $ | 588    | 
|Receivable from subsidiary                 |  |      | 28     |      |   | 2,231  | 
|Deferred income taxes                      |  |      | 15     |      |   | 25     | 
|Investment in subsidiaries                 |  |      | 83,826 |      |   | 94,787 | 
|                                           |  |      |        |      |   |        | 
|Total assets                               |  | $    | 85,077 |      | $ | 97,631 | 
|                                           |  |      |        |      |   |        | 
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |      |        |      |   |        | 
|Liabilities                                |  |      |        |      |   |        | 
|Dividends payable                          |  | $    |       |      | $ | 1,262  | 
|Other payables                             |  |      | 18     |      |   |       | 
|Interest Payable                           |  |      | 3      |      |   | 7      | 
|Debentures                                 |  |      | 16,100 |      |   | 16,100 | 
|Total liabilities                          |  |      | 16,121 |      |   | 17,369 | 
|                                           |  |      |        |      |   |        | 
|Stockholders equity                       |  |      | 68,956 |      |   | 80,262 | 
|                                           |  |      |        |      |   |        | 
|Total liabilities and stockholders
equity |  | $    | 85,077 |      | $ | 97,631 | 

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 20 -
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)

CONDENSED
STATEMENTS OF OPERATIONSYears ended December 31

|                                                                                             |  |      |         |      |   |        |   |   |       |  
|-------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | - | - | ----- | -
|                                                                                             |  | 2008 |         | 2007 |   | 2006   |  
|Income                                                                                       |  |      |         |      |   |        |   |   |       |  
|Dividends from subsidiaries                                                                  |  | $    |        |      | $ | 4,500  |   | $ | 5,400 |  
|Interest income                                                                              |  |      | 37      |      |   | 87     |   |   | 152   |  
|Total income                                                                                 |  |      | 37      |      |   | 4,587  |   |   | 5,552 |  
|                                                                                            
|Expenses                                                                                     |  |      |         |      |   |        |   |   |       |  
|Interest                                                                                     |  |      | 794     |      |   | 1,089  |   |   | 1,705 |  
|Other                                                                                        |  |      | 116     |      |   | 70     |   |   | 175   |  
|Total expenses                                                                               |  |      | 910     |      |   | 1,159  |   |   | 1,880 |  
|                                                                                             |  |      |         |      |   |        |   |   |       |  
|Income (loss) before equity
 in undistributed net income of
 subsidiaries                    |  |      | (873    | )    |   | 3,428  |   |   | 3,672 |  
|                                                                                             |  |      |         |      |   |        |   |   |       |  
|Equity in undistributed net income (loss)
 of subsidiaries (dividends in excess of earnings) |  |      | (9,241  | )    |   | (3,627 | ) |   | 3,117 |  
|Income (loss) before income taxes                                                            |  |      | (10,114 | )    |   | (199   | ) |   | 6,789 |  
|Income tax benefit                                                                           |  |      | (297    | )    |   | (365   | ) |   | (587  | )
|                                                                                             |  |      |         |      |   |        |   |   |       |  
|Net income (loss)                                                                            |  | $    | (9,817  | )    | $ | 166    |   | $ | 7,376 |  

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|                                          
|------------------------------------------
|BAYLAKE CORP.                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2008, 2007 and 2006          
|(Dollar amounts in thousands)             

NOTE 20 -
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)

CONDENSED
STATEMENT OF CASH FLOWSYears ended December 31

|                                                                                   |  |      |        |      |   |        |   |   |         |  
|---------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------- | -
|                                                                                   |  | 2008 |        | 2007 |   | 2006   |  
|Cash flows from operating activities:                                              |  |      |        |      |   |        |   |   |         |  
|Net income (loss)                                                                  |  | $    | (9,817 | )    | $ | 166    |   | $ | 7,376   |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |      |        |      |   |        |   |   |         |  
|Undistributed (earnings) loss of subsidiary
 (dividends in excess of earnings)     |  |      | 9,241  |      |   | 3,627  |   |   | (3,117  | )
|Stock Compensation Expense                                                         |  |      | (44    | )    |   | 21     |   |   | 48      |  
|Amortization of debt issue costs                                                   |  |      |       |      |   |       |   |   | 475     |  
|Net amortization of securities                                                     |  |      |       |      |   | (1     | ) |   | (3      | )
|Net change in intercompany receivable                                              |  |      | 2,203  |      |   | (2,205 | ) |   | 142     |  
|Tax benefit from exercise of stock options                                         |  |      | 8      |      |   | (94    | ) |   | (272    | )
|Other changes, net                                                                 |  |      | 34     |      |   | 92     |   |   | 261     |  
|Net cash provided by operating activities                                          |  |      | 1,625  |      |   | 1,606  |   |   | 4,910   |  
|                                                                                   |  |      |        |      |   |        |   |   |         |  
|Cash flows from investing
activities:                                              |  |      |        |      |   |        |   |   |         |  
|Proceeds from sale of securities                                                   |  |      |       |      |   | 1,000  |   |   |        |  
|                                                                                   |  |      |        |      |   |        |   |   |         |  
|Cash flows from financing
activities:                                              |  |      |        |      |   |        |   |   |         |  
|Redemption of subordinated debt                                                    |  |      |       |      |   |       |   |   | (16,100 | )
|Proceeds from issue of
 subordinated debt                                          |  |      |       |      |   |       |   |   | 16,100  |  
|Proceeds from exercise of stock options                                            |  |      |       |      |   | 1,184  |   |   | 932     |  
|Tax benefit (expense) from exercise of
 stock options                              |  |      | (8     | )    |   | 94     |   |   | 272     |  
|Treasury stock repurchases                                                         |  |      |       |      |   | (1,823 | ) |   | (1,101  | )
|Dividend reinvestment plan                                                         |  |      | 265    |      |   | 1,096  |   |   | 268     |  
|Dividends paid                                                                     |  |      | (1,262 | )    |   | (5,022 | ) |   | (4,982  | )
|Net cash used in financing activities                                              |  |      | (1,005 | )    |   | (4,471 | ) |   | (4,611  | )
|                                                                                   |  |      |        |      |   |        |   |   |         |  
|Net change in cash and cash equivalents                                            |  |      | 620    |      |   | (1,865 | ) |   | 299     |  
|                                                                                   |  |      |        |      |   |        |   |   |         |  
|Beginning cash and cash equivalents                                                |  |      | 588    |      |   | 2,453  |   |   | 2,154   |  
|                                                                                   |  |      |        |      |   |        |   |   |         |  
|Ending cash and cash equivalents                                                   |  | $    | 1,208  |      | $ | 588    |   | $ | 2,453   |  

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

None.

ITEM
9A. 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, 2008. 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 2009 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 2009 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 2009 Annual
Meeting of Stockholders is incorporated herein by reference.

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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, 2008.

|                                                               |  |                                                                                                     |         |                                                                                     |   |                                                                                                                                                        |  |  |   | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | - | 
|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        |  |                                                                                                     | 116,628 |                                                                                     | $ | 16.70                                                                                                                                                  |  |  |  | 
|Equity compensation plans not approved by
 security holders ** |  |                                                                                                     | 10,000  |                                                                                     |   | 14.15                                                                                                                                                  |  |  |  | 
|Total                                                          |  |                                                                                                     | 126,628 |                                                                                     | $ | 16.50                                                                                                                                                  |  |  |  | 

** 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 2009 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 2009 Annual Meeting of
Stockholders is incorporated herein by reference.

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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

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.
 Cera                            | 
| |                | Robert J.
 Cera                               | 
| |                | President
 and Chief Executive Officer and   
| |                | Director
 (Principal Executive Officer)      
| |                |                                              
| | By:            | /s/Kevin L.
 LaLuzerne                        | 
| |                | Kevin L.
 LaLuzerne                           | 
| |                | Chief
 Financial Officer and Treasurer       
| |                | (Principal
 Financial and Accounting Officer)

Date: March 17, 2009

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.

| |  | 
| |  | 
| |  | 

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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on these dates indicated.

|                                             |                                                |                                            | 
|-------------------------------------------- | ---------------------------------------------- | ------------------------------------------ | 
|/s/ Thomas
 L. Herlache                      |                                                | /s/ Richard
 A. Braun                      | 
|Thomas L.
 Herlache, Director                | Richard A.
 Braun, Director                   
|Chairman of
 the Board                       | Vice-Chairman
 of the Board                   
|                                             |                                                |                                            | 
|/s/ Kevin L.
 LaLuzerne                      |                                                | /s/ Robert
 W. Agnew                       | 
|Kevin L.
 LaLuzerne, Chief Financial Officer | Robert W.
 Agnew, Director                    
|and
 Treasurer (Principal Financial and      |                                                |                                           
|Accounting
 Officer)                         |                                                |                                           
|                                             |                                                |                                            | 
|/s/ Dee
 Geurts-Bengtson                     |                                                | /s/ Robert
 J. Cera                        | 
|Dee
 Geurts-Bengtson, Director               | Robert J.
 Cera, President and Chief Executive
|                                             |                                                | Officer and
 Director (Principal Executive
|                                             |                                                | Officer)                                   | 
|                                             |                                                |                                            | 
|/s/ George
 Delveaux, Jr.                    |                                                | /s/ Roger G.
 Ferris                       | 
|George
 Delveaux, Jr., Director              | Roger G.
 Ferris, Director                    
|                                             |                                                |                                            | 
|/s/ Joseph
 J. Morgan                        |                                                | /s/ William
 Parsons                       | 
|Joseph J.
 Morgan, Director                  | William
 Parsons, Director                    
|                                             |                                                |                                            | 
|/s/ Paul Jay
 Sturm                          |                                                |                                            | 
|Paul Jay
 Sturm, Director                    |                                                |                                           

* Each of the above signatures
is affixed as of March 17, 2009.

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|            |  |                                                                                                                                                                                                                                                                                  | 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                      | 
|3.1         |  | 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, 2004                                                                   
|            |  |                                                                                                                                                                                                                                                                                 
|3.2         |  | 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, 2007                                                                                             
|            |  |                                                                                                                                                                                                                                                                                 
|3.3         |  | 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, 2007                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                 
|3.4         |  | 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, 2004                                                                                 
|            |  |                                                                                                                                                                                                                                                                                 
|4.1         |  | 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, 2006
|            |  |                                                                                                                                                                                                                                                                                 
|10.1        |  | 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, 1993                                                                    
|            |  |                                                                                                                                                                                                                                                                                 
|10.2        |  | 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, 1993                                           
|            |  |                                                                                                                                                                                                                                                                                 
|10.3        |  | 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, 2006           
|            |  |                                                                                                                                                                                                                                                                                 
|10.4        |  | Baylake Corp. Stock Purchase Plan*, incorporated by reference to
 Exhibit 4 from the Companys Form S-8 filed on February 10, 1998                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                 
|10.5        |  | 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, 1998                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                 
|10.6        |  | 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, 2004                                                                                     
|            |  |                                                                                                                                                                                                                                                                                 
|10.7        |  | 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,
 2006                                                 
|            |  |                                                                                                                                                                                                                                                                                 
|10.8        |  | 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, 2007                                                                   

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|      |  |                                                                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2006    
|      |  |                                                                                                                                                                                                                                           
|10.10 |  | 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, 2008                    
|      |  |                                                                                                                                                                                                                                           
|21.1  |  | List of Subsidiaries                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                           
|23.1  |  | Consent of Virchow, Krause & Company, LLP                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                           
|23.2  |  | Consent of Crowe Horwath LLP                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                           
|24.1  |  | 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 amended                                                                                                            
|      |  |                                                                                                                                                                                                                                           
|31.2  |  | Certification of the Chief Financial Officer pursuant to Rule
 13a-14(a) under the Securities Exchange Act of 1934, as amended                                                                                                            
|      |  |                                                                                                                                                                                                                                           
|32.1  |  | 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 1350                                                                                
|      |  |                                                                                                                                                                                                                                           
|32.2  |  | 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 agreements                                                                                                                                                                                              

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