Table of Contents





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

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|------------------------------------------------------------ | ---------- | 
|                                                            
|                                                            
|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, 2007                 
|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 x | Non-accelerated filer o | 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,
2007, (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
$13.75 reported bid price on that date) held by non-affiliates (excludes a
total of 449,978 shares reported as beneficially owned by directors and
executive officers-does not constitute an admission as to affiliate status) was
approximately $117,401,857. As of March 31, 2008, 7,911,538 shares of Common
Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------
|                                                                                                                                          |  | Part of Form 10-K Into Which          
|Document                                                                                                                                  |  | Portions of Documents are Incorporated
|                                                                                                                                          |  |                                       
|Definitive Proxy Statement for 2008 Annual Meeting of Shareholders to be
filed within 120 days of the fiscal year ended December 31, 2007 |  | Part III                              
|                                                                                                                                          |  |                                       
|                                                                                                                                          |  |                                       
|                                                                                                                                          |  |                                       
|                                                                                                                                          |  |                                       





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2007 FORM 10-K
TABLE OF CONTENTS

|         |          |                                                                                                               |         
|-------- | -------- | ------------------------------------------------------------------------------------------------------------- | --------
|         |          | DESCRIPTION                                                                                                   | PAGE NO.
|         |          |                                                                                                               |         
|PART I   |          |                                                                                                               |         
|         | ITEM 1.  | Business                                                                                                      | 4       
|         | ITEM 1A. | Risk Factors                                                                                                  | 7       
|         | ITEM 1B. | Unresolved Staff Comments                                                                                     | 10      
|         | ITEM 2.  | Properties                                                                                                    | 10      
|         | ITEM 3.  | Legal Proceedings                                                                                             | 10      
|         | ITEM 4.  | Submission of Matters to a Vote of Security
  Holders                                                         | 10      
|         |          |                                                                                                               |         
|PART II  |          |                                                                                                               |         
|         | ITEM 5.  | Market for Registrants Common Equity,
  Related Stockholder Matters and Issuer Purchase of Equity Securities | 10      
|         | ITEM 6.  | Selected Financial Data                                                                                       | 13      
|         | ITEM 7.  | Managements Discussion and Analysis of
  Financial Condition and Results of Operations                       | 14      
|         | ITEM 7A. | Quantitative and Qualitative Disclosures
  about Market Risk                                                  | 42      
|         | ITEM 8.  | Financial Statements and Supplementary
Data                                                                   | 42      
|         | ITEM 9.  | Changes and Disagreements with Accountants
  on Accounting and Financial Disclosure.                          | 81      
|         | ITEM 9A  | Controls and Procedures                                                                                       | 81      
|         | ITEM 9B  | Other Information                                                                                             | 81      
|         |          |                                                                                                               |         
|PART III |          |                                                                                                               |         
|         | ITEM 10. | Directors and Executive Officers of the
  Registrant                                                          | 81      
|         | ITEM 11. | Executive Compensation                                                                                        | 81      
|         | ITEM 12. | Security Ownership of Certain Beneficial
  Owners and Management And Related Stockholder Matters              | 81      
|         | ITEM 13. | Certain Relationships and Related
  Transactions                                                              | 82      
|         | ITEM 14. | Principal Accountant Fees and
Services                                                                        | 82      
|         |          |                                                                                                               |         
|PART IV  |          |                                                                                                               |         
|         | ITEM 15. | Exhibits and Financial Statement
Schedules                                                                    | 83      
|         |          |                                                                                                               |         
|         |          | Signatures                                                                                                    | 83      

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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 indirectly 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.

Baylake Bank

Baylake Bank
is a Wisconsin state bank originally chartered in 1876. 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.

Baylake Bank
is an independent community bank offering a full range of financial services
primarily to small businesses and individuals located in our market area.

Non-Bank Subsidiaries

In addition to
our banking operations, Baylake 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. Baylake 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 38 banks (including
Baylake Bank) and ATM processing services to approximately 49 banks, as well as
electronic banking processing to 3 banks.

At December
31, 2007, we had total assets of $1.1 billion. For additional financial
information, see our Consolidated Financial Statements and Notes at Item 8 of
this Form 10-K.

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 $133.3 million
at December 31, 2007, or 17.5% 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 total
outstanding loans as of December 31, 2007 were approximately $760.2 million,
consisting of 50.9% commercial real estate loans, 15.8% residential real estate
loans, 12.2% construction and land development real estate loans, 16.8%
commercial and industrial loans, 1.9% consumer and 2.4% tax exempt loans.

Investments

We maintain a
portfolio of investments, primarily consisting of U.S. Treasury securities,
U.S. Government 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, 2007, our total deposits were approximately
$884.2 million, including interest-bearing deposits of $790.1 million and
non-interest bearing deposits of $94.1 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. 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. Nonetheless, the financial needs of those involved in the delivery of
tourism-related services have financial needs throughout the entire year.

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

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 level 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 WDFI.

The Sarbanes-Oxley Act of 2002 (SOA), 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, SOA 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 SOA 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. SOA 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.

Baylake Bank.As a FRB member Wisconsin-chartered bank, Baylake Bank is subject to
supervision and regulation by the Wisconsin Department of Financial Institutions, Division of Banking (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.

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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, or (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 and 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, 2007, we had 327 full-time equivalent employees company-wide. We consider
our relationship with our employees to be good.

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.

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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. 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.

Risk Factors

The following risk factors and other information included in this Report should be carefully
considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we presently deem less significant than others may also adversely affect our business, operating
results, cash flows, and financial condition. If any of the following actually occur, our business, operating results, cash flows
and financial condition could be materially adversely affected.

If we have significant loan losses not previously identified and provided for, we would need to
further increase our Allowance for Loan Losses and our earnings would decrease; impairment charges on letters of credit could have
similar effects.

Our loan customers may not repay their loans according to their terms. We may also be required to
make payments on letters of credit that we have issued even though our borrower is unable to repay us in accordance with the terms
of our agreement. With any delinquent loan or letter of credit relationship, the collateral securing the borrowers repayment
obligations may not be sufficient to cover the loan balance. In these cases, we may be required to take an impairment charge and a
loan loss provision which represents a dollar-for-dollar reduction of our pretax earnings for the period in which we make the provision.
In addition, if we determine that a loan is uncollectible in whole or in in part, we are required to charge off the remaining
balance against our earnings.

In evaluating our impaired loans, we assess repayment expectations and determine collateral values
based on all information that is available to us. However, we often must make subjective decisions based on our assumptions and
judgments about the quality and collectability of a particular loan or a segment of our loan portfolio, including the
creditworthiness of the borrowers and the value of the collateral. If the information we obtain is incorrect or imcomplete, our
assumptions are incorrect or our expectations do not materialize, our loan loss allowance may not be sufficient to cover our
loss.

If any of these things happen, it could have a material adverse effect on our financial condition
and results of operations.

Our operations are geographically limited and significantly concentrated in the tourism
industry, which makes us more at risk for downturns in those areas.

Most of our operations, business and customer base are 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.

In addition, a significant percentage of our customer base is in the tourism industry,
particularly lodging and restaurants, especially in our Door County market. Many of our other 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.

A significant portion of our lending is concentrated in the commercial real estate sector,
which makes us more vulnerable to downturns in that sector.

Approximately 50.9%, or $387 million of our loans are concentrated in commercial real estate
lending at year-end 2007 as compared to 56.7%, or $465 million at December 31, 2006. A downturn in the economy or in pricing of
these development type properties would affect the values of these properties, increase the potential for problem loans and thus
have a direct impact on our financial results.

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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 lines of business, dividend limitations, limitations on
products and services offered, loan limits, geographical limits, consumer
credit regulations, community reinvestment requirements and restrictions on
transactions with affiliated parties. The system of supervision and regulation
applicable to us establishes a comprehensive framework for our operations and
is intended primarily for the protection of the FDICs deposit funds, our
depositors and the public, rather than our shareholders. We are also subject to
regulation by the SEC. Any change in government regulation may have a material
adverse effect on our business.

A decreasing interest rate environment could
affect our results and our equity.

In recent
periods, the FRB has decreased the Federal Funds target rate multiple times and
additional decreases are possible. Decreases to the middle- and long-term
interest rates that we are able to charge have not been commensurate with the
short-term interest rate moves by the Federal Reserve, resulting in a flattened
yield curve. The flattening of the yield curve, together with competitive
market pressures, has resulted in a compressed interest margin by limiting our
ability to obtain reasonable returns on middle- and long-term earning assets.
We expect this factor to continue to have an adverse effect on the growth of
our net interest margin. In such event, net income and return on equity would
be adversely affected.

We hold $222.5
million of securities available-for-sale at December 31, 2007. We must carry
these securities at fair value on our balance sheet under generally accepted
accounting principles, and unrealized gains or losses on those securities are
one component of stockholders equity. Increases in market interest rates would
generally cause the fair value of our securities available-for-sale to
decrease, resulting in a corresponding decrease in equity.

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 institutions, 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 institutions
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 retain
relationships with customers and can lower the rates 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 and
profitability.

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, consumers 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.

We rely on the accuracy and completeness of
information about customers and 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.

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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 our third
party service providers, may be vulnerable to security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming and/or human
errors, 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.

Wisconsin tax developments could reduce our
earnings.

Like many
Wisconsin financial institutions, our bank has a subsidiary in Nevada which
holds and manages investments and other earning assets; 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 are currently in
negotiations with WDOR regarding a settlement. Although, we believe that the
tax assets and liabilities are adequate and properly recorded in the
consolidated financial statements and that we have complied with requirements
previously established by WDOR, depending upon the terms and circumstances of
any such settlement, an adverse resolution of those matters could result in
additional Wisconsin tax obligations for prior periods and/or higher Wisconsin
taxes going forward, with a negative impact on our earnings. We also may incur
additional costs in the future to address state tax issues.

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 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
financial 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, when
considered in the aggregate, is not material to our financial position. All of
such other real property is reserved for future expansion and is located in the
following Wisconsin locations: Berlin, Appleton, Neenah, and Oshkosh.

ITEM 3. LEGAL PROCEEDINGS

We may be
involved from time to time in various routine legal proceedings incidental to
our business. Neither we nor any of our subsidiaries is currently engaged in
any legal proceedings that are expected to have a material adverse effect on
our 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 2007.

PART II

ITEM 5. MARKET FOR THE 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.

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

|     |  |                 |              |      |   |       |  |                           |       |  |   |      | 
|---- |  | --------------- | ------------ | ---- | - | ----- |  | ------------------------- | ----- |  | - | ---- | 
|     |  | Calendar period |              | High |   | Low   |  | Cash dividends per
 share
|     |  |                 |              |      |   |       |  |                          
|2006 |  |                 | 1st
 Quarter |      | $ | 17.00 |  | $                         | 16.20 |  | $ | 0.16 | 
|     |  |                 | 2nd
 Quarter |      | $ | 16.50 |  | $                         | 15.55 |  | $ | 0.16 | 
|     |  |                 | 3rd
 Quarter |      | $ | 15.95 |  | $                         | 15.65 |  | $ | 0.16 | 
|     |  |                 | 4th
 Quarter |      | $ | 16.15 |  | $                         | 15.70 |  | $ | 0.16 | 
|     |  |                 |              |      |   |       |  |                           |       |  |   |      | 
|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 | 

We had approximately 1,764 shareholders of record at December 31, 2007. The number of shareholders
does not reflect persons or entities that hold their stock in nominee or street name through various brokerage firms.

Dividends on our common stock have historically been paid in cash on a quarterly basis in March,
June, September and January, although, as discussed below, we will not pay a dividend in March 2008. The holders of our common
stock are entitled to receive such dividends when and as declared by our Board of Directors and approved by our regulators. In
determining the payment of cash dividends, our Board of Directors considers the earnings, capital and debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators, our financial condition, and other relevant factors.

Our ability to pay dividends is dependent upon our receipt of dividends from our subsidiary bank,
which is subject to regulatory restrictions. Such restrictions, which govern state-chartered banks, generally limit the payment of
dividends on bank stock to 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.

On February 28, 2008, the Board of Directors of Baylake Corp. announced that they, in consultation
with federal and state regulators, decided to forego the cash dividend on our common stock that historically had been declared and
paid during the first quarter of the year. Our ability to pay dividends is subject to various factors including, among other
things, sufficient earnings, available capital, board discretion and regulatory compliance. There can be no assurance when or if
we will resume payment of quarterly dividends at historical levels or at all. In order to pay dividends in 2008, we will need to
seek approval in advance from the Wisconsin Department of Financial Institutions as well as the Federal Reserve Board.

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, at 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
new program between July 1 and December 31, 2007 and are able to purchase the remaining 221, 000 shares by June 30, 2008, if
deemed appropriate.

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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, | 
|                   |  | 2002            |  | 2003   |  | 2004   |  | 2005   |  | 2006   |  | 2007   | 
|                   |  |                 |  |        |  |        |  |        |  |        |  |        | 
|Baylake
 Corp.     |  | 100.00          |  | 113.24 |  | 140.61 |  | 136.25 |  | 140.43 |  | 94.79  | 
|Nasdaq Bank
 Index |  | 100.00          |  | 129.93 |  | 144.21 |  | 137.97 |  | 153.15 |  | 119.35 | 
|S&P 500            |  | 100.00          |  | 126.38 |  | 137.75 |  | 141.88 |  | 161.20 |  | 166.89 | 

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Assumes $100
 invested on December 31, 2002 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,                       |           |      |   |           |  
|                                                                         |  | 2007                                          |           | 2006 |   | 2005      |   | 2004 |           | 2003 |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |  
|                                                                         |  | (dollars in thousands, except per share data) |          
|Results of operations:                                                   |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Interest and dividend income                                             |  | $                                             | 69,668    |      | $ | 70,014    |   | $    | 61,538    |      | $ | 50,362    |   | $ | 47,474  |  
|Interest expense                                                         |  |                                               | 38,753    |      |   | 36,378    |   |      | 26,660    |      |   | 16,357    |   |   | 18,416  |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Net interest income                                                      |  |                                               | 30,915    |      |   | 33,636    |   |      | 34,878    |      |   | 34,005    |   |   | 29,058  |  
|Provision for loan losses                                                |  |                                               | 9,761     |      |   | 903       |   |      | 3,217     |      |   | 1,599     |   |   | 5,650   |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Net interest income after provision for loan losses                      |  |                                               | 21,154    |      |   | 32,733    |   |      | 31,661    |      |   | 32,406    |   |   | 23,408  |  
|Other income                                                             |  |                                               | 9,174     |      |   | 9,737     |   |      | 11,597    |      |   | 9,526     |   |   | 10,640  |  
|Non-interest expense:                                                    |  |                                               | 32,578    |      |   | 32,329    |   |      | 30,519    |      |   | 26,479    |   |   | 24,031  |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Income before provision for income taxes                                 |  |                                               | (2,250    | )    |   | 10,141    |   |      | 12,739    |      |   | 15,453    |   |   | 10,017  |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Income tax provision                                                     |  |                                               | (2,416    | )    |   | 2,765     |   |      | 3,836     |      |   | 4,680     |   |   | 2,060   |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Net income                                                               |  | $                                             | 166       |      | $ | 7,376     |   | $    | 8,903     |      | $ | 10,773    |   | $ | 7,957   |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Per Share Data:(1)                                                       |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Net income per share (basic)                                             |  | $                                             | 0.02      |      | $ | 0.95      |   | $    | 1.15      |      | $ | 1.41      |   | $ | 1.06    |  
|Net income per share (diluted)                                           |  |                                               | 0.02      |      |   | 0.94      |   |      | 1.14      |      |   | 1.40      |   |   | 1.04    |  
|Cash dividends per common share                                          |  |                                               | 0.64      |      |   | 0.64      |   |      | 0.61      |      |   | 0.57      |   |   | 0.53    |  
|Book value per share                                                     |  |                                               | 10.18     |      |   | 10.50     |   |      | 10.09     |      |   | 9.91      |   |   | 9.16    |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Selected Financial Condition Data (at end of period):                    |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Total assets                                                             |  | $                                             | 1,106,616 |      | $ | 1,111,684 |   | $    | 1,089,408 |      | $ | 1,047,748 |   | $ | 974,740 |  
|Securities                                                               |  |                                               | 222,475   |      |   | 188,315   |   |      | 171,638   |      |   | 197,392   |   |   | 176,815 |  
|Gross loans                                                              |  |                                               | 760,210   |      |   | 819,568   |   |      | 812,296   |      |   | 757,228   |   |   | 715,022 |  
|Total
 deposits                                                          |  |                                               | 884,185   |      |   | 878,911   |   |      | 856,711   |      |   | 844,541   |   |   | 783,292 |  
|Short-term
 borrowings (2)                                               |  |                                               | 27,174    |      |   | 4,480     |   |      | 1,315     |      |   | 1,284     |   |   | 23,359  |  
|Other
 borrowings (3)                                                    |  |                                               | 85,172    |      |   | 115,179   |   |      | 125,185   |      |   | 100,192   |   |   | 75,092  |  
|Subordinated
 debentures                                                 |  |                                               | 16,100    |      |   | 16,100    |   |      | 16,100    |      |   | 16,100    |   |   | 16,100  |  
|Total
 shareholders equity                                              |  |                                               | 80,262    |      |   | 82,193    |   |      | 78,544    |      |   | 76,205    |   |   | 69,628  |  
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Performance Ratios:                                                      |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Return on
 average assets                                                |  |                                               | 0.02      | %    |   | 0.67      | % |      | 0.82      | %    |   | 1.07      | % |   | 0.87    | %
|Return on
 average total shareholders equity                            |  |                                               | 0.21      | %    |   | 9.33      | % |      | 11.51     | %    |   | 14.88     | % |   | 11.86   | %
|Dividend
 payout ratio                                                   |  |                                               | 3,030.48  | %    |   | 67.67     | % |      | 52.99     | %    |   | 40.49     | % |   | 50.22   | %
|Net interest
 margin (4)                                                 |  |                                               | 3.21      | %    |   | 3.44      | % |      | 3.60      | %    |   | 3.76      | % |   | 3.56    | %
|Net interest
 spread (4)                                                 |  |                                               | 2.80      | %    |   | 3.05      | % |      | 3.27      | %    |   | 3.52      | % |   | 3.27    | %
|Non-interest
 income to average assets                                   |  |                                               | 0.83      | %    |   | 0.89      | % |      | 1.07      | %    |   | 0.94      | % |   | 1.16    | %
|Non-interest
 expense to average assets                                  |  |                                               | 2.96      | %    |   | 2.94      | % |      | 2.81      | %    |   | 2.63      | % |   | 2.62    | %
|Net overhead
 ratio (5)                                                  |  |                                               | 2.12      | %    |   | 2.06      | % |      | 1.74      | %    |   | 1.68      | % |   | 1.46    | %
|Average
 loan-to-average deposit ratio                                   |  |                                               | 91.24     | %    |   | 94.73     | % |      | 94.16     | %    |   | 93.63     | % |   | 93.01   | %
|Average interest-earning assets to average
 interest-bearing liabilities |  |                                               | 110.58    | %    |   | 111.09    | % |      | 112.73    | %    |   | 113.59    | % |   | 113.19  | %
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Asset Quality Ratios:(6)                                                 |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Non-performing
 loans to total loans                                     |  |                                               | 4.94      | %    |   | 3.40      | % |      | 0.85      | %    |   | 0.78      | % |   | 2.27    | %
|Allowance
 for loan losses to:                                           |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Gross loans                                                              |  |                                               | 1.56      | %    |   | 0.98      | % |      | 1.18      | %    |   | 1.38      | % |   | 1.70    | %
|Non-performing loans                                                     |  |                                               | 31.53     | %    |   | 29.46     | % |      | 137.58    | %    |   | 176.44    | % |   | 74.95   | %
|Net
 charge-offs to average loans                                        |  |                                               | 0.74      | %    |   | 0.29      | % |      | 0.52      | %    |   | 0.45      | % |   | 0.70    | %
|Non-performing
 assets to total assets                                   |  |                                               | 3.86      | %    |   | 3.02      | % |      | 0.94      | %    |   | 0.81      | % |   | 1.90    | %
|                                                                         |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Capital Ratios:(7)                                                       |  |                                               |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Shareholders
 equity to assets                                          |  |                                               | 7.25      | %    |   | 7.39      | % |      | 7.21      | %    |   | 7.27      | % |   | 7.14    | %
|Tier 1
 risk-based capital                                               |  |                                               | 10.07     | %    |   | 10.00     | % |      | 9.70      | %    |   | 9.75      | % |   | 9.53    | %
|Total
 risk-based capital                                                |  |                                               | 11.32     | %    |   | 10.87     | % |      | 10.73     | %    |   | 10.95     | % |   | 10.78   | %
|Leverage
 ratio                                                          |  |                                               | 8.34      | %    |   | 8.53      | % |      | 8.27      | %    |   | 8.27      | % |   | 8.38    | %

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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) | 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.                                                                 
|(7) | 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 those financial statements, related notes, the
selected financial data and the statistical information presented elsewhere in this report for a more complete understanding of
the following discussion and analysis.

Critical Accounting Policies

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

Allowance for Loan Losses: The allowance for loan losses (ALL) represents
managements estimate of probable incurred credit losses in the loan portfolio. Estimating the amount of the allowance for
loan losses requires 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 allowance, while recoveries of
amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on
managements periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

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The allowance for loan losses consists of an allocated component on specific loans and an
unallocated component for loans without specific reserves. The components of the allowance represent an estimation pursuant to
either Statement of Financial Accounting Standards No. (SFAS) 5, Accounting for Contingencies, or SFAS
114, Accounting by Creditors for Impairment of a Loan. The allocated component of the allowance for loan losses
reflects expected 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 loans over a fixed-dollar
amount where the internal credit rating is at or below a predetermined classification. 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 and changes in portfolio
mix and volume and other qualitative factors.

There are many factors affecting the allowance for loan losses; some are quantitative while others
require qualitative judgment. The process for determining the allowance (which management believes adequately considers all of the
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 provision for credit losses could
be required that could adversely affect our earnings or financial position in future periods. 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.

Foreclosed Assets: Foreclosed 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.

Provision for Impairment of Standby Letter of Credit: The provision for impairment of standby
letter of credit represents managements estimate of probable incurred losses on an off-balance sheet standby letter of
credit which was used to accommodate our customers borrowing 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 this standby letter of credit. See the Non-Interest Expense discussion in
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 15-Income Tax Expense to our consolidated financial statements for further
information.

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 who have formed and
contributed assets to subsidiaries located in Nevada.

The WDOR sent letters in late July 2004 to financial institutions in Wisconsin, whether or not they
are undergoing an audit, reporting on settlements involving 17 banks and their out-of-state investment subsidiaries. The letter
provided a summary of settlement parameters that may be available. For periods before 2004, they included: restrictions on the
types of subsidiary income excluded from Wisconsin taxation; assessment of certain back taxes for a limited period of time; and
interest (but not penalties) on any past-due taxes. For 2004 and going forward, there were similar provisions plus limits on the
amount of subsidiaries assets as to which their income would be excluded from Wisconsin tax. Settlement on the terms
outlined would result in the Departments rescission of related prior letter rulings, and would purport to be binding going
forward except for future legislation or change by mutual agreement. By implication, the Department appears to accept the general
proposition that some out-of-state investment subsidiary income is not subject to Wisconsin taxes.

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We continue to believe that we have reported income and paid Wisconsin taxes correctly in accordance
with applicable tax laws and the Departments prior longstanding interpretations thereof, including interpretations issued
specifically to it. However, in view of the Departments subsequent change in position (even if that change does not have a
basis in law), the aggressive stance taken by the Department, 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 have determined that we will
consider a settlement proposal from the Department. In July 2007, the Department contacted us to begin discussions on this issue.
They requested, and we complied with, an agreement to extend, for audit purposes, the 2002 income and franchise tax year to March
15, 2008, which we expect to be extended further. During the third and fourth quarter of 2007, a formal audit of our Nevada
subsidiary was commenced by the Department. In February 2008, the Department issued a proposed assessment. Management, in
conjunction with outside counsel, is currently negotiating a settlement with the Department, which we anticipate reaching in the
near future. We believe our financial statements adequately provide for any settlement that may be reached. As of March 11, 2008,
no formal settlement has been reached but negotiations are ongoing.

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 gradually decreased interest rates by 100 basis points in
the aggregate. A further decrease of 125 basis points occurred in January of 2008. Net interest income decreased for 2007 due to
our high level of non-performing loans and increased funding costs compared to 2006. 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.

Throughout 2007, our regulatory capital ratios and those of the Bank were in excess of the levels
established by regulatory agencies for well-capitalized financial institutions. We continue our emphasis on improving
asset quality, especially related to our level of non-performing commercial loans. We have implemented changes to our regional and
overall bank credit approval structure, which we believe strengthen and improve our credit underwriting process. As part of these
changes, a newly created position of Chief Credit Officer was added to the management team in January 2007. The Chief Credit
Officer is primarily responsible for credit quality.

Performance Summary

The following is a brief summary of some of the factors that affected our earnings in 2007. See the
remainder of this section for a more thorough discussion.

We reported net income of $166,000 for the year ended December 31, 2007, a decrease of
$7.2 million or 97.7% compared to $7.4 million earned in 2006. Both basic and diluted earnings per share were $0.02 for
2007 compared to $0.95 and $0.94, respectively for 2006. Return on average assets for the year ended December 31, 2007 was
0.02% and 0.67% for 2006. The return on average equity was 0.21% for 2007 and 9.33% for 2006. Cash dividends declared in 2007
remained at $0.64 per share, the same as in 2006. Key factors behind these results were:

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net interest income and net interest margin were impacted in 2007 by a decreasing interest rate
environment for the second half of 2007, thereby decreasing interest spread.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Tax-equivalent net interest income was $32.5 million for 2007, a decrease of $2.4 million or 6.9%
from $34.9 million for 2006. Tax-equivalent interest income decreased $39,000, while interest expense increased $2.4 million. The
decrease in tax-equivalent net interest income was attributable to unfavorable rate variances reducing tax-equivalent net interest
income by $2.2 million, as well as unfavorable volume variances (with balance sheet growth and differences in the mix of average
earning assets and average interest-bearing liabilities negatively impacting tax-equivalent net interest income by $166,000). The
primary reason for the overall decrease was due to an increase in non-performing loans, which had the effect of reducing interest
income by $3.9 million during 2007. Average earning assets remained relatively stable at $1.0 billion, while interest-bearing
liabilities increased $3.3 million to $914.7 million.
| |  | The net interest margin for 2007 was 3.21%, compared to 3.44% in 2006. The 23 basis points
(bps) decrease in net interest margin largely resulted from a 25 bps decrease in interest rate spread caused by a 25
bps increase in the cost of interest-bearing liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Total loans were $760.2 million at December 31, 2007, a decrease of $59.4 million or 7.2%, from
December 31, 2006. Commercial real estate loans decreased $77.9 million (16.8%) and represented 50.9% of total loans at December
31, 2007, compared to 56.6% at year-end 2006. Total deposits were $884.2 million at December 31, 2007, an increase of $5.3 million
or 0.6% from year-end 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Charge-offs increased from a year ago. Net loan charge-offs were $6.0 million in 2007, an increase
of $3.6 million over 2006 results. Net loan charge-offs for commercial loans represented $3.4 million of the $6.0 million total in
2007. Net loan charge-offs represented 0.74% of average loans in 2007 compared to 0.29% in 2006. The provision for loan losses
increased to $9.8 million for 2007 compared to $903,000 in 2006. The ratio of allowance for loan losses to total loans was
1.56% and 0.98% at December 31, 2007 and 2006, respectively. Non-performing loans were $37.6 million at
December 31, 2007, representing 5.0% of total loans, compared to $27.8 million or 3.4% at year-end 2006.                                                                                                                                                                                                                                               
| |  | Non-interest income was $9.2 million for 2007, a decrease of $563,000 or 5.8% from 2006 results.
A $195,000 decrease in net gains from sales of loans and a $294,000 decrease in net gains from sales of fixed assets were
partially offset by an increase in fees for other services to customers of $265,000. In addition, mortgage servicing rights
decreased $595,000 during 2007 due to a decline in the fair market value of the rights combined with a decline in outstanding
portfolio balances of the loans serviced.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Non-interest expense was $32.6 million, an increase of $247,000 over 2006 results. This was the
result of increases in the areas of operation of ORE properties and loan and collection expenses of $758,000 and $229,000,
respectively, offset by a decline of $752,000 in Salaries and employee benefits due to management restructuring and reduced
staffing levels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Provision for income taxes resulted in a tax benefit of $2.4 million versus a tax expense of
$2.8 million for 2006. The 2007 benefit versus the 2006 expense was primarily attributable to a $12.4 million decrease
in income before income tax expense in 2007 as compared to 2006. The effective tax rate was 27.3% in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

INCOME STATEMENT ANALYSIS

2007 compared to 2006

Net Interest Income

Net interest income is impacted by the difference between rates earned on interest-earning assets
and rates paid on interest-bearing liabilities (interest rate spread) and the relative amounts of interest-earning assets and
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 utilized 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. The net interest margin is expressed as the percentage of net interest income to average
earning assets. The 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.

17

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Table of Contents

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, 2007, 2006 and 2005.

Net interest income in the consolidated statements of income (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. 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 $1.6 million for 2007 and $1.3 million for 2006 resulted in a 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.

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. In addition, the high level
of non-performing loans further decreased net interest income. 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 $166,000 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 $297,000 decrease to tax equivalent net interest income in
2007 offset by a $132,000 decrease and composition change in interest-bearing liabilities. Rate changes on earning assets
increased interest income by $259,000 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 at 7.04%, attributable to an increase of 3
bps in the loan yield and a 5 bps increase in the yield on taxable investments. These increases were offset by a 32 bps decline in
the yield achieved on tax exempt securities and an 11 bps decrease in yield on Federal funds and money market securities. 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 higher-cost time deposit accounts. This increase was
partially offset by the cost of wholesale funding (comprised of Federal funds purchased; repurchase agreements; FHLB advances and
subordinated debentures) which decreased by 14 bps to 5.39% for 2007, impacted favorably by a decreasing interest rate environment
for wholesale funding costs during the year on reduced borrowings.

Average earning assets remained at $1.0 billion in 2007, the same as in 2006. Average loans
outstanding declined to $804.5 million in 2007 from $818.1 million in 2006, a decrease of 1.7%. 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 $326,000 increase related to a slight improvement in the
yields on such loans. Balances of securities and short-term investments increased $12.6 million on average. Tax equivalent
interest income on securities and short-term investments increased $708,000 from volume changes, and decreased $72,000 from the
impact of the rate environment, for a net $636,000 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 $4.3 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 increased $722,000 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 $854,000 due to volume changes and decreased by $215,000 from declining rates, for an aggregate decrease of $1.1
million versus 2006 results.

18

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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, |           |          |  
|                                            |  | 2007                    |           | 2006     |   | 2005          | 
|                                            |  |                         |           |          |   |               | 
|                                            |  | 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)                             |  | $                       | 804,493   |          |   | 61,165        |  | 7.60                 | % | $        | 818,086   |               |   | 61,909               |  | 7.57     | % | $             | 789,316   |  |   | 52,946 |  | 6.71  | %
|U.S. Treasuries                             |  |                         |          |          |   |              |  | 0.00                 | % |          | 72        |               |   | 3                    |  | 4.17     | % |               | 195       |  |   | 9      |  | 4.62  | %
|Agencies                                    |  |                         | 135,372   |          |   | 5,898         |  | 4.36                 | % |          | 136,226   |               |   | 5,928                |  | 4.35     | % |               | 157,293   |  |   | 6,326  |  | 4.02  | %
|State and municipal
 obligations (2)        |  |                         | 52,330    |          |   | 3,225         |  | 6.16                 | % |          | 39,728    |               |   | 2,573                |  | 6.48     | % |               | 41,766    |  |   | 2,835  |  | 6.79  | %
|Other Securities                            |  |                         | 12,635    |          |   | 598           |  | 4.73                 | % |          | 10,671    |               |   | 450                  |  | 4.22     | % |               | 11,077    |  |   | 598    |  | 5.40  | %
|Federal funds sold                          |  |                         | 3,211     |          |   | 159           |  | 4.95                 | % |          | 5,694     |               |   | 290                  |  | 5.09     | % |               | 876       |  |   | 29     |  | 3.31  | %
|Other money market
 instruments             |  |                         | 3,373     |          |   | 159           |  | 4.72                 | % |          | 1,983     |               |   | 89                   |  | 4.49     | % |               | 3,010     |  |   | 94     |  | 3.12  | %
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Total earning assets                        |  | $                       | 1,011,414 |          | $ | 71,204        |  | 7.04                 | % | $        | 1,012,460 |               | $ | 71,242               |  | 7.04     | % | $             | 1,003,533 |  | $ | 62,837 |  | 6.26  | %
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Non-interest earning assets                 |  |                         | 90,376    |          |   |               |  |                      |   |          | 85,640    |               |   |                      |  |          |   |               | 81,671    |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Total assets                                |  | $                       | 1,101,790 |          |   |               |  |                      |   | $        | 1,098,100 |               |   |                      |  |          |   | $             | 1,085,204 |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|LIABILITIES AND STOCKHOLDERS EQUITY        |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Interest bearing
 lLiabilities              |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|NOW accounts                                |  | $                       | 110,322   |          | $ | 2,798         |  | 2.54                 | % | $        | 103,740   |               | $ | 2,353                |  | 2.27     | % | $             | 90,782    |  | $ | 1,500  |  | 1.65  | %
|Savings accounts                            |  |                         | 262,026   |          |   | 9,125         |  | 3.48                 | % |          | 263,018   |               |   | 8,970                |  | 3.41     | % |               | 221,414   |  |   | 4,998  |  | 2.26  | %
|Time deposits> $100M                        |  |                         | 212,133   |          |   | 10,420        |  | 4.91                 | % |          | 218,116   |               |   | 9,558                |  | 4.38     | % |               | 239,682   |  |   | 7,752  |  | 3.23  | %
|Time deposits<$100M                         |  |                         | 203,547   |          |   | 9,587         |  | 4.71                 | % |          | 183,755   |               |   | 7,604                |  | 4.14     | % |               | 178,912   |  |   | 5,132  |  | 2.87  | %
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Total interest-bearing
 deposits            |  |                         | 788,028   |          |   | 31,930        |  | 4.05                 | % |          | 768,629   |               |   | 28,485               |  | 3.71     | % |               | 730,790   |  |   | 19,382 |  | 2.65  | %
|Federal funds purchased                     |  |                         | 9,067     |          |   | 497           |  | 5.48                 | % |          | 7,496     |               |   | 394                  |  | 5.26     | % |               | 25,526    |  |   | 891    |  | 3.49  | %
|Repurchase agreements                       |  |                         | 7,981     |          |   | 387           |  | 4.85                 | % |          | 1,207     |               |   | 48                   |  | 3.98     | % |               | 1,419     |  |   | 39     |  | 2.75  | %
|FHLB advances                               |  |                         | 93,504    |          |   | 4,850         |  | 5.19                 | % |          | 117,702   |               |   | 5,745                |  | 4.88     | % |               | 116,407   |  |   | 4,309  |  | 3.70  | %
|Subordinated debentures                     |  |                         | 16,100    |          |   | 1,089         |  | 6.76                 | % |          | 16,365    |               |   | 1,705                |  | 10.42    | % |               | 16,100    |  |   | 2,039  |  | 12.66 | %
|Long term debt                              |  |                         |          |          |   |              |  |                     |   |          |          |               |   |                     |  |         |   |               |          |  |   |       |  |      |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Total interest-bearing
 liabilities         |  | $                       | 914,680   |          | $ | 38,753        |  | 4.24                 | % | $        | 911,399   |               | $ | 36,377               |  | 3.99     | % | $             | 890,242   |  | $ | 26,660 |  | 2.99  | %
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Demand deposits                             |  |                         | 93,706    |          |   |               |  |                      |   |          | 94,938    |               |   |                      |  |          |   |               | 107,506   |  |   |        |  |       |  
|Accrued expenses and other
 liabilities     |  |                         | 12,587    |          |   |               |  |                      |   |          | 12,672    |               |   |                      |  |          |   |               | 10,091    |  |   |        |  |       |  
|Stockholders equity                        |  |                         | 80,817    |          |   |               |  |                      |   |          | 79,091    |               |   |                      |  |          |   |               | 77,365    |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Total liabilities and
 shareholders equity |  | $                       | 1,101,790 |          |   |               |  |                      |   | $        | 1,098,100 |               |   |                      |  |          |   | $             | 1,085,204 |  |   |        |  |       |  
|                                            |  |                         |           |          |   |               |  |                      |   |          |           |               |   |                      |  |          |   |               |           |  |   |        |  |       |  
|Net interest income and
 rate spread        |  |                         |           |          | $ | 32,451        |  | 2.80                 | % |          |           |               | $ | 34,865               |  | 3.05     | % |               |           |  | $ | 36,177 |  | 3.27  | %
|Net interest margin                         |  |                         |           |          |   |               |  | 3.21                 | % |          |           |               |   |                      |  | 3.44     | % |               |           |  |   |        |  | 3.60  | %

| |     |                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                              

19

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Table of Contents

Table 2: Rate/Volume Analysis (1)

|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|------------------------------------ |  | ------------------------------------------------- | ------ | ------------------------------------------------- | - | ------ | - | ------ | ------ | ---- | - | ----- | - | - | ------ | - | - | ------ | -
|                                     |  | 2007 compared to 2006
 Increase (Decrease) due to |        | 2006 compared to 2005
 Increase (Decrease) due to |  
|                                     |  |                                                   |        |                                                   |  
|                                     |  | Volume                                            |        | Rate                                              |   | Net    |   | Volume |        | Rate |   | Net   |  
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |  
|                                     |  | (dollars in thousands)                            |       
|Interest
 income:                    |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|Loans (2)                            |  | $                                                 | (1,070 | )                                                 | $ | 326    |   | $      | (744   | )    | $ | 1,994 |   | $ | 6,969  |   | $ | 8,963  |  
|U.S.
 treasuries                     |  |                                                   | (3     | )                                                 |   |       |   |        | (3     | )    |   | (5    | ) |   | (1     | ) |   | (6     | )
|Agencies                             |  |                                                   | (37    | )                                                 |   | 7      |   |        | (30    | )    |   | (890  | ) |   | 492    |   |   | (398   | )
|State and
 municipal obligations (2) |  |                                                   | 782    |                                                   |   | (130   | ) |        | 652    |      |   | (21   | ) |   | (127   | ) |   | (148   | )
|Other
 securities                    |  |                                                   | 89     |                                                   |   | 59     |   |        | 148    |      |   | (135  | ) |   | (127   | ) |   | (262   | )
|Federal
 funds sold                  |  |                                                   | (123   | )                                                 |   | (8     | ) |        | (131   | )    |   | 238   |   |   | 23     |   |   | 261    |  
|Other money
 market instruments      |  |                                                   | 65     |                                                   |   | 5      |   |        | 70     |      |   | (38   | ) |   | 33     |   |   | (5     | )
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|Total earning assets                 |  | $                                                 | (297   | )                                                 | $ | 259    |   | $      | (38    | )    | $ | 1,143 |   | $ | 7,262  |   | $ | 8,405  |  
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|Interest
 expense:                   |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|NOW accounts                         |  | $                                                 | 155    |                                                   | $ | 291    |   | $      | 446    |      | $ | 236   |   | $ | 617    |   | $ | 853    |  
|Savings accounts                     |  |                                                   | (34    | )                                                 |   | 189    |   |        | 155    |      |   | 1,068 |   |   | 2,904  |   |   | 3,972  |  
|Time
 deposits                       |  |                                                   | 601    |                                                   |   | 2,244  |   |        | 2,845  |      |   | (606  | ) |   | 4,884  |   |   | 4,278  |  
|Federal
 funds purchased             |  |                                                   | 85     |                                                   |   | 18     |   |        | 103    |      |   | (815  | ) |   | 318    |   |   | (497   | )
|Repurchase
 agreements               |  |                                                   | 326    |                                                   |   | 13     |   |        | 339    |      |   | (6    | ) |   | 15     |   |   | 9      |  
|FHLB
 advances                       |  |                                                   | (1,238 | )                                                 |   | 343    |   |        | (895   | )    |   | 48    |   |   | 1,388  |   |   | 1,436  |  
|Subordinated debentures              |  |                                                   | (27    | )                                                 |   | (589   | ) |        | (616   | )    |   | 33    |   |   | (367   | ) |   | (334   | )
|Long term debt                       |  |                                                   |       |                                                   |   |       |   |        |       |      |   |      |   |   |       |   |   |       |  
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  
|Total interest-bearing liabilities   |  | $                                                 | (132   | )                                                 | $ | 2,509  |   | $      | 2,377  |      | $ | (42   | ) | $ | 9,759  |   | $ | 9,717  |  
|Net interest
 income                 |  | $                                                 | (165   | )                                                 | $ | (2,250 | ) | $      | (2,415 | )    | $ | 1,185 |   | $ | (2,497 | ) | $ | (1,312 | )
|                                     |  |                                                   |        |                                                   |   |        |   |        |        |      |   |       |   |   |        |   |   |        |  

| |     |                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 an FTE basis using a tax rate
 of 34% for all periods presented.                        

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Table of Contents

Provision for Loan Losses

The provision for loan losses (PFLL) is the periodic cost of providing an allowance
for probable incurred losses. As previously discussed, the allowance consists of specific and general components. Our internal
risk system is used to identify loans that meet the criteria as being impaired under the definition of SFAS 114. The
specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or
doubtful. These identified loans for potential impairment are assigned a loss allocation based upon that analysis. The general
component covers non-classified loans and is based on historical loss experience adjusted for current factors. These current
factors include loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, managements
evaluation of loan quality, general economic factors and collateral values.

The PFLL in 2007 was $9.8 million. The PFLL in 2006 and 2005 was $903,000 and $3.2 million,
respectively. At December 31, 2007, the allowance for loan losses (ALL) was $11.8 million, compared to $8.1 million at
December 31, 2006. Net charge-offs were $6.0 million for 2007, compared to $2.4 million for 2006 and $4.1 million for 2005. For
additional discussion, see Note 3 in the Notes to Consolidated Financial Statements. Net charge-offs as a percent of average loans
were 0.74%, 0.29%, and 0.52% for 2007, 2006, and 2005, respectively. The ratio of the ALL to gross loans was 1.56% at
December 31, 2007, compared to 0.98% at December 31, 2006 and 1.18% at December 31, 2005.

Management believes that the PFLL at December 31, 2007 conforms to our
loan loss reserve policy and 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 the non-performing
relationships and will make provisions, as necessary, if the facts and
circumstances change. In addition, notwithstanding the non-performing loans, 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 allowance. If there are significant
charge-offs against the allowance, or we otherwise determine that the allowance
is inadequate; we will need to make higher provisions in the future. See 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
and service charges are the primary components of non-interest income. Total
non-interest income for 2007 was $9.2 million, a $563,000 or 5.8% decrease from
2006. The non-interest income to average assets ratio was 0.83% for the year
ended December 31, 2007 compared to 0.89% for the same period in 2006.

In 2007, gains from sales of loans were curtailed by a slowdown in
refinancing activity throughout the industry due to higher mortgage rates,
similar to the year 2006, as well as a slowdown in the Small Business
Administration loan sales activity. Loan servicing fees decreased $73,000 and
gains from sales of loans decreased $195,000 between 2007 and 2006. The net change
in the valuation of servicing rights declined $595,000 for 2007, the first year
of adoption of the fair-value measurement method of servicing rights. The
decrease is the result of a decline in the outstanding portfolio balance of the
loans being serviced as well as an overall decline in the fair market value of
such servicing rights. Secondary market loan production declined 1.0% between
2007 and 2006 ($40.8 million in 2007 versus $41.2 million in 2006).

Service charges on deposit accounts increased $265,000 in 2007 due in
part to the continuation of the High Performance Checking program (HPC). This
has resulted in additional overdraft income, partially offset by a reduction in
the number of service charge paying personal checking accounts and reduced service
charges on commercial checking accounts, as the earnings credit rate has
increased. In addition, interchange income on debit card transactions increased
from $381,000 in 2006 to $531,000 in 2007.

For 2006, a gain of $103,000 was realized on the sale of a condominium
unit at Baylake City Center to an unrelated third party. Also, a gain of
$188,000 was realized in the sale of bank land located in the Green Bay market
area during 2006.

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Non-Interest Expense

Non-interest expense in 2007 increased to $32.6 million, a $247,000 or
0.8% increase compared to 2006, primarily as a result of expenses related to
the operation of other real estate 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 $18.7 million in 2007, a decrease of $752,000,
or 3.9%, from 2006 as a result of management restructuring and reduced
staffing. The number of full-time equivalent employees decreased to 327 in 2007
from 336 in 2006, a decrease of 2.1%.

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 $246,000 for 2007, a decline of $553,000 from 2006 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. 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 2008. Management will continue its
efforts to control salaries and employee benefit expense, although increases in
these expenses are likely to continue in future years as we continue to grow.

Net occupancy expense for 2007 totaled $2.5 million, reflecting an
increase of $83,000 compared to 2006. The increase was primarily due to normal
occupancy-related expense increases.

Data processing and courier expense in 2007 reflected minimal
increases. 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.

Other real estate expenses are netted against income received from such
properties in the determination of net other real estate owned expense. Other
real estate owned reflected a net expense from the operation of other real
estate of $966,000 in 2007. Losses of $379,000 were recognized on the sale of
ORE properties in 2007, partially offset by gains of $147,000, for a net loss
of $232,000 on the sale of ORE properties.

The provision for impairment loss on the letter of credit in 2006
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, 2007. We continue to
monitor the financial condition of the borrower on an ongoing basis and if it
continues to deteriorate, may need to provide additional reserves with respect
to this off-balance sheet commitment.

Other operating expenses in 2007 remained unchanged at $5.4 million compared to 2006. Included in
other operating expenses is FDIC insurance expense of $504,000 for 2007 as compared to $105,000 for 2006. 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
2007, 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. In contrast to 2006, our bank was assessed premiums for FDIC insurance on its deposits in 2007. 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
partially offset by a portion of our one-time assessment credit. We anticipate that the remaining credit will be applied to our
FDIC assessment in the first two quarters of 2008. Payments for the FICO component will continue as long as FICO obligations
remain outstanding.

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Loan and collection expenses were $229,000 higher in 2007 than in 2006. This is primarily related
to costs on loans that are in the collection process that have not been transferred to ORE and includes costs incurred for
property management fees, real estate taxes, insurance, and operating expenses. Legal services deemed appropriate in resolving
nonperforming loans were outsourced during 2007, services that had been provided by our internal legal staff in prior years. These
legal costs totaled $814,000, offset in part by a reduction in internal collection costs of $506,000 on two credits subsequently
transferred to other real estate owned. In 2008, loan and collection costs are expected to continue at a comparable level, unless
and until the volume of nonperforming loans declines further.

Employee acquisition expenses decreased $226,000 compared to 2006, from
$382,000 to $156,000. The increased costs in 2006 were primarily attributed to
$286,000 of recruiting fees that were paid for the hiring of employees for key
positions, including the hiring of our new president. During 2007, only $50,000
of recruiting fees were paid.

Costs related to other outside services totaled $1.1 million in 2007,
$64,000 higher than in 2006. The primary item was expenses of $348,000 related
to the High Performance Checking program, including mailing, consulting fees,
and material costs compared to costs of $378,000 related to the program in
2006. Since the program was renewed for another year in October 2007, a
majority of these costs are expected to continue in 2008.

Off-Balance Sheet Arrangements

We do not use interest rate contracts (e.g. swaps) or other derivatives
to manage interest rate risk and have none of these instruments outstanding.
Our bank does have, through its normal operations, loan commitments and standby
letters of credit outstanding as of December 31, 2007 in the amount of $188.5
million and $227.9 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 $2.4 million in 2007, compared to income tax
expense of $2.8 million in 2006. The tax benefit in 2007 reflected the decrease
in our income before income taxes to a net loss position in 2007.

See Note 1, Summary of Significant Accounting Policies, and Note 15,
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 income 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.

2006
compared to 2005

Net Interest Income

Net interest income in the consolidated statements of income (which
excludes the tax equivalent adjustment) was $33.6 million in 2006, compared to
$34.9 million in 2005. Net interest income in 2006 was negatively impacted by
the increased level of non-performing loans. Interest income is not recognized
on these loans until paid, thus reducing our earnings. The tax equivalent
adjustments (adjustments needed to bring tax-exempt interest to a level that
would yield the same after-tax income had that income been subject to taxation
using a 34% tax rate) of $1.2 million for 2006 and $1.3 million for 2005
resulted in a tax-equivalent net interest income of $34.8 million and $36.2
million, respectively.

The decrease in 2006 net interest income of $1.3 million was a function
of unfavorable interest rate changes, partially offset by a higher level of
earning assets. The net interest margin for 2006 was 3.44% compared to 3.60% in
2005. The 16 bps decrease in net interest margin was attributable to a 22 bps
decrease in interest rate spread (with a 78 bps increase in the yield on
earning assets, more than offset by a 100 bps higher cost of interest-bearing
liabilities) and a 6 bps higher contribution from net free funds. Interest
rates generally rose during the first half of 2006, increasing 100 bps as the
FRB attempted to keep inflation in control.

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The Federal Funds rate at December 31, 2006, was at 5.17% compared to
4.16% at year-end 2005. We had positioned the balance sheet to be slightly
asset sensitive (which means that assets will re-price faster than
liabilities); thus, the rate increases would impact net interest income
positively. However, the high level of non-performing loans limited the benefit
we anticipated in the rising rate environment.

For 2006, the yield on earning assets improved 78 bps to 7.04%, in
large part attributable to an increase of 86 bps in the loan yield to 7.57% in
2006 versus 6.71% in 2005. Increases during 2006 in the interest rate
environment were a primary factor in the improvement in loan yields.
Competitive pricing on new and refinanced loans dampened efforts for further
improvements in loan yields in 2006. The yield on securities and short-term
investments combined was up 18 bps to 4.80% in 2006.

For 2006, the cost of interest-bearing liabilities increased 100 bps
compared to 2005, to 3.99%, precipitated by an increasing interest rate
environment through the first half of the year. The combined average cost of
interest-bearing deposits was 3.71%, up 106 bps from 2005, primarily from
increases in the short-term interest rates during 2006 offset to a lesser
degree by an increase in the mix of lower-cost transaction accounts. The cost
of wholesale funding (comprised of federal funds purchased; repurchase
agreements; FHLB advances and subordinated debentures) increased by 97 bps to
5.53% for 2006, impacted unfavorably by an increase in the interest rate
environment and its affect on wholesale funding costs during the year.

Average earning assets were approximately $1.0 billion in both 2006 and
2005. Average loans outstanding grew to $818.1 million in 2006 from $789.3
million in 2005, an increase of 3.6%. Average loans to average total assets
increased to 74.50% in 2006 from 72.7% in 2005. For 2006, tax equivalent
interest income on loans increased $2.0 million from growth and $7.0 million
from the impact of rising interest rates. Balances of securities and short-term
investments decreased $19.8 million on average. Tax equivalent interest income
on securities and short-term investments decreased $851,000 from volume
changes, and increased $293,000 from the impact of the rate environment, for a
net $558,000 decrease in tax equivalent interest income.

Average interest-bearing liabilities increased $21.2 million, or 2.4%,
from 2005, while net free funds (the total of demand deposits, accrued
expenses, other liabilities and stockholders equity less non-interest earning
assets) decreased $12.2 million. The decrease in net free funds is primarily
attributable to the shift from demand deposits to NOW accounts. The primary
reason for this was the High Performance Checking (HPC) account product
offering that originally started in October 2005. Average non-interest bearing
demand deposits decreased by $12.6 million, or 11.7% between 2005 and 2006.
Average interest-bearing deposits grew $37.8 million, or 5.2%, to $768.6
million between the same periods. This growth resulted from increases in
interest-bearing demand deposits, savings accounts, and time deposits less than
$100,000 offset by a decline in time deposits greater than $100,000. Interest
expense on interest-bearing deposits increased $8.4 million from the impact of
the rate environment and increased $698,000 from volume and mix changes,
resulting in an aggregate increase of $9.1 million in interest expense in 2006
versus 2005. Average wholesale-funding sources decreased by $16.7 million
during 2006. For 2006, interest expense on wholesale funding sources decreased
by $740,000 due to volume changes and increased by $1.4 million from higher
rates, for a net increase of $614,000 versus 2005.

Provision for Loan Losses

The PFLL in 2006 was $903,000 versus $3.2 million in 2005. At December
31, 2006, the allowance for loan losses (ALL) was $8.1 million compared to $9.6
million at December 31, 2005. Net charge-offs were $2.4 million for 2006
compared to $4.1 million for 2005. During 2005 we had reserved on a majority of
the loans charged-off in 2006. As such, these charge-offs did not have a
significant impact on that years PFLL. In addition, even though the non-performing
and impaired loans increased year over year, the amount allocated to impaired
loans decreased by $1.1 million. See Table 6 for a year-to-year comparison of
the PFLL.

Net charge-offs as a percent of average loans were 0.29% and 0.52% for
2006 and 2005, respectively. The ratio of the ALL to gross loans was 0.98% at
December 31, 2006, compared to 1.18% at December 31, 2005.

Non-Interest Income

Total non-interest income for 2006 was $9.7 million, a $1.9 million or
16.0% decrease from 2005. Non-interest income in 2005 included income from the
sale of two properties. The non-interest income to average assets ratio was
0.89% for the year ended December 31, 2006 compared to 1.07% for the same
period in 2005.

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In 2006, gains from sales of loans were curtailed by a slowdown in
refinancing activity throughout the industry due to higher mortgage rates, as
well as a slowdown in the Small Business Administration loan sales activity.
Loan servicing fees decreased $39,000 and gains from sales of loans decreased $188,000
between the comparable periods of 2006 and 2005. As interest rates increased
over the first half of 2006, we continued to experience a decline in the number
of loan applications. Secondary loan production declined 14.1% between the
years ($41.2 million in 2006 versus $48.3 million in 2005).

Service charges on deposit accounts increased $110,000 in 2006 due in
part to the implementation of a High Performance Checking program (HPC) in
the fourth quarter of 2005. This resulted in additional overdraft income,
partially offset by a reduction in the number of service charge paying personal
checking accounts and reduced service charges on commercial checking accounts,
as the earnings credit rate has increased.

Financial service income increased $139,000 in 2006, or 18.6% compared
to 2005 as a result of additional brokerage business generated.

For 2006, a gain of $103,000 was realized on the sale of a condominium
unit at Baylake City Center to an unrelated third party. Also, a gain of
$188,000 was realized in the sale of bank land located in the Green Bay market
area. In 2005, non-interest income included gains totaling $2.7 million from
two property sales. These gains were partially offset by losses of $379,000 on
various bank properties sold or written down during the period. These losses
related primarily to the sale of two buildings and land formerly used as branch
offices. In addition, the bank closed one leased facility during 2005, for
which leasehold improvements were written off.

Non-Interest Expense

Non-interest expense in 2006 increased to $32.3 million, a $1.8 million or 5.9% increase over 2005
non-interest expense, primarily as a result of increased personnel expense, professional services, other operating expense and
recruiting fees, partially offset by a reduction in the provision taken for the impairment of an off-balance sheet letter of
credit. In 2005, a $2.2 million impairment charge was taken related to this off-balance sheet letter of credit compared to a
charge of only $27,000 in 2006.

Salaries and employee benefits expense is the largest component of non-interest expense and
totaled $19.4 million in 2006, an increase of $2.7 million, or 16.0%, as compared to 2005 results. The increase in 2006 primarily
resulted from staffing increases, increased benefit costs and normal salary increases partially offset by a decrease in bonus
expense. Salary costs increased $2.1 million, or 17.6 %, during 2006 compared to 2005 as a result of increased staffing and normal
salary increases. Also impacting the increase in salary expenses were severance costs related to the termination of certain
executives resulting from a management restructuring undertaken in 2006. This severance accounted for $266,000 or 2.3% of the
increase. The number of full-time equivalent employees increased to 336 in 2006 from 317 in 2005, an increase of 6.0%.

Also contributing to the increase in salary and employee benefits were 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
$799,000 for 2006. Accrued benefit costs, principally for health insurance, pension costs and bonus expense, represented the
remaining increase in personnel-related costs.

Net occupancy expense for 2006 totaled $2.4 million, reflecting a decrease of $68,000 compared to
2005. While additional costs were incurred in 2006 for real estate tax expense for properties purchased in the Fox Valley area, as
well as normal occupancy-related expense increases, 2005 results included costs of $265,000 for lease termination costs that did
not recur in 2006.

Data processing and courier expense in 2006 increased $106,000, or 9.1% due to an increase in the
volume of accounts processed.

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Other real estate expenses were netted against income received from
such properties in the determination of net other real estate owned expense.
Other real estate owned showed net expense from the operation of other real
estate of $376,000 in 2006 compared to $399,000 in 2005. Gains of $168,000 from
seven commercial property sales and one residential property sale were realized
in 2006 and offset by losses of $166,000 from the sale of four commercial
properties and one residential property during 2006 for a net gain of $2,000.
Expenses from the operation of other real estate owned totaled $421,000 in
2006.

The provision for impairment loss on the letter of credit of $27,000
related to a liability for our exposure on a standby letter of credit. This
compared to an impairment change of $2.2 million in 2005 on that same letter of
credit. The letter of credit supported secondary market financing on behalf of
the borrower.

Other operating expenses in 2006 increased $683,000 or 11.9% to $6.4
million as compared to $5.7 million in 2005. Loan and collection expenses were
$501,000, or 181.5% higher in 2006 or $777,000 versus $276,000 in 2005
primarily related to costs on two loans that were in the collection process. In
addition, other operating expense included costs totaling $589,000 which were
incurred in 2006 for property management fees, real estate taxes, legal fees,
insurance, and operating expenses.

Employee acquisition expenses were up $279,000 compared to 2005. The
increased costs were attributable to $286,000 of recruiting fees that were paid
for the hiring of employees for key positions, including the hiring of the new
president in 2006.

Costs related to other outside services were $368,000 higher in 2006
than in 2005. The primary item contributing to the increase in these costs was
expense of $378,000 related to the High Performance Checking program, including
mailing, consulting fees, and material costs. Since the program was renewed for
another year in October 2006, a majority of these costs continued in 2007.
Other costs of $89,000 were for consulting expenses related to the
restructuring of the Wealth Management division.

Provision for Income Taxes

Income tax expense totaled $2.8 million in 2006, a decrease of $1.1
million compared to 2005. The lower tax expense in 2006 reflected the decrease
in our income before income tax expense in 2006. Our effective tax rate was
27.3% in 2006 compared to 30.1% in 2005. Taxable income decreased while
tax-exempt interest income from municipal loans and investments remained
relatively constant, causing the change in the effective tax rate.

BALANCE SHEET ANALYSIS

Loans

Gross loans outstanding declined to $760.2 million at December 31,
2007, a 7.2% decrease from December 31, 2006. This follows a 0.9% increase from
the end of 2005.

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

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Table 3: Loan Composition

|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|-------------------------------------- |  | ----------------------------------------- | ------- | ---------- |  | ------ | -- | ---------- | ------- | ------ |  | ---------- | -- | ------ | ------- | ---------- |  | ------ | -- | ---------- | ------- | - |  | ----- | -- | - | ------- | - |  | ----- | -
|                                       |  | As of December 31, (dollars in thousands)
|                                       |  | 2007                                      |         | 2006       |  | 2005   |    | 2004       |         | 2003   | 
|                                       |  |                                           |         |            |  |        |    |            |         |        | 
|                                       |  | Amount                                    |         | %
of Total |  | Amount |    | %
of Total |         | Amount |  | %
of Total |    | Amount |         | %
of Total |  | Amount |    | %
of Total |        
|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|Amount of loans by type                |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|Real estate-mortgage                   |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|Commercial                             |  | $                                         | 386,981 |            |  | 50.9   | %  | $          | 464,843 |        |  | 56.7       | %  | $      | 467,956 |            |  | 57.6   | %  | $          | 424,712 |   |  | 56.1  | %  | $ | 387,778 |   |  | 54.2  | %
|1-4 Family residential                 |  |                                           | 119,932 |            |  | 15.8   | %  |            | 143,873 |        |  | 17.6       | %  |        | 148,736 |            |  | 18.3   | %  |            | 134,350 |   |  | 17.8  | %  |   | 125,700 |   |  | 17.6  | %
|Construction                           |  |                                           | 93,047  |            |  | 12.2   | %  |            | 94,082  |        |  | 11.5       | %  |        | 85,729  |            |  | 10.6   | %  |            | 80,384  |   |  | 10.6  | %  |   | 77,350  |   |  | 10.8  | %
|Commercial, financial and agricultural |  |                                           | 127,549 |            |  | 16.8   | %  |            | 82,619  |        |  | 10.1       | %  |        | 80,260  |            |  | 9.9    | %  |            | 83,787  |   |  | 11.1  | %  |   | 91,051  |   |  | 12.7  | %
|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|Consumer installment                   |  |                                           | 14,388  |            |  | 1.9    | %  |            | 14,893  |        |  | 1.8        | %  |        | 14,263  |            |  | 1.8    | %  |            | 13,936  |   |  | 1.8   | %  |   | 14,460  |   |  | 2.0   | %
|Tax exempt                             |  |                                           | 18,663  |            |  | 2.5    | %  |            | 19,633  |        |  | 2.4        | %  |        | 15,785  |            |  | 1.9    | %  |            | 20,457  |   |  | 2.7   | %  |   | 19,032  |   |  | 2.7   | %
|Less: deferred fees, net of costs      |  |                                           | (350    | )          |  | (0.1   | )% |            | (375    | )      |  | (0.1       | )% |        | (433    | )          |  | (0.1   | )% |            | (398    | ) |  | (0.1  | )% |   | (349    | ) |  | 0.0   | %
|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  
|Total loans (net of unearned income)   |  | $                                         | 760,210 |            |  | 100.0  | %  | $          | 819,568 |        |  | 100.0      | %  | $      | 812,296 |            |  | 100.0  | %  | $          | 757,228 |   |  | 100.0 | %  | $ | 715,022 |   |  | 100.0 | %
|                                       |  |                                           |         |            |  |        |    |            |         |        |  |            |    |        |         |            |  |        |    |            |         |   |  |       |    |   |         |   |  |       |  

Commercial
real estate loans totaled $387.0 million at year-end 2007 and comprised 50.9%
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 totaled $127.5 million at year-end 2007, up
$44.9 million or 54.4% since year-end 2006. 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 2007 compared to growth experienced in years prior to 2006.   The credit risk related to the 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 $1.0 million or 1.1% to $93.0 million at December
31, 2007 from December 31, 2006.  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 generally are 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 the 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.

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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
a multiple of 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, 2007, there existed two industry group concentrations
in our loans that exceeded 10% of total loans. At year-end 2007, loans to real estate rental properties located throughout our
market area totaled $80.9 million, or 10.6% of total loans and are located in various areas of our market area and loans for real
estate development totaled $80.0 million, or 10.5% of total loans.

In addition, loans to tourism related businesses remain a significant part of the portfolio 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 businesses could also be affected in the event of a downturn in the industry.

Although growth was slow in 2007 for the tourism business in the Door County market, management
believes that business activity will remain adequate to service debt of our customers and for customers in general to make
improvements to their operations.

At the end of 2007, residential real estate mortgage loans totaled $119.9 million and comprised
15.8% of the loan portfolio. These loans decreased $23.9 million or 16.6% during 2007. The rising interest rate environment during
the first half of 2007 caused consumer preference to remain with fixed-rate residential loans. Refinancing activity slowed in
2007, as interest rates have increased. We expect this trend to continue into 2008, and given current trends, we do not anticipate
growth in mortgage loans. 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 2007, those loans
totaled $20.4 million, an increase of $4.7 million over 2006. 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. 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, 2007, these loans totaled $89.7 million compared to $101.5 million at
December 31, 2006.

We also offer fixed rate mortgages through participation in fixed rate mortgage programs under
private investors. These loans also are sold in the secondary market with servicing rights released to the buyer. In 2007, we sold
$40 million in mortgage loans through the secondary programs compared to $38.9 million in 2006.

Installment loans to individuals totaled $14.4 million, or 1.9%, of the total loan portfolio at
December 31, 2007 compared to $14.9 million, or 1.8%, at December 31, 2006. 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 credit worthiness
of the borrowers, as well as taking the appropriate collateral and guaranty positions on such loans primarily controls credit
risk.

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Tax-exempt loans totaled $18.7 million at December 31, 2007 compared to $19.6 million at year-end
2006. Tax-exempt 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, 2007. Those loans with
expected maturities over one year are further scheduled by re-pricing opportunities.

Table 4: Loan Maturity and Interest Rate Sensitivity

|                                          |  |                        |         |           |   |               |  |       |         |  |   |         | 
|----------------------------------------- |  | ---------------------- | ------- | --------- | - | ------------- |  | ----- | ------- |  | - | ------- | 
|                                          |  | Maturity               |        
|                                          |  |                        |        
|December
  31, 2007                       |  | 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    |  | $                      | 56,409  |           | $ | 36,005        |  | $     | 27,518  |  | $ | 119,932 | 
|Construction                              |  |                        | 62,000  |           |   | 30,504        |  |       | 543     |  |   | 93,047  | 
|Commercial
  real estate                  |  |                        | 178,902 |           |   | 143,759       |  |       | 63,970  |  |   | 386,631 | 
|Commercial,
  financial and agricultural  |  |                        | 50,941  |           |   | 51,723        |  |       | 24,885  |  |   | 127,549 | 
|Tax-exempt                                |  |                        | 5,706   |           |   | 4,110         |  |       | 8,847   |  |   | 18,663  | 
|Consumer                                  |  |                        | 8,046   |           |   | 6,151         |  |       | 191     |  |   | 14,388  | 
|                                          |  |                        |         |           |   |               |  |       |         |  |   |         | 
|Total                                     |  | $                      | 362,004 |           | $ | 272,252       |  | $     | 125,954 |  | $ | 760,210 | 

|                     |  |                      |  |  |            |         |               |   |         |  |  |  | 
|-------------------- |  | -------------------- |  |  | ---------- | ------- | ------------- | - | ------- |  |  |  | 
|                     |  | Interest sensitivity | 
|                     |  |                      | 
|                     |  |                      |  |  | Fixed rate |         | Variable rate |   |         |  | 
|                     |  |                      |  |  |            |         |               |   |         |  | 
|Due after
  one year |  |                      |  |  | $          | 290,103 |               | $ | 166,198 |  |  |  | 
|                     |  |                      |  |  |            |         |               |   |         |  |  |  | 

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 incurred credit losses through periodic charges to our earnings. These charges are shown in our
consolidated income statement 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 allowance for
loan losses 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.

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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.                                     
| |  | 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, fmancial 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 2007 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 with internal credit gradings at or below a predetermined classification 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 Chief Credit Officer and management familiar with the credits.

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During 2007, $9.8 million was added to the ALL and charged to operating expense, compared to $903,000 in 2006.
Of the $9.8 million charge taken in 2007, $6.0 million was added during the first quarter and $3.3 million was added during the forth quarter.

Late in the first quarter of 2007, under our normal impairment review procedures, a significant credit relationship was identified
by management as having insufficient collateral to cover the outstanding principal involved and was placed on non-accrual. This
credit was not past due at December 31, 2006 and appropriately, did not have a specific allocation of our ALL at that date. As a
result of this analysis, $3.6 million relating to this specific credit was added to the ALL during the first quarter of 2007. We
made an additional provision of $2.4 million to our specific loss reserve allocation relating to other loans identified as part of
the CCOs portfolio review process. The quantitative impact of the change to a more proactive credit analysis process
accounted for adjusted values assigned to three specific credits, aggregating a total fmancial statement impact of $472,000 all of
which was taken as a provision to ALL and charged to income in the first quarter of 2007.

Based upon information obtained subsequent to the close of our 2007 fiscal year, we completed an impairment evaluation of two loan
relationships which comprise 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 making our determination to record the impairment, we relied upon a variety of factors including third
party appraisal information, executed sale/purchase transaction documents, representations of certain parties under contract to
purchase collateral securing one of the loans, other publically available information and the likelihood of collection of monies
owed under the terms of existing personal guarantees with current borrowers. In our opinion, we believe that the $2.0 million
impairment charge is appropriate and adequate based upon a relative weighting of all of the information available to us as of the
date of this report. However, management will continue to monitor the status of these loans and as future events occur, changes to
our loss allocation may be required. In addition to the $2.0 million provision described above, a $1.3 million provision was taken in the
fourth quarter of 2007 for unrelated loans.

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 $6.0 million in the first quarter
of 2007 increased our ALL to $13.8 million at March 31, 2007. In the second quarter, net charge-offs of $2.3 million were
realized reducing the ALL to $11.5 million at June 30, 2007. During the third quarter of 2007, net charge-offs of
$1.5 million were taken, partially offset by a loan loss provision charged to earnings of $500,000. This resulted in an ALL
balance of $10.5 million at September 30, 2007. Net charge-offs of $1.9 million were taken in the fourth quarter,
more than offset by a provision of $3.3 million, resulting in an ALL balance of $11.8 million at year-end 2007.

Table 5: Quarterly Allowance for Loan Loss Components

|                                                  |  |                        |       |          |   |          |  |          |        |          |   |        |  |   |        | 
|------------------------------------------------- |  | ---------------------- | ----- | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                                  |  | As of Quarter end      |      
|                                                  |  | 12/31/06               |       | 03/31/07 |   | 06/30/07 |  | 09/30/07 |        | 12/31/07 |  
|                                                  |  |                        |       |          |   |          |  |          |        |          |  
|                                                  |  | (dollars in thousands) |      
|Component 1  Specific credit allocation          |  | $                      | 2,176 |          | $ | 7,790    |  | $        | 5,736  |          | $ | 4,739  |  | $ | 6,051  | 
|Component 2  General loss allocation: historical |  |                        | 4,215 |          |   | 4,027    |  |          | 4,052  |          |   | 4,662  |  |   | 4,721  | 
|General loss
  allocation: other                  |  |                        | 1,664 |          |   | 1,783    |  |          | 1,742  |          |   | 1,065  |  |   | 1,068  | 
|Unallocated                                       |  |                        | 3     |          |   | 234      |  |          | 18     |          |   | 41     |  |   |       | 
|                                                  |  |                        |       |          |   |          |  |          |        |          |   |        |  |   |        | 
|Allowance for Loan Losses                         |  | $                      | 8,058 |          | $ | 13,834   |  | $        | 11,548 |          | $ | 10,507 |  | $ | 11,840 | 

Management believes the ALL is at an appropriate level to absorb probable incurred losses in the
loan portfolio at December 31, 2007. 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 further deteriorate, the level of non-performing
loans, charge-offs and delinquencies could rise, warranting an increase in the provision.

During 2007, we determined that collateral shortfalls existed with respect to several commercial
loans. These shortfalls were the primary reason that we made $9.8 million of loan loss provisions in 2007, compared to
$903,000 in 2006.

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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, 2007 was $11.8 million compared with
$8.1 million at year-end 2006. Loans decreased 7.2% in 2007, while the allowance as a percent of gross loans increased to
1.6% from 1.0% at year-end 2006. Net commercial mortgage loan charge-offs represented 34.1% of the total net charge-offs for 2007.
Net commercial loan charge-offs represented 57.2% of the total net charge-offs in 2007 while residential real estate-mortgage loan
net charge-offs represented 6.3% of the total net charge-offs for 2007. Although net loan charge-offs increased in 2007, the ALL
as a percent of total loans increased as a result of the higher amount of specific allocations to impaired loans and a higher
general reserve as a percentage of the performing loan portfolio. 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, |        
|                                                                    |  | 2007                     |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |  
|                                                                    |  | (dollars in thousands)   |        
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Daily
  average amount of loans                                     |  | $                        | 804,493 |      | $ | 818,086 |   | $    | 789,316 |      | $ | 740,605 |   | $ | 695,669 |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Loans, end
  of period                                              |  | $                        | 760,210 |      | $ | 819,568 |   | $    | 812,296 |      | $ | 757,228 |   | $ | 715,022 |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|ALL, at
  beginning of year                                         |  | $                        | 8,058   |      | $ | 9,551   |   | $    | 10,445  |      | $ | 12,159  |   | $ | 11,410  |  
|Loans
  charged off:                                                |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                |  |                          | 437     |      |   | 204     |   |      | 537     |      |   | 226     |   |   | 946     |  
|                                                                   
|Real estate-construction                                            |  |                          | 25      |      |   | 624     |   |      |        |      |   | 3       |   |   | 79      |  
|Real estate-commercial                                              |  |                          | 2,154   |      |   | 1,341   |   |      | 3,363   |      |   | 1,039   |   |   | 649     |  
|Commercial/agricultural loans                                       |  |                          | 3,627   |      |   | 847     |   |      | 651     |      |   | 2,781   |   |   | 4,369   |  
|Consumer loans                                                      |  |                          | 215     |      |   | 401     |   |      | 320     |      |   | 240     |   |   | 302     |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                   
|Total loans
  charged off                                           |  | $                        | 6,458   |      | $ | 3,417   |   | $    | 4,871   |      | $ | 4,289   |   | $ | 6,345   |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries of loans previously charged off:                         |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Real estate-mortgage                                                |  |                          | 63      |      |   | 409     |   |      | 392     |      |   | 79      |   |   | 263     |  
|Real estate-construction                                            |  |                          |        |      |   |        |   |      |        |      |   | 1       |   |   |        |  
|Real estate-commercial                                              |  |                          | 113     |      |   | 127     |   |      | 91      |      |   | 79      |   |   | 107     |  
|Commercial/agricultural loans                                       |  |                          | 206     |      |   | 134     |   |      | 163     |      |   | 741     |   |   | 950     |  
|Consumer loans                                                      |  |                          | 97      |      |   | 351     |   |      | 114     |      |   | 76      |   |   | 124     |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total loans
  recovered                                             |  |                          | 479     |      |   | 1,021   |   |      | 760     |      |   | 976     |   |   | 1,444   |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans
  charged off (NCOs)                                    |  |                          | 5,979   |      |   | 2,396   |   |      | 4,111   |      |   | 3,313   |   |   | 4,901   |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Additions to allowance for loan losses charged to operating expense |  |                          | 9,761   |      |   | 903     |   |      | 3,217   |      |   | 1,599   |   |   | 5,650   |  
|ALL, at end of year                                                 |  | $                        | 11,840  |      | $ | 8,058   |   | $    | 9,551   |      | $ | 10,445  |   | $ | 12,159  |  
|                                                                    |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Ratio of NCOs during period to average
  loans outstanding          |  |                          | 0.74    | %    |   | 0.29    | % |      | 0.52    | %    |   | 0.45    | % |   | 0.70    | %
|Ratio of ALL to NCOs                                                |  |                          | 2.0     |      |   | 3.4     |   |      | 2.3     |      |   | 3.2     |   |   | 2.5     |  
|Ratio of ALL to total loans end of period                           |  |                          | 1.56    | %    |   | 0.98    | % |      | 1.18    | %    |   | 1.38    | % |   | 1.70    | %

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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, net charge-offs, and non-performing loans.

Table 7 shows the amount of the ALL allocated for the time periods 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 are viewed to have less risk.

Table 7: Allocation of the Allowance for Loan Losses

|                                     |  |                        |        |                    |  |        |   |                    |       |        |  |                    |   |        |       |                 |  |        |   |                    |        |  |  |       |   |   |        |  |  |       |  
|------------------------------------ |  | ---------------------- | ------ | ------------------ |  | ------ | - | ------------------ | ----- | ------ |  | ------------------ | - | ------ | ----- | --------------- |  | ------ | - | ------------------ | ------ |  |  | ----- | - | - | ------ |  |  | ----- | -
|                                     |  | As of December 31,     |       
|                                     |  | (dollars in thousands) |       
|                                     |  | 2007                   |        | 2006               |  | 2005   |   | 2004               |       | 2003   | 
|                                     |  | Amount                 |        | % of total
  loans |  | Amount |   | % of total
  loans |       | Amount |  | % of total
  loans |   | Amount |       | % of totalloans |  | Amount |   | % of total
  loans |       
|Commercial, financial & agricultural |  | $                      | 3,405  |                    |  | 16.7   | % | $                  | 2,082 |        |  | 10.1               | % | $      | 2,317 |                 |  | 9.9    | % | $                  | 1,982  |  |  | 11.1  | % | $ | 2,386  |  |  | 12.7  | %
|Commercial real estate               |  |                        | 5,367  |                    |  | 50.9   | % |                    | 4,280 |        |  | 56.6               | % |        | 5,633 |                 |  | 57.5   | % |                    | 6,374  |  |  | 56.0  | % |   | 6,772  |  |  | 54.2  | %
|Real estate                          |  |                        |        |                    |  |        |   |                    |       |        |  |                    |   |        |       |                 |  |        |   |                    |        |  |  |       |   |   |        |  |  |       |  
|Construction                         |  |                        | 1,774  |                    |  | 12.2   | % |                    | 597   |        |  | 11.5               | % |        | 454   |                 |  | 10.6   | % |                    | 998    |  |  | 10.6  | % |   | 702    |  |  | 10.8  | %
|Residential                          |  |                        | 987    |                    |  | 15.8   | % |                    | 755   |        |  | 17.6               | % |        | 482   |                 |  | 18.3   | % |                    | 539    |  |  | 17.8  | % |   | 1,325  |  |  | 17.6  | %
|Consumer                             |  |                        | 306    |                    |  | 1.9    | % |                    | 342   |        |  | 1.8                | % |        | 243   |                 |  | 1.8    | % |                    | 198    |  |  | 1.8   | % |   | 346    |  |  | 2.0   | %
|Tax exempt loans                     |  |                        |       |                    |  | 2.5    | % |                    |      |        |  | 2.4                | % |        |      |                 |  | 1.9    | % |                    |       |  |  | 2.7   | % |   |       |  |  | 2.7   | %
|Not specifically Allocated           |  |                        | 1      |                    |  |        |   |                    | 2     |        |  |                    |   |        | 422   |                 |  |        |   |                    | 354    |  |  |       |   |   | 628    |  |  |       |  
|                                     |  |                        |        |                    |  |        |   |                    |       |        |  |                    |   |        |       |                 |  |        |   |                    |        |  |  |       |   |   |        |  |  |       |  
|Total allowance                      |  | $                      | 11,840 |                    |  | 100.0  | % | $                  | 8,058 |        |  | 100.0              | % | $      | 9,551 |                 |  | 100.0  | % | $                  | 10,445 |  |  | 100.0 | % | $ | 12,159 |  |  | 100.0 | %

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Non-Performing Loans and Other Real Estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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.
  Restructured loans involve loans that have had a charge-off taken to reduce
  the carrying amount of the loan to fair market value as determined pursuant
  to SFAS 114.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Table 8
  details non-performing loans and non-performing assets by type for 2007 and
  the preceding four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Table 8: Nonperforming Loans and Other Real Estate Owned                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                               |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|---------------------------------------------- |  | ---------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                               |  | As of December 31,(dollars in thousands) |       
|                                               |  | 2007                                     |        | 2006 |   | 2005   |   | 2004 |        | 2003 |  
|                                               |  |                                          |        |      |   |        |   |      |        |      |  
|                                              
|Nonaccrual
  loans                             |  | $                                        | 37,555 |      | $ | 27,352 |   | $    | 6,942  |      | $ | 5,920  |   | $ | 11,079 |  
|Accruing
  loans past due 90 days or more      |  |                                          |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|Restructured
  loans                           |  |                                          |       |      |   | 496    |   |      |       |      |   |       |   |   | 5,144  |  
|                                               |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total non-performing loans (NPLs)              |  | $                                        | 37,555 |      | $ | 27,848 |   | $    | 6,942  |      | $ | 5,920  |   | $ | 16,223 |  
|                                               |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Other real estate owned/operating subsidiaries |  |                                          | 5,167  |      |   | 5,760  |   |      | 3,333  |      |   | 2,572  |   |   | 2,271  |  
|                                               |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total
  non-performing assets (NPAs)           |  | $                                        | 42,722 |      | $ | 33,608 |   | $    | 10,275 |      | $ | 8,492  |   | $ | 18,494 |  
|                                               |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                              
|Ratios:                                        |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|NPLs to
  total loans                          |  |                                          | 4.94   | %    |   | 3.40   | % |      | 0.85   | %    |   | 0.78   | % |   | 2.27   | %
|NPAs to
  total assets                         |  |                                          | 3.86   | %    |   | 3.02   | % |      | 0.94   | %    |   | 0.81   | % |   | 1.90   | %
|ALL to NPLs                                    |  |                                          | 31.53  | %    |   | 28.94  | % |      | 137.58 | %    |   | 176.44 | % |   | 74.95  | %

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Non-performing loans at December 31, 2007 were $37.6 million compared to $27.8 million at December
31, 2006. Impacting the increase were six large commercial credits that moved to non-accrual status during 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 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 provisions
may be necessary.

Table 9: Quarterly Nonaccrual and Restructured Loans

|                                                      |  |                                      |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|----------------------------------------------------- |  | ------------------------------------ | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                                      |  | Quarters Ended(dollars in thousands) |       
|                                                      |  | 12/31/06                             |        | 03/31/07 |   | 06/30/07 |  | 09/30/07 |        | 12/31/07 |  
|                                                      |  |                                      |        |          |   |          |  |          |        |          |  
|Nonaccrual Loans                                      |  | $                                    | 27,352 |          | $ | 37,729   |  | $        | 45,873 |          | $ | 43,780 |  | $ | 37,555 | 
|Loans
  restructured in a troubled debt restructuring |  |                                      | 496    |          |   | 1,410    |  |          | 475    |          |   | 464    |  |   |       | 
|                                                      |  |                                      |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|Total
  Nonperforming Loans                           |  | $                                    | 27,848 |          | $ | 39,139   |  | $        | 46,348 |          | $ | 44,244 |  | $ | 37,555 | 

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, |      
|                                                    |  |                            |      
|                                                    |  | 2007                       |       | 2006 |   | 2005  |  
|                                                    |  |                            |       |      |   |       |  
|                                                    |  | (dollars in thousands)     |      
|Interest
  income in accordance with original terms |  | $                          | 3,971 |      | $ | 2,555 |   | $ | 605  |  
|Interest
  income recognized                        |  |                            | (665  | )    |   | (670  | ) |   | (300 | )
|                                                    |  |                            |       |      |   |       |   |   |      |  
|Reduction in
  interest income                      |  | $                          | 3,306 |      | $ | 1,885 |   | $ | 305  |  
|                                                    |  |                            |       |      |   |       |   |   |      |  

Other real
estate owned, which represents property that we acquired through foreclosure or
in satisfaction of debt, consisted of fourteen properties totaling $5.2 million
at end of year 2007. This compared to sixteen properties totaling $5.8 million
at year-end 2006. Management actively seeks to ensure that properties held are
administered to minimize any risk of loss.

Activity for
other real estate for 2007, 2006, and 2005, including costs of operation are
shown in Table 11:

Table 11: Other Real Estate Operation Summary

|                                      |  |      |        |      |   |      |   |   |      |  
|------------------------------------- |  | ---- | ------ | ---- | - | ---- | - | - | ---- | -
|                                      |  | 2007 |        | 2006 |   | 2005 |  
|                                      |  |      |        |      |   |      |  
|                                      |  |      |        |      |   |      |  
|Income from
  operation of ORE        |  | $    | 64     |      | $ | 43   |   | $ | 182  |  
|Expense from
  operation of ORE       |  |      | (966   | )    |   | (421 | ) |   | (556 | )
|Net gains
  (losses) from sale of ORE |  |      | (232   | )    |   | 2    |   |   | (25  | )
|                                      |  |      |        |      |   |      |   |   |      |  
|Cost of
  operation and sale of ORE   |  | $    | (1,134 | )    | $ | (376 | ) | $ | (399 | )
|                                      |  |      |        |      |   |      |   |   |      |  

Investment Portfolio

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

34

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Table 12: Investment Portfolio

|                                                   |  |                        |         |      |   |         |  |   |         | 
|-------------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                   |  | 2007                   |         | 2006 |   | 2005    | 
|                                                   |  |                        |         |      |   |         | 
|                                                   |  | (dollars in thousands) |        
|Securities Available for Sale (AFS):               |  |                        |         |      |   |         |  |   |         | 
|U.S. Treasury and other agency securities          |  | $                      | 29,222  |      | $ | 58,412  |  | $ | 60,793  | 
|Obligations of states and political
  subdivisions |  |                        | 55,741  |      |   | 49,695  |  |   | 33,689  | 
|Mortgage-backed securities                         |  |                        | 118,848 |      |   | 79,655  |  |   | 74,544  | 
|Private placement and corporate bonds              |  |                        | 15,141  |      |   | 999     |  |   | 996     | 
|Other equity securities                            |  |                        | 3,419   |      |   | 1,487   |  |   | 4,421   | 
|                                                   |  |                        |         |      |   |         |  |   |         | 
|Total amortized cost                               |  | $                      | 222,371 |      | $ | 190,248 |  | $ | 174,443 | 
|                                                   |  |                        |         |      |   |         |  |   |         | 
|Total fair value and carrying value                |  | $                      | 222,475 |      | $ | 188,315 |  | $ | 171,638 | 
|                                                   |  |                        |         |      |   |         |  |   |         | 

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, or in response to changes in interest rates or other economic factors. While we have no current
intention of selling those securities, they may not be held until maturity. Securities available for sale are carried at market
value. Adjustments to market value at December 31, 2007 and 2006 are recorded as a separate component of equity, net of tax.
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.

In December 2005, our investment subsidiary sold securities with a total carrying value of $36.5
million. These were sold as a result of the flat yield curve that, combined with the premium paid to obtain wholesale funding,
meant that we were paying more in costs to borrow money than to hold securities that had lesser yields. From a funding standpoint,
it was less expensive to raise money by selling certain securities than to borrow funds in the wholesale market.

In November 2007, our investment subsidiary sold agency securities with a total carrying value of
$30.0 million to 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 reposition our investment portfolio while taking 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 |       
|                                                            |  |                                                                   |        |                                        |  |                                          |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |       
|                                                            |  |                                                                   |        |                                        |  |                                          |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |       
|Treasury                                                    |  | $                                                                 |       |                                        |  |                                         |   | $               |       |        |  |      |   | $      |       |       |  |       |   | $     |       |  |  |     |   | $ |        |  |  |     |  
|Agencies                                                    |  |                                                                   | 5,212  |                                        |  | 3.49                                     | % |                 | 19,492 |        |  | 3.81  | % |        |       |       |  |       |   |       | 4,564  |  |  | 6.00 | % |   | 29,268  |  |  | 4.09 | %
|Mortgage-backed securities                                  |  |                                                                   | 15,605 |                                        |  | 3.95                                     | % |                 | 61,123 |        |  | 4.55  | % |        | 38,184 |       |  | 5.12   | % |       | 3,784  |  |  | 5.25 | % |   | 118,696 |  |  | 4.68 | %
|Tax exempt obligations of states and political
subdivisions |  |                                                                   | 1,102  |                                        |  | 6.46                                     | % |                 | 3,518  |        |  | 7.08  | % |        | 20,362 |       |  | 6.12   | % |       | 30,674 |  |  | 6.08 | % |   | 55,656  |  |  | 6.17 | %
|Taxable obligations of states and political subdivisions    |  |                                                                   | 572    |                                        |  | 7.50                                     | % |                 |       |        |  |      |   |        |       |       |  |       |   |       |       |  |  |     |   |   | 572     |  |  | 7.50 | %
|Private placement and corporate bonds                       |  |                                                                   |       |                                        |  |                                         |   |                 |       |        |  |      |   |        |       |       |  |       |   |       | 14,864 |  |  | 7.49 | % |   | 14,864  |  |  | 7.49 | %
|Other                                                       |  |                                                                   | 3,419  |                                        |  | 5.13                                     | % |                 |       |        |  |      |   |        |       |       |  |       |   |       |       |  |  |     |   |   | 3,419   |  |  | 5.13 | %
|Total carrying value                                        |  | $                                                                 | 25,910 |                                        |  | 4.20                                     | % | $               | 84,133 |        |  | 4.48  | % | $      | 58,546 |       |  | 5.47   | % | $     | 53,886 |  |  | 6.40 | % |   | 222,475 |  |  | 5.17 | %
|                                                            |  |                                                                   |        |                                        |  |                                          |   |                 |        |        |  |       |   |        |        |       |  |        |   |       |        |  |  |      |   |   |         |  |  |      |  

Securities
averaged $203.7 million in 2007 compared with $188.7 million in 2006. In 2007,
taxable securities comprised approximately 74.3% of the total average
investments compared to 78.9% in 2006. Tax-exempt securities for 2007 accounted
for 25.7% of the total average investments compared to 21.1% in 2006.

35

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Deposits

Deposits are our largest source of funds. Average total deposits for 2007 were $881.7 million, an
increase of 2.1% over 2006. At December 31, 2007, deposits were $884.2 million, an increase of $5.3 million or 0.6% from $878.9
million recorded at December 31, 2006. While average brokered deposits were down $33.9 million, or 22.6% between 2006 and 2007,
total brokered deposits increased $10.7 million to $130.9 million at year-end 2007 from $120.1 million at year-end 2006. The
increase in brokered time deposits occurred throughout the year in 2007 and may continue in the future as liquidity needs arise.
Typically we are able to procure such brokered deposits at funding rates that we encounter in our own market area. 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.

Table 14: Average Deposits Distribution

|                                                                |  |                        |         |            |  |        |     |            |  |        |         |            |  |  |     |   |  |   |         |  |  |  |     |   | 
|--------------------------------------------------------------- |  | ---------------------- | ------- | ---------- |  | ------ | --- | ---------- |  | ------ | ------- | ---------- |  |  | --- | - |  | - | ------- |  |  |  | --- | - | 
|                                                                |  | 2007                   |         | 2006       |  | 2005   |    
|                                                                |  |                        |         |            |  |        |    
|                                                                |  | Amount                 |         | % of Total |  | Amount |     | % of Total |  | Amount |         | % of Total | 
|                                                                |  |                        |         |            |  |        |     |            |  |        |         |            | 
|                                                                |  | (dollars in thousands) |        
|Noninterest-bearing demand deposits                             |  | $                      | 93,706  |            |  |        | 11  | %          |  | $      | 94,938  |            |  |  | 11  | % |  | $ | 107,506 |  |  |  | 13  | % | 
|Interest-bearing demand deposits                                |  |                        | 110,322 |            |  |        | 12  | %          |  |        | 103,740 |            |  |  | 12  | % |  |   | 90,782  |  |  |  | 11  | % | 
|Savings deposits                                                |  |                        | 262,026 |            |  |        | 30  | %          |  |        | 263,018 |            |  |  | 31  | % |  |   | 221,414 |  |  |  | 26  | % | 
|Other time deposits (excluding brokered
  deposits)             |  |                        | 184,479 |            |  |        | 21  | %          |  |        | 167,552 |            |  |  | 19  | % |  |   | 178,912 |  |  |  | 21  | % | 
|Time deposits $100,000 and over (excluding
  brokered deposits) |  |                        | 115,120 |            |  |        | 13  | %          |  |        | 84,307  |            |  |  | 10  | % |  |   | 64,180  |  |  |  | 8   | % | 
|Brokered certificates of deposit                                |  |                        | 116,081 |            |  |        | 13  | %          |  |        | 150,012 |            |  |  | 17  | % |  |   | 175,502 |  |  |  | 21  | % | 
|                                                                |  |                        |         |            |  |        |     |            |  |        |         |            |  |  |     |   |  |   |         |  |  |  |     |   | 
|Total deposits                                                  |  | $                      | 881,734 |            |  |        | 100 | %          |  | $      | 863,567 |            |  |  | 100 | % |  | $ | 838,296 |  |  |  | 100 | % | 
|                                                                |  |                        |         |            |  |        |     |            |  |        |         |            |  |  |     |   |  |   |         |  |  |  |     |   | 

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

|                                        |  |                                             |   |         |  | 
|--------------------------------------- |  | ------------------------------------------- | - | ------- |  | 
|                                        |  | December 31, 2007
  Certificates of Deposit |  
|                                        |  |                                             |  
|Three months
  or less                  |  |                                             | $ | 109,559 |  | 
|Over three
  months through six months  |  |                                             |   | 96,717  |  | 
|Over six
  months through twelve months |  |                                             |   | 147,806 |  | 
|Over twelve
  months                    |  |                                             |   | 81,584  |  | 
|                                        |  |                                             |   |         |  | 
|Total                                   |  |                                             | $ | 435,666 |  | 

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As shown in
Table 14, non-interest bearing demand deposits in 2007 averaged $93.7 million,
down 1.3% from $94.9 million recorded in 2006. This $1.2 million decrease is
attributable to the shift from non-interest bearing to interest-bearing HPC
accounts. As of December 31, 2007, non-interest-bearing demand deposits totaled
$94.1 million compared with $96.9 million at year-end 2006.

Interest-bearing
deposits generally consist of interest-bearing checking, savings deposits,
money market accounts, individual retirement accounts (IRAs) and certificates
of deposit (CDs). In 2007, interest-bearing deposits averaged $788.0 million,
an increase of 2.5% over 2006. NOW accounts, savings deposits and money market
accounts increased $5.6 million or 1.5% as a result of customer preference to
stay liquid in the current 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 $16.9 million or
10.1%, primarily in response to customer anticipation of short-term rate
declines. Average time deposits over $100,000 other than brokered time deposits
increased by $30.8 million or 36.5%. 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. Average brokered deposits decreased $33.9 million,
or 22.6% in 2007 compared to 2006 as deposit growth provided necessary funds
and enabled us to reduce our reliance on brokered deposits.

Emphasis will
be placed on generating additional core deposits in 2008 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. We also
may continue to increase brokered CDs during fiscal 2008 as an additional
source of funds to provide for loan growth, in the event that core deposit
growth goals are not accomplished. Under that scenario, we will continue to
look at other wholesale sources of funds if the brokered CD market becomes
illiquid or more costly in terms of rate.

Other funding sources

Total other
funding sources, including short-term borrowings, Federal Home Loan Bank
(FHLB) advances and subordinated debentures, were $128.5 million at December
31, 2007, a decrease of $7.3 million, or 5.4%, from $135.8 million at December
31, 2006. As indicated in Table 16, average 2007 FHLB advances were $93.5
million compared to $117.7 million during 2006, a decrease of $24.2 million, or
20.6%.

Table 16: Short-term Borrowings

|                                                              |  |                                    |         |      |   |         |   |   |         |  
|------------------------------------------------------------- |  | ---------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                              |  | December 31,(dollars in thousands) |        
|                                                              |  | 2007                               |         | 2006 |   | 2005    |  
|                                                              |  |                                    |         |      |   |         |  
|Federal Home
 Loan Bank advances:                             |  |                                    |         |      |   |         |   |   |         |  
|                                                              |  |                                    |         |      |   |         |   |   |         |  
|Balance end
 of year                                          |  | $                                  | 85,172  |      | $ | 115,179 |   | $ | 125,185 |  
|Average
 amounts outstanding during year                      |  | $                                  | 93,504  |      | $ | 117,702 |   | $ | 116,407 |  
|Maximum
 month-end amounts outstanding                        |  | $                                  | 115,179 |      | $ | 125,185 |   | $ | 125,188 |  
|Average
 interest rates on amounts outstanding at end of year |  |                                    | 4.40    | %    |   | 5.23    | % |   | 4.35    | %
|Average
 interest rates on amounts outstanding during year    |  |                                    | 5.19    | %    |   | 4.88    | % |   | 3.70    | %

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 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.

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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, 2007, 2006 and 2005. For additional details, see Note 10,
Subordinated Debentures, to the Consolidated Financial Statements..

Contractual Obligations

As of December
31, 2007, 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 |  | $                                            | 435,666 |                   | $ | 354,083      |  | $            | 77,762 |                   | $ | 3,821 |  |   |       | 
|Subordinated
 debentures                                    |  |                                              | 16,100  |                   |   |             |  |              |       |                   |   |      |  |   | 16,100 | 
|FHLB
 advances                                              |  |                                              | 85,172  |                   |   | 85,000       |  |              | 172    |                   |   |      |  |   |       | 
|Operating
 leases                                           |  |                                              | 96      |                   |   |             |  |              | 96     |                   |   |      |  |   |       | 
|                                                            |  |                                              |         |                   |   |              |  |              |        |                   |   |       |  |   |        | 
|Totals                                                      |  | $                                            | 537,034 |                   | $ | 439,083      |  | $            | 78,030 |                   | $ | 3,821 |  | $ | 16,100 | 

Further discussion of these contractual obligations, see Note 4, 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 will continue to be our main source of liquidity. In consultation with our
federal and state regulators, accordingly, our Board of Directors elected to forego paying the dividend normally paid to our
shareholders during the first quarter of 2008. The dividends from our bank were not sufficient to pay cash dividends to our
shareholders of $5.0 million in 2007. Additional cash of $1.0 million was generated by the sale of an investment security which
partially offset the shortfall. In order to pay dividends in 2008, 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 $26.5 million were made in 2007 and $92.8 million in investments were purchased in 2007. At December 31,
2007, the carrying book value of investment securities maturing within one year amounted to $25.9 million, or 11.6% of the total
investment securities portfolio. This compares to 9.3% of our investment securities with one year or less maturities as of
December 31, 2006. At the end of 2007, the investment portfolio contained $148.0 million of U.S. Treasury and federal agency
backed securities representing 66.5% of the total investment portfolio. These securities tend to be highly marketable and had a
market value approximately $106,000 below amortized cost at year-end 2007.

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Deposit growth is another source of liquidity for our bank. As a financing activity reflected in
the 2007 Consolidated Statements of Cash Flows, deposit growth provided $5.3 million in cash during 2007. Our banks overall
average deposit base grew $18.2 million or 2.1% during 2007. Deposit growth is the most stable source of liquidity for our bank,
although brokered deposits are inherently less stable than locally generated core deposits. Affecting liquidity are core deposit
growth levels, certificate of deposit maturity structure and retention, and characteristics and diversification of wholesale
funding sources affecting the channels by which brokered deposits are acquired. Conversely, deposit outflow would require our bank
to develop alternative sources of funds which may not be as liquid and may be potentially a more costly alternative.

Federal funds sold averaged $3.2 million in 2007 compared to $5.7 million in 2006. Funds provided
from the maturity of these assets typically are used as funding sources for seasonal loan growth, which typically have 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, 2007, our bank did not have any federal funds sold.

The scheduled maturity of loans can provide a source of additional liquidity. Our bank has $362.0
million of loans maturing within one year, or 47.6% of total loans. Factors affecting liquidity relative to loans are loan
origination volumes, loan prepayment rates and the maturity structure of existing loans. Our banks liquidity position is
influenced by changes in interest rates, economic conditions and competition. Conversely, loan demand as a need for liquidity will
cause us to acquire other sources of funding which could be harder to find and, therefore, more costly to acquire.

Within the classification of short-term borrowings at year-end 2007 and 2006, federal funds
purchased and securities sold under agreements to repurchase totaled $27.2 million and $4.5 million, respectively. 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, 2007, our bank had $33.5 million available in the form of federal funds lines.
Short-term and long-term FHLB Advances are another source of funds, totaling $85.2 million at year-end 2007. At December 31, 2007,
our bank had $3.8 million in the form of additional available FHLB advances.

Our banks liquidity resources were sufficient in 2007 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 2007,
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.

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Interest Rate Sensitivity Management

Our business and the composition of our 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 increase
in market interest rates or a 100 and 200 bps decrease in market rates. The interest rates scenarios are used for analytical
purposes and do not necessarily represent managements view of future market movements. The table below presents our
projected changes in net interest income for 2008, based on financial data at December 31, 2007, for the various rate shock
levels indicated.

Table 18: Net Interest Income Sensitivity Analysis

|                                             |  |                        |        |                                              |    |                                              |   |  |      |    | 
|-------------------------------------------- |  | ---------------------- | ------ | -------------------------------------------- | -- | -------------------------------------------- | - |  | ---- | -- | 
|Potential impact on 2008 net interest income |  | Net Interest Income    |       
|                                             |  | Amount                 |        | Potential Change in Net
 Interest Income ($) |    | Potential Change in Net
 Interest Income (%) |  
|                                             |  |                        |        |                                              |    |                                              |  
|                                             |  | (Dollars in thousands) |       
|+ 200 bps                                    |  | $                      | 29,737 |                                              | ($ | 2,934                                        | ) |  | (9.0 | %) | 
|+ 100 bps                                    |  | $                      | 31,190 |                                              | ($ | 1,481                                        | ) |  | (4.5 | %) | 
|Base                                         |  | $                      | 32,671 |                                              |    |                                             |   |  |     |    | 
|- 100 bps                                    |  | $                      | 34,043 |                                              | $  | 1,372                                        |   |  | 4.2  | %  | 
|- 200 bps                                    |  | $                      | 35,387 |                                              | $  | 2,716                                        |   |  | 8.3  | %  | 

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

Based on our
model at December 31, 2007, the effect on an immediate 100 bps increase in
interest rates would decrease our net interest income by 4.5% or approximately
$1.5 million. The effect of an immediate 100 bps decrease in rates would
increase our net interest income by 4.2% or approximately $1.4 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 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 the ALCO process. 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, 2007 decreased $1.9 million or 2.3% to
$80.3 million, compared with $82.2 million at the end of 2006. Earnings, proceeds from the exercise of stock options, and common stock issued under the Dividend
Reinvestment Plan during 2007 were more than offset by the payment of cash dividends and
Treasury Stock repurchases during the year. Additionally, other comprehensive income improved by $1.3 million during 2007 resulting in
$85,000 of accumulated other comprehensive income at year-end 2007 versus a $1.2 million accumulated other comprehensive loss
at year-end 2006. Stockholders equity to assets at December 31, 2007 was 7.25%, compared to 7.39% at year-end 2006.

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On June 5,
2006, our Board of Directors authorized management, at 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 and are able to repurchase the remaining 221,000 shares by June 30, 2008, if deemed
appropriate.

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, 2007, all $16.1 million of the Trust Preferred Securities qualify as Tier 1
Capital.

Cash dividends paid in 2007 were $0.64 per share, the same as per share dividends paid in 2006.
Our Board of Directors recently announced that it has elected to forego payment of our normal first quarter dividend in 2008.

The adequacy of our capital is regularly reviewed to ensure that sufficient capital is available
for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends
upon a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic
conditions in markets served and strength of management. Management is confident that because of current capital levels and
projected earnings, capital levels will be more than adequate to meet our ongoing and future concerns.

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, our regulatory capital ratios and those of the 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%. At December 31, 2007 and 2006, our bank was categorized as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that notification that management believes have changed 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 is
strong, but also must be maintained at an appropriate level to provide the opportunity for an adequate return on the capital
employed. Management actively reviews our capital strategies to ensure that capital levels are appropriate based on the perceived
business risks, further growth opportunities, industry standards, and regulatory requirements.

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Table 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, 2007 and 2006:

|                                   |  |                                               |        |         |   |              |  |             |        |  |   |        |  
|---------------------------------- |  | --------------------------------------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------ | -
|                                   |  | 2007 Quarter Ended                            |       
|                                   |  | March 31                                      |        | June 30 |   | September 30 |  | December 31 |       
|                                   |  | (Dollars 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
(benefit) for income tax |  |                                               | (2,064 | )       |   | 229          |  |             | 225    |  |   | (804   | )
|                                   |  |                                               |        |         |   |              |  |             |        |  |   |        |  
|Net income (loss)                  |  |                                               | (2,297 | )       |   | 1,414        |  |             | 1,387  |  |   | (339   | )

|                                  |  |    |      |   |   |      |  |   |      |  |   |       |  
|--------------------------------- |  | -- | ---- | - | - | ---- |  | - | ---- |  | - | ----- | -
|Basic earnings (loss) per share   |  | ($ | 0.29 | ) | $ | 0.18 |  | $ | 0.18 |  | $ | (0.04 | )
|Diluted earnings (loss) per share |  | ($ | 0.29 | ) | $ | 0.18 |  | $ | 0.18 |  | $ | (0.04 | )
|                                  |  |    |      |   |   |      |  |   |      |  |   |       |  

|                                  |  |                                               |        |         |   |              |  |             |        |  |   |        | 
|--------------------------------- |  | --------------------------------------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------ | 
|                                  |  | 2006 Quarter Ended                            |       
|                                  |  | March 31                                      |        | June 30 |   | September 30 |  | December 31 |       
|                                  |  | (Dollars in thousands, except per share data) |       
|Interest income                   |  | $                                             | 16,646 |         | $ | 17,522       |  | $           | 18,094 |  | $ | 17,752 | 
|Interest
 expense                 |  |                                               | 8,768  |         |   | 8,835        |  |             | 9,288  |  |   | 9,487  | 
|                                  |  |                                               |        |         |   |              |  |             |        |  |   |        | 
|Net interest
 income              |  |                                               | 7,878  |         |   | 8,687        |  |             | 8,806  |  |   | 8,265  | 
|Provision
 for loan losses        |  |                                               | 200    |         |   | 61           |  |             | 371    |  |   | 271    | 
|                                  |  |                                               |        |         |   |              |  |             |        |  |   |        | 
|Net interest
 income after PLL    |  |                                               | 7,678  |         |   | 8,626        |  |             | 8,435  |  |   | 7,994  | 
|Non-interest
 income              |  |                                               | 2,238  |         |   | 2,481        |  |             | 2,477  |  |   | 2,541  | 
|Non-interest
 expense             |  |                                               | 8,124  |         |   | 7,693        |  |             | 8,326  |  |   | 8,186  | 
|                                  |  |                                               |        |         |   |              |  |             |        |  |   |        | 
|Income
 before income tax expense |  |                                               | 1,792  |         |   | 3,414        |  |             | 2,586  |  |   | 2,349  | 
|Provision
 for income tax         |  |                                               | 468    |         |   | 1,044        |  |             | 703    |  |   | 550    | 
|                                  |  |                                               |        |         |   |              |  |             |        |  |   |        | 
|Net income                        |  |                                               | 1,324  |         |   | 2,370        |  |             | 1,883  |  |   | 1,799  | 
|                                 
|Basic earnings per share          |  | $                                             | 0.17   |         | $ | 0.30         |  | $           | 0.24   |  | $ | 0.23   | 
|Diluted
 earnings per share       |  | $                                             | 0.17   |         | $ | 0.30         |  | $           | 0.24   |  | $ | 0.23   | 

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, 2007, 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 29, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Baylake Corp. (the Company) as of
December 31, 2007 and 2006, and the related statements of income, changes in stockholders equity and cash flows for each of
the years in the three year period ended December 31, 2007. We have also audited Baylake Corp.s Internal Control over
Financial Reporting as of December 31, 2007, 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 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 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 financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, based on the
assessed risk. Our audits also included performing 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 financial statements referred to above present fairly, in all material respects,
the financial position of Baylake Corp. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2007 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, 2007, based on criteria established in COSO.

As discussed in Note 1 to the consolidated financial statements, the Company adopted FASB
Interpetation (FIN) 48, Accounting for Uncertainy in Income Taxes andFASB Statement 156, Accounting
for Servicing of Financial Assets.

/s/ Crowe Chizek and Company LLC Crowe Chizek and Company
LLC

Oak Brook, Illinois March 29, 2008

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BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
(Dollar amounts in thousands, except per share data)

|                                                                                                                                                                                 |  |      |           |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                                                                                                 |  | 2007 |           | 2006 |  
|                                                                                                                                                                                 |  |      |           |      |  
|ASSETS                                                                                                                                                                           |  |      |           |      |   |           |  
|Cash and due from financial institutions                                                                                                                                         |  | $    | 46,381    |      | $ | 22,685    |  
|Securities available for sale                                                                                                                                                    |  |      | 222,475   |      |   | 188,315   |  
|Loans held for sale                                                                                                                                                              |  |      | 741       |      |   | 889       |  
|Loans, net of allowance after $11,840 and $8,058                                                                                                                                 |  |      | 748,370   |      |   | 811,510   |  
|Cash value of life insurance                                                                                                                                                     |  |      | 23,404    |      |   | 24,239    |  
|Premises, held for sale                                                                                                                                                          |  |      | 673       |      |   | 673       |  
|Premises and equipment, net                                                                                                                                                      |  |      | 26,597    |      |   | 27,732    |  
|Federal Home Loan Bank stock                                                                                                                                                     |  |      | 6,792     |      |   | 6,792     |  
|Foreclosed assets, net                                                                                                                                                           |  |      | 5,167     |      |   | 5,760     |  
|Goodwill                                                                                                                                                                         |  |      | 6,108     |      |   | 5,723     |  
|Accrued interest receivable                                                                                                                                                      |  |      | 5,394     |      |   | 6,183     |  
|Other assets                                                                                                                                                                     |  |      | 14,514    |      |   | 11,183    |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Total assets                                                                                                                                                                     |  | $    | 1,106,616 |      | $ | 1,111,684 |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                             |  |      |           |      |   |           |  
|Deposits                                                                                                                                                                         |  |      |           |      |   |           |  
|Non-interest-bearing                                                                                                                                                             |  | $    | 94,120    |      | $ | 96,895    |  
|Interest-bearing                                                                                                                                                                 |  |      | 790,065   |      |   | 782,016   |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Total deposits                                                                                                                                                                   |  |      | 884,185   |      |   | 878,911   |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Federal Home Loan Bank advances                                                                                                                                                  |  |      | 85,172    |      |   | 115,179   |  
|Federal funds purchased and repurchase agreements                                                                                                                                |  |      | 27,174    |      |   | 4,480     |  
|Subordinated debentures                                                                                                                                                          |  |      | 16,100    |      |   | 16,100    |  
|Accrued expenses and other liabilities                                                                                                                                           |  |      | 12,461    |      |   | 13,568    |  
|Dividends payable                                                                                                                                                                |  |      | 1,262     |      |   | 1,253     |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Total liabilities                                                                                                                                                                |  |      | 1,026,354 |      |   | 1,029,491 |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Common stock, $5 par value, authorized 50,000,000; issued- 8,106,973
 shares in 2007, 7,922,154 shares in 2006; outstanding- 7,885,960 shares in
 2007, 7,830,141 shares in 2006 |  |      | 40,535    |      |   | 39,611    |  
|Additional paid-in capital                                                                                                                                                       |  |      | 11,875    |      |   | 10,403    |  
|Retained earnings                                                                                                                                                                |  |      | 31,316    |      |   | 35,134    |  
|Treasury stock (221,013 shares in 2007 and 92,013 shares in
2006)                                                                                                                |  |      | (3,549    | )    |   | (1,726    | )
|Accumulated other comprehensive income (loss)                                                                                                                                    |  |      | 85        |      |   | (1,229    | )
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Total stockholders equity                                                                                                                                                       |  |      | 80,262    |      |   | 82,193    |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  
|Total liabilities and stockholders
equity                                                                                                                                       |  | $    | 1,106,616 |      | $ | 1,111,684 |  
|                                                                                                                                                                                 |  |      |           |      |   |           |  

See accompanying notes to the consolidated financial statements.

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BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2007, 2006, and 2005
(Dollar amounts in thousands, except per share data)

|                                                                    |  |      |        |      |   |        |  |   |        | 
|------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                                    |  | 2007 |        | 2006 |   | 2005   | 
|                                                                    |  |      |        |      |   |        | 
|Interest and dividend income                                        |  |      |        |      |   |        |  |   |        | 
|Loans, including fees                                               |  | $    | 60,727 |      | $ | 61,556 |  | $ | 52,609 | 
|Taxable securities                                                  |  |      | 6,495  |      |   | 6,382  |  |   | 6,932  | 
|Tax exempt securities                                               |  |      | 2,128  |      |   | 1,697  |  |   | 1,874  | 
|Federal funds sold and other                                        |  |      | 318    |      |   | 379    |  |   | 123    | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Total interest and dividend income                                  |  |      | 69,668 |      |   | 70,014 |  |   | 61,538 | 
|Interest expense                                                    |  |      |        |      |   |        |  |   |        | 
|Deposits                                                            |  |      | 31,930 |      |   | 28,486 |  |   | 19,382 | 
|Federal funds purchased and repurchase
agreements                   |  |      | 884    |      |   | 442    |  |   | 930    | 
|Federal Home Loan Bank advances and other
debt                      |  |      | 4,850  |      |   | 5,745  |  |   | 4,309  | 
|Subordinated debentures                                             |  |      | 1,089  |      |   | 1,705  |  |   | 2,039  | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Total interest expense                                              |  |      | 38,753 |      |   | 36,378 |  |   | 26,660 | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Net interest income                                                 |  |      | 30,915 |      |   | 33,636 |  |   | 34,878 | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Provision for loan losses                                           |  |      | 9,761  |      |   | 903    |  |   | 3,217  | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Net interest income after provision for loan losses                 |  |      | 21,154 |      |   | 32,733 |  |   | 31,661 | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Other income                                                        |  |      |        |      |   |        |  |   |        | 
|Fees from fiduciary activities                                      |  |      | 956    |      |   | 1,025  |  |   | 780    | 
|Fees from loan servicing                                            |  |      | 1,019  |      |   | 1,092  |  |   | 1,131  | 
|Fees for other services to customers                                |  |      | 5,253  |      |   | 4,988  |  |   | 4,759  | 
|Gains from sales of loans                                           |  |      | 630    |      |   | 825    |  |   | 1,013  | 
|Net change in valuation of servicing
rights                         |  |      | (595   | )    |   |       |  |   |       | 
|Securities gains, net                                               |  |      | 352    |      |   |       |  |   | 52     | 
|Net gains (losses) from sale and disposal of
premises and equipment |  |      | (7     | )    |   | 287    |  |   | 2,383  | 
|Increase in cash surrender value of life
insurance                  |  |      | 863    |      |   | 922    |  |   | 784    | 
|Other income                                                        |  |      | 703    |      |   | 598    |  |   | 695    | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Total other income                                                  |  |      | 9,174  |      |   | 9,737  |  |   | 11,597 | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Noninterest expenses                                                |  |      |        |      |   |        |  |   |        | 
|Salaries and employee benefits                                      |  |      | 18,662 |      |   | 19,414 |  |   | 16,733 | 
|Occupancy expense                                                   |  |      | 2,456  |      |   | 2,373  |  |   | 2,441  | 
|Equipment expense                                                   |  |      | 1,517  |      |   | 1,658  |  |   | 1,564  | 
|Data processing and courier                                         |  |      | 1,299  |      |   | 1,269  |  |   | 1,163  | 
|Operation of other real estate                                      |  |      | 1,134  |      |   | 376    |  |   | 399    | 
|Provision for impairment of standby letter of
credit                |  |      |       |      |   | 27     |  |   | 2,191  | 
|Loan and collection expense                                         |  |      | 1,006  |      |   | 777    |  |   | 276    | 
|Other outside services                                              |  |      | 1,104  |      |   | 1,040  |  |   | 697    | 
|Other operating expenses                                            |  |      | 5,400  |      |   | 5,395  |  |   | 5,055  | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Total other expenses                                                |  |      | 32,578 |      |   | 32,329 |  |   | 30,519 | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Income (loss) before provision for income taxes                     |  |      | (2,250 | )    |   | 10,141 |  |   | 12,739 | 
|Provision for (benefit from) income taxes                           |  |      | (2,416 | )    |   | 2,765  |  |   | 3,836  | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Net income                                                          |  | $    | 166    |      | $ | 7,376  |  | $ | 8,903  | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|                                                                    |  |      |        |      |   |        |  |   |        | 
|Basic earnings per common share                                     |  | $    | 0.02   |      | $ | 0.95   |  | $ | 1.15   | 
|Diluted earnings per common share                                   |  | $    | 0.02   |      | $ | 0.94   |  | $ | 1.14   | 

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, 2007, 2006 and 2005
(Dollar amounts in thousands, except per share data)

|                                                                                                              |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |        |   |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------ | - | -------------------------- |  | ----------------- | ------ | -------------- | - | --------------------------------------------- | - | ------------ | ------ | - | - | ------ | - | - | ------ | -
|                                                                                                              |  |              |           |        |   | Additional Paid-in Capital |  | Retained Earnings |        | Treasury Stock |   | Accumulated Other Comprehensive Income (loss) |   | Total Equity |       
|                                                                                                              |  | Common Stock |           |        |   |                            |  |                  
|                                                                                                              |  |              |           |        |   |                            |  |                  
|                                                                                                              |  | Shares       |           | Amount |   |                            |  |                   |        |               
|                                                                                                              |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |       
|                                                                                                              |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |        |   |   |        |   |   |        |  
|Balance, January 1, 2005                                                                                      |  |              | 7,692,777 |        | $ | 38,580                     |  | $                 | 8,806  |                | $ | 28,275                                        |   | $            | (625   | ) | $ | 1,169  |   | $ | 76,205 |  
|Net income for the year                                                                                       |  |              |          |        |   |                           |  |                   |       |                |   | 8,903                                         |   |              |       |   |   |       |   |   | 8,903  |  
|Net changes in unrealized loss on securities available for sale, net
 of $1,629 deferred taxes                |  |              |          |        |   |                           |  |                   |       |                |   |                                              |   |              |       |   |   | (2,955 | ) |   | (2,955 | )
|                                                                                                              |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |       
|Total comprehensive income                                                                                    |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |        |   |   |        |   |   | 5,948  |  
|Stock options exercised                                                                                       |  |              | 89,650    |        |   | 448                        |  |                   | 364    |                |   |                                              |   |              |       |   |   |       |   |   | 812    |  
|Tax benefit from exercise
 of stock options                                                                   |  |              |          |        |   |                           |  |                   | 296    |                |   |                                              |   |              |       |   |   |       |   |   | 296    |  
|Cash dividends declared
 ($0.61 per share)                                                                    |  |              |          |        |   |                           |  |                   |       |                |   | (4,717                                        | ) |              |       |   |   |       |   |   | (4,717 | )
|                                                                                                              |  |              |           |        |   |                            |  |                   |        |                |   |                                               |   |              |        |   |   |        |   |   |        |  
|Balance,
 December 31, 2005                                                                                   |  |              | 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 |  

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, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

|                                                                                               |  |              |           |                            |   |                   |  |                |        |                                               |   |              |   |   |        |   |   |       |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------ | --------- | -------------------------- | - | ----------------- |  | -------------- | ------ | --------------------------------------------- | - | ------------ | - | - | ------ | - | - | ----- |  | - | ------ | -
|                                                                                               |  |              |           | Additional Paid-in Capital |   | Retained Earnings |  | Treasury Stock |        | Accumulated Other Comprehensive Income (loss) |   | Total Equity |  
|                                                                                               |  | Common Stock |           |                            |   |                   |  |               
|                                                                                               |  |              |           |                            |   |                   |  |               
|                                                                                               |  | Shares       |           | Amount                     |   |                   |  |                |        |                                              
|                                                                                               |  |              |           |                            |   |                   |  |                |        |                                               |   |              |   |   |       
|                                                                                              
|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 | )
|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 |  
|                                                                                               |  |              |           |                            |   |                   |  |                |        |                                               |   |              |   |   |        |   |   |       |  |   |        |  

See accompanying notes to the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2007, 2006, and 2005 
(Dollar amounts in thousands)

|                                                                                   |  |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | 2007 |         | 2006 |   | 2005    |  
|                                                                                   |  |      |         |      |   |         |  
|Cash flows from operating activities:                                              |  |      |         |      |   |         |   |   |         |  
|Reconciliation
 of net income to net cash provided by operating activities:        |  |      |         |      |   |         |   |   |         |  
|Net income                                                                         |  | $    | 166     |      | $ | 7,376   |   | $ | 8,903   |  
|Adjustments to reconcile net income to net
 cash provided to operating activities: |  |      |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                      |  |      | 1,534   |      |   | 1,609   |   |   | 1,585   |  
|Amortization of debt issuance costs                                                |  |      |        |      |   | 475     |   |   | 429     |  
|Amortization of core deposit intangible                                            |  |      | 52      |      |   | 52      |   |   | 52      |  
|Provision for losses on loans                                                      |  |      | 9,761   |      |   | 903     |   |   | 3,217   |  
|Provision for impairment of letter of
 credit                                      |  |      |        |      |   | 27      |   |   | 2,191   |  
|Net amortization of securities                                                     |  |      | 112     |      |   | 125     |   |   | 578     |  
|Increase in cash surrender value of life
 insurance                                |  |      | (863    | )    |   | (922    | ) |   | (784    | )
|Federal Home Loan Bank stock dividend                                              |  |      |        |      |   |        |   |   | (384    | )
|Net realized gain on sale of securities                                            |  |      | (352    | )    |   |        |   |   | (52     | )
|Net gain on sale of loans                                                          |  |      | (630    | )    |   | (825    | ) |   | (1,013  | )
|Proceeds from sale of loans held for sale                                          |  |      | 42,976  |      |   | 41,483  |   |   | 50,333  |  
|Origination of loans held for sale                                                 |  |      | (42,198 | )    |   | (41,175 | ) |   | (48,345 | )
|Net change in valuation of mortgage
 servicing rights                              |  |      | 595     |      |   |        |   |   |        |  
|Provision for valuation allowance on other
 real estate owned                      |  |      | 133     |      |   | 90      |   |   | 186     |  
|Net gain (loss) from sale and disposal of
 premises and equipment                  |  |      | 7       |      |   | (287    | ) |   | (2,383  | )
|Net (gain) loss from disposal of other real
 estate owned                          |  |      | 232     |      |   | (76     | ) |   | 25      |  
|Provision for (benefit from) deferred tax
 expense                                 |  |      | (2,205  | )    |   | (840    | ) |   | 910     |  
|Stock option compensation expense
 recognized                                      |  |      | 21      |      |   | 48      |   |   |        |  
|Tax benefit from exercise of stock options                                         |  |      | (94     | )    |   | (272    | ) |   |        |  
|Changes in assets and liabilities:                                                 |  |      |         |      |   |         |   |   |         |  
|Accrued interest receivable and other
 assets                                      |  |      | (1,010  | )    |   | (562    | ) |   | (892    | )
|Accrued expenses and other liabilities                                             |  |      | (1,049  | )    |   | 3,258   |   |   | 1,021   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net cash provided by operating activities                                          |  |      | 7,188   |      |   | 10,487  |   |   | 15,577  |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                              |  |      |         |      |   |         |   |   |         |  
|Proceeds
 from sale of securities available-for-sale                               |  |      | 34,479  |      |   |        |   |   | 36,516  |  
|Principal
 payments on securities available-for-sale                               |  |      | 26,454  |      |   | 20,029  |   |   | 20,228  |  
|Purchase of
 securities available-for-sale                                         |  |      | (92,816 | )    |   | (35,959 | ) |   | (36,101 | )
|Proceeds
 from sale of other real estate owned                                     |  |      | 6,160   |      |   | 3,958   |   |   | 1,280   |  
|Proceeds
 from sale of premises and equipment                                      |  |      |        |      |   | 690     |   |   | 5,428   |  
|Loan
 originations and payments, net                                               |  |      | 47,447  |      |   | (16,067 | ) |   | (63,232 | )
|Proceeds from
 redemption of FHLB Stock                                            |  |      |        |      |   | 1,289   |   |   |        |  
|Additions to
 premises and equipment                                               |  |      | (406    | )    |   | (5,041  | ) |   | (5,723  | )
|Proceeds
 from life insurance death benefit                                        |  |      | 2,431   |      |   |        |   |   |        |  
|Investment
 in bank-owned life insurance                                           |  |      | (732    | )    |   | (503    | ) |   | (469    | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing
 activities                               |  |      | 23,017  |      |   | (31,604 | ) |   | (42,073 | )

See accompanying notes to the consolidated financial statements.

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BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2007, 2006, and 2005(Dollar amounts in thousands)

|                                                                 |  |      |         |      |   |          |   |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------- | - | - | ------- | -
|                                                                 |  | 2007 |         | 2006 |   | 2005     |  
|                                                                 |  |      |         |      |   |          |  
|Cash flows from financing activities:                            |  |      |         |      |   |          |   |   |         |  
|Net change
 in deposits                                          |  | $    | 5,274   |      | $ | 22,200   |   | $ | 12,170  |  
|Net change
 in federal funds purchased and repurchase agreements |  |      | 22,694  |      |   | 3,165    |   |   | 31      |  
|Proceeds
 from Federal Home Loan Bank advances                   |  |      | 50,000  |      |   | 100,000  |   |   | 100,000 |  
|Repayments
 on Federal Home Loan Bank advances                   |  |      | (80,007 | )    |   | (110,006 | ) |   | (75,007 | )
|Redemption
 of subordinated debt                                 |  |      |        |      |   | (16,100  | ) |   |        |  
|Proceeds
 from issuance of subordinated debt                     |  |      |        |      |   | 16,100   |   |   |        |  
|Proceeds
 from exercise of stock options                         |  |      | 1,185   |      |   | 932      |   |   | 812     |  
|Tax benefit
 from exercise of options                            |  |      | 94      |      |   | 272      |   |   |        |  
|Treasury
 stock repurchases                                      |  |      | (1,823  | )    |   | (1,101   | ) |   |        |  
|Dividend
 reinvestment plan                                      |  |      | 1,096   |      |   | 268      |   |   |        |  
|Cash dividends
 paid                                             |  |      | (5,022  | )    |   | (4,982   | ) |   | (4,628  | )
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Net cash provided by (used in) financing
 activities             |  |      | (6,509  | )    |   | 10,748   |   |   | 33,378  |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Net change
 in cash and cash equivalents                         |  |      | 23,696  |      |   | (10,369  | ) |   | 6,882   |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Beginning
 cash and cash equivalents                             |  |      | 22,685  |      |   | 33,054   |   |   | 26,172  |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Ending cash and cash equivalents                                 |  | $    | 46,381  |      | $ | 22,685   |   | $ | 33,054  |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Supplemental
 cash flow information:                             |  |      |         |      |   |          |   |   |         |  
|Interest paid                                                    |  | $    | 38,511  |      | $ | 35,926   |   | $ | 25,186  |  
|Income taxes paid                                                |  |      | 1,589   |      |   | 2,345    |   |   | 3,257   |  
|                                                                 |  |      |         |      |   |          |   |   |         |  
|Supplemental
 noncash disclosures:                               |  |      |         |      |   |          |   |   |         |  
|Transfers from loans to other real estate
 owned                 |  | $    | 5,932   |      | $ | 6,399    |   | $ | 2,252   |  

See accompanying notes to the consolidated financial statements.

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

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. All significant intercompany items and transactions have been
eliminated.

The Bank owns a 49.8% interest 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 $7,189 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 balance sheet. Income recognized by the Company was $554, $512, and $392 for 2007, 2006, and 2005,
respectively, and is included in other income on the consolidated statements of income. Amounts paid to UFS for data processing
services by Baylake Bank were $1,208, $1,157, and $1,043 in 2007, 2006, and 2005, 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 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 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, income tax expense, and fair values
of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial
institutions, and federal funds sold. 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.

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

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

Interest income includes amortization of purchase premium or 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.

Declines in the fair value of securities below their cost that are other than temporary are
reflected as realized losses. 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 cost allocated to the servicing right. 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, 2007, 2006 and 2005 
(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 incurred 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 or loans otherwise classified as
substandard or doubtful. The general component covers non-classified 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 portion of the allowance is allocated 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 in net change in valuation of servicing rights. 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 included with gains from sales of
loans on the income statement. 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, 2007, 2006 and 2005 
(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 income statement 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 $665, $736 and $759 for
the years ended December 31, 2007, 2006 and 2005. 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 $1,366 and $1,655 on
loans serviced for others totaling $115,698 and $133,820 in 2007 and 2006,
respectively. Servicing rights capitalized totaled $116, $180, and $281, during
2007, 2006, and 2005, respectively. Amortization of servicing rights, which is
included in other expense, totaled $357 and $257 during 2006, and 2005,
respectively. The decrease in fair value of servicing rights recognized in
income in 2007 was $595.

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.

Company
Owned Life Insurance:
The Company has purchased life insurance policies on certain executives and directors.
Upon adoption of EITF 06-5, which is discussed further below, Company 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, 2007, 2006 and 2005 
(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).This
Issue 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,
the Issue 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 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:
Consists 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
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for 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 $150 and $202 at December 31, 2007 and 2006, respectively.
Scheduled amortization expense related to the core deposit intangible is $52
for each of the next two years and $46 in the third year.

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|                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------
|BAYLAKE CORP. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2007, 2006 and 2005
 (Dollar amounts in thousands)

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

Long-Term Assets: Premises and equipment, 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.

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, 2007, 2006, and 2005 were $291, $273, and $351,
respectively.

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

Prior to
January 1, 2006 employee compensation expense under stock options was reported
using the intrinsic value method; therefore, no stock-based compensation cost
is reflected in net income for the year ended December 31, 2005, as all options
granted had an exercise price equal to or greater than the market price of the
underlying common stock at date of grant.

The following
table illustrates the effect on net income and earnings per share if expense
was measured using the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation,for
the years ending December 31.

57

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Table of Contents

BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

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

|                                                                                   |  |      |       | 
|---------------------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                                   |  | 2005 |      
|                                                                                   |  |      |      
|                                                                                   |  |      |       | 
|Net income as reported                                                             |  | $    | 8,903 | 
|Deduct: Stock-based compensation expense
 determined under fair value based method |  |      | 57    | 
|                                                                                   |  |      |      
|Pro forma net income                                                               |  |      | 8,846 | 
|                                                                                   |  |      |      
|Basic earnings per common share as reported                                        |  | $    | 1.15  | 
|Pro forma basic earnings per share                                                 |  |      | 1.14  | 
|                                                                                   |  |      |       | 
|Diluted earnings per share as reported                                             |  | $    | 1.14  | 
|Pro forma diluted earnings per share                                               |  |      | 1.13  | 

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.

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 (COLI). 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 position
is as follows:

|                                                      |  |   |       |  
|----------------------------------------------------- |  | - | ----- | -
|Gross tax
 liability, beginning of year               |  | $ | 1,552 |  
|Reduction in
 tax liability due to adoption of FIN 48 |  |   | (980  | )
|                                                      |  |   |       |  
|Adjusted tax
 liability, beginning of year            |  |   | 572   |  
|Current
 period change in tax benefits                |  |   | 67    |  
|Gross tax
 liability, end of year                     |  | $ | 639   |  

58

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Table of Contents

BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

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

The gross tax liability, at December 31, 2007, is related to income earned by our subsidiary
located in the state of Nevada. Due to the State of Wisconsin Department of Revenues (DOR) 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 $639 and $572 at year end 2007 and 2006 respectively.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. They are no longer subject to examination by U.S. Federal taxing authorities for years before 2004
and for Wisconsin state income taxes through 2000. 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 $639 referred to above, is $166 of interest and penalties, net of federal tax benefit.

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

Comprehensive Income: Comprehensive income consists of net income 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.

Effect of Newly Issued But Not Yet Effective Accounting Standards: 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.

59

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Table of Contents

BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

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

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities.The standard 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 standard was effective for the Company on
January 1, 2008. The Company has not yet assessed the impact of this adoption.

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 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after
December 15, 2007. The Company does not expect the impact of this standard to be 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 financial statements was not material.

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 $7,362 and $6,916 was required to meet
regulatory reserve and clearing requirements at year-end 2007 and 2006. These
balances do not earn 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 a separate note. 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.

60

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Table of Contents

BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

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

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 Baylake common stock.
Shares issued in 2007 and 2006 were 74,814 and 17,024 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 financial statements were reclassified to
conform to the current presentation.

NOTE 2  SECURITIES

The fair value of securities available for sale and the related unrealized gains and losses as of
December 31, 2007 and 2006 are as follows:

|                                                  |  |              |         |                            |   |                             |  |   |        |  
|------------------------------------------------- |  | ------------ | ------- | -------------------------- | - | --------------------------- |  | - | ------ | -
|                                                  |  | 2007         |        
|                                                  |  |              |        
|                                                  |  | Fair 
 Value |         | Gross 
 Unrealized 
 Gains |   | Gross 
 Unrealized 
 Losses | 
|                                                  |  |              |         |                            |   |                             | 
|U.S.
 Treasury and other U.S. government agencies |  | $            | 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 | )
|                                                  |  |              |         |                            |   |                             |  |   |        |  

61

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

NOTE 2  SECURITIES (Continued)

|                                                  |  |              |         |                            |   |                             |  |   |        |  
|------------------------------------------------- |  | ------------ | ------- | -------------------------- | - | --------------------------- |  | - | ------ | -
|                                                  |  | 2006         |        
|                                                  |  |              |        
|                                                  |  | Fair 
 Value |         | Gross 
 Unrealized 
 Gains |   | Gross 
 Unrealized 
 Losses | 
|                                                  |  |              |         |                            |   |                             | 
|U.S. Treasury and other U.S. government
 agencies |  | $            | 57,528  |                            | $ | 69                          |  | $ | (953   | )
|Obligations of states and political
 subdivisions |  |              | 50,059  |                            |   | 512                         |  |   | (148   | )
|Mortgage-backed securities                        |  |              | 78,226  |                            |   | 154                         |  |   | (1,583 | )
|Private placements and corporate bonds            |  |              | 1,015   |                            |   | 16                          |  |   |       |  
|Other securities                                  |  |              | 1,487   |                            |   |                            |  |   |       |  
|                                                  |  |              |         |                            |   |                             |  |   |        |  
|                                                 
|                                                  |  | $            | 188,315 |                            | $ | 751                         |  | $ | (2,684 | )
|                                                  |  |              |         |                            |   |                             |  |   |        |  

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:

|                       |  |      |        |      |   |      |  |   |        | 
|---------------------- |  | ---- | ------ | ---- | - | ---- |  | - | ------ | 
|                       |  | 2007 |        | 2006 |   | 2005 | 
|                       |  |      |        |      |   |      | 
|                      
|Proceeds               |  | $    | 34,479 |      | $ |     |  | $ | 36,516 | 
|Gross
 realized gains  |  |      | 353    |      |   |     |  |   | 465    | 
|Gross
 realized losses |  |      | 1      |      |   |     |  |   | 413    | 

The estimated
market value of investments at December 31, 2007, 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                |  | $                      | 6,887   | 
|Due after
 one year through five years  |  |                        | 23,009  | 
|Due after
 five years through ten years |  |                        | 20,362  | 
|Due after
 ten years                    |  |                        | 50,102  | 
|                                        |  |                        |         | 
|                                        |  |                        | 100,360 | 
|Other equity
 securities                |  |                        | 3,419   | 
|Mortgage-backed
 securities             |  |                        | 118,696 | 
|                                        |  |                        |         | 
|                                        |  |                        |         | 
|                                        |  | $                      | 222,475 | 
|                                        |  |                        |         | 

62

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 2  SECURITIES (Continued)

Securities pledged to secure public deposits and borrowed funds had a carrying value of $123,602 and
$124,469 at December 31, 2007 and 2006, respectively.

Securities with unrealized losses at year-end 2007 and 2006, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position, are as follows:

|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|-------------------------- |  | ----------------------- | ------- | ----------------- | - | ------------ | - | ----------------- | ------- | ------------ | - | ----------------- | - | - | ------- |  | - | ------ | -
|                           |  | As of December 31, 2007
|                           |  | Less than 12 Months     |         | 12 Months or More |   | Total        |  
|                           |  |                         |         |                   |   |             
|Description of Securities  |  | Fair
  Value            |         | Unrealized
  Loss |   | Fair
  Value |   | Unrealized
  Loss |         | Fair
  Value |   | Unrealized
  Loss |  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|U.S. Treasury and other    |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|U.S. government agencies   |  | $                       | 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          |  |                         | 2,811   |                   |   | (277         | ) |                   |        |              |   |                  |   |   | 2,811   |  |   | (277   | )
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|Total temporarily impaired |  | $                       | 108,193 |                   | $ | (1,151       | ) | $                 |        |              | $ |                  |   | $ | 108,193 |  | $ | (1,151 | )
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|                           |  | As of December 31, 2006
|                           |  | Less than 12 Months     |         | 12 Months or More |   | Total        |  
|                           |  |                         |         |                   |   |             
|Description of Securities  |  | Fair
  Value            |         | Unrealized
  Loss |   | Fair
  Value |   | Unrealized
  Loss |         | Fair
  Value |   | Unrealized
  Loss |  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|U.S. Treasury and other    |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|U.S. government agencies   |  | $                       | 6,011   |                   | $ | (19          | ) | $                 | 44,721  |              | $ | (934              | ) | $ | 50,732  |  | $ | (953   | )
|Mortgage-backed securities |  |                         | 25      |                   |   |             |   |                   | 67,857  |              |   | (1,583            | ) |   | 67,882  |  |   | (1,583 | )
|Obligations states and     |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|Political Subdivisions     |  |                         | 5,188   |                   |   | (59          | ) |                   | 9,388   |              |   | (89               | ) |   | 14,576  |  |   | (148   | )
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  
|Total temporarily impaired |  | $                       | 11,224  |                   | $ | (78          | ) | $                 | 121,966 |              | $ | (2,606            | ) | $ | 133,190 |  | $ | (2,684 | )
|                           |  |                         |         |                   |   |              |   |                   |         |              |   |                   |   |   |         |  |   |        |  

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. At December 31, 2007 and 2006, securities with unrealized
losses had depreciated in value by approximately 1% and 2%, 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, management has the intent and
ability to hold these securities until recovery or maturity, and the decline in
fair value is largely due to an increase in interest rates since the time the
securities were purchased. The losses on these securities are expected to
dissipate as they approach their maturity dates and/or if interest rates
decline.

At year end
2007 and 2006, 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
shareholders equity.

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Table of Contents

BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 3  LOANS

Major classifications of loans as of December 31, 2007 and 2006 are as
follows:

|                                               |  |      |         |      |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                               |  | 2007 |         | 2006 |  
|                                               |  |      |         |      |  
|                                               |  |      |         |      |   |         | 
|Commercial                                     |  | $    | 127,549 |      | $ | 82,619  | 
|Real estate                                    |  |      |         |      |   |         | 
|Residential                                    |  |      | 119,932 |      |   | 143,873 | 
|Commercial                                     |  |      | 386,981 |      |   | 464,843 | 
|Construction                                   |  |      | 93,047  |      |   | 94,082  | 
|Consumer                                       |  |      | 14,388  |      |   | 14,893  | 
|Tax exempt
  loans                             |  |      | 18,663  |      |   | 19,633  | 
|                                               |  |      |         |      |   |         | 
|                                               |  |      | 760,560 |      |   | 819,943 | 
|Less:                                          |  |      |         |      |   |         | 
|Deferred loan origination fees, net of
  costs |  |      | 350     |      |   | 375     | 
|Allowance for loan losses                      |  |      | 11,840  |      |   | 8,058   | 
|                                               |  |      |         |      |   |         | 
|                                               |  |      |         |      |   |         | 
|Net loans                                      |  | $    | 748,370 |      | $ | 811,510 | 
|                                               |  |      |         |      |   |         | 

Loans having a
carrying value of $27,407 and $32,556 are pledged as collateral for borrowings
from the Federal Home Loan Bank at December 31, 2007 and 2006, 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 2007 and 2006.

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

|                                                                      |  |      |        |  
|--------------------------------------------------------------------- |  | ---- | ------ | -
|                                                                      |  | 2007 |       
|                                                                      |  |      |       
|                                                                      |  |      |        |  
|Balance at
  beginning of year                                        |  | $    | 5,932  |  
|New loans
  made                                                      |  |      | 3,938  |  
|Repayments
  received                                                 |  |      | (3,898 | )
|Reclassification
  for loans related to former officers and directors |  |      | (1,428 | )
|                                                                      |  |      |        |  
|                                                                      |  |      |        |  
|Balance at
  end of year                                              |  | $    | 4,544  |  
|                                                                      |  |      |        |  

64

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Table of Contents

BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 3  LOANS (Continued)

Changes in the allowance for loan losses were as follows:

|                                  |  |      |        |      |   |        |   |   |        |  
|--------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                  |  | 2007 |        | 2006 |   | 2005   |  
|                                  |  |      |        |      |   |        |  
|                                  |  |      |        |      |   |        |   |   |        |  
|Balance at
  beginning of year    |  | $    | 8,058  |      | $ | 9,551  |   | $ | 10,445 |  
|Provision
  charged to operations |  |      | 9,761  |      |   | 903    |   |   | 3,217  |  
|Recoveries                        |  |      | 479    |      |   | 1,021  |   |   | 760    |  
|Loans
  charged off               |  |      | (6,458 | )    |   | (3,417 | ) |   | (4,871 | )
|                                  |  |      |        |      |   |        |   |   |        |  
|Balance at
  end of year          |  | $    | 11,840 |      | $ | 8,058  |   | $ | 9,551  |  
|                                  |  |      |        |      |   |        |   |   |        |  

Information regarding impaired loans is as follows:

|                                                         |  |  |  |      |   |        |  |   |        | 
|-------------------------------------------------------- |  |  |  | ---- | - | ------ |  | - | ------ | 
|                                                         |  |  |  | 2007 |   | 2006   | 
|                                                         |  |  |  |      |   |        | 
|Impaired loans with no allocated allowance for loan loss |  |  |  |      | $ | 4,805  |  | $ | 12,118 | 
|Impaired
  loans with allocated allowance for loan loss  |  |  |  |      |   | 32,754 |  |   | 15,614 | 
|Allowance
  allocated to impaired loans                  |  |  |  |      |   | 6,051  |  |   | 2,176  | 

Currently, there is a significant loan outstanding for which the carrying value of $9.4 million at December 31,
2007 is included in the Impaired loans with allocated allowance for loan loss data above. Future events may result in
either an increase or decrease in the loss allocation relating to this loan.

|                                               |  |      |        |      |   |        |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                               |  | 2007 |        | 2006 |   | 2005   | 
|                                               |  |      |        |      |   |        | 
|                                               |  |      |        |      |   |        |  |   |        | 
|Average
  impaired loans during the period     |  | $    | 34,231 |      | $ | 23,952 |  | $ | 18,973 | 
|Interest
  income recognized during impairment |  |      | 565    |      |   | 364    |  |   | 979    | 
|Cash-basis
  interest income recognized        |  |      | 505    |      |   | 339    |  |   | 928    | 

Nonperforming loans were as
follows:

|                                                      |  |  |  |      |   |        |  |   |        | 
|----------------------------------------------------- |  |  |  | ---- | - | ------ |  | - | ------ | 
|                                                      |  |  |  | 2007 |   | 2006   | 
|                                                      |  |  |  |      |   |        | 
|Loans past
  due over 90 days still on accrual        |  |  |  |      | $ |       |  | $ |       | 
|Loans
  restructured in a troubled debt restructuring |  |  |  |      |   |       |  |   | 496    | 
|Non-accrual
  loans                                   |  |  |  |      |   | 37,555 |  |   | 27,352 | 
|                                                      |  |  |  |      |   |        |  |   |        | 
|Total nonperforming loans                             |  |  |  |      | $ | 37,555 |  | $ | 27,848 | 
|                                                      |  |  |  |      |   |        |  |   |        | 

If these loans
had been current throughout their terms, interest income for the non-accrual period
would have approximated $3,971, $2,555 and $605 for 2007, 2006 and 2005,
respectively.

65

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 4 -
PREMISES AND EQUIPMENT

|                                |  |      |        |      |   |        | 
|------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                |  | 2007 |        | 2006 |  
|                                |  |      |        |      |  
|                                |  |      |        |      |   |        | 
|Land                            |  | $    | 6,715  |      | $ | 6,715  | 
|Buildings
  and improvements    |  |      | 24,704 |      |   | 24,632 | 
|Equipment                       |  |      | 12,253 |      |   | 12,041 | 
|                                |  |      |        |      |   |        | 
|                                |  |      | 43,672 |      |   | 43,388 | 
|Less
  accumulated depreciation |  |      | 17,075 |      |   | 15,656 | 
|                                |  |      |        |      |   |        | 
|                                |  |      |        |      |   |        | 
|Premises and equipment          |  | $    | 26,597 |      | $ | 27,732 | 
|                                |  |      |        |      |   |        | 

Depreciation
expense was $1,534, $1,609, and $1,585 for 2007, 2006, and 2005, respectively.

The Company
had a ten-year lease on office space that had been formerly used as a branch
and was vacated in the middle of 2005. The lease was to expire on November 30,
2009. This lease was terminated in December 2005 at which time the Company
negotiated with the lessor to buyout the remainder of the lease at a cost of
$265. These costs are reflected in the 2005 Consolidated Statements of Income
under Occupancy Expense. There are no further costs on this obligation. In
addition to these lease costs, leasehold improvements with a book basis of $193
were written off in 2005 on this property. 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 2007, 2006,
and 2005 was $37, $39, and $120, respectively. Future minimum lease payments
under the remaining lease agreement that expires in 2010 is $96.

During 2006
and 2005, vacant property owned by the Company was sold with realized gains
totaling $190 and $2,200 respectively. At December 31, 2007, approximately 12
acres of land were held for sale with a cost basis of $208.

During 2006
and 2005, gains of $103 and $411 were realized on the sale of office space
under a condominium development arrangement. At year-end 2007, there is still
one unit held for sale with a cost basis of $465.

NOTE 5  FORECLOSED ASSETS, NET

Other real estate is summarized
as follows:

|                                                        |  |      |        |      |   |        |   |   |        |  
|------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                        |  | 2007 |        | 2006 |   | 2005   |  
|                                                        |  |      |        |      |   |        |  
|Beginning
  balance                                     |  | $    | 5,760  |      | $ | 3,333  |   | $ | 2,572  |  
|Transfer of
  net realizable value to other real estate |  |      | 5,932  |      |   | 6,399  |   |   | 2,252  |  
|Sale
  proceeds, net                                    |  |      | (6,160 | )    |   | (3,958 | ) |   | (1,280 | )
|Net gain
  (loss) from sale of other real estate        |  |      | (232   | )    |   | 76     |   |   | (25    | )
|Provision
  for other real estate                       |  |      | (133   | )    |   | (90    | ) |   | (186   | )
|                                                        |  |      |        |      |   |        |   |   |        |  
|Total Other
  Real Estate                               |  | $    | 5,167  |      | $ | 5,760  |   | $ | 3,333  |  
|                                                        |  |      |        |      |   |        |   |   |        |  

66

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 5  FORECLOSED ASSETS, NET(Continued)

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

|                                         |  |      |     |      |   |      |   |   |      |  
|---------------------------------------- |  | ---- | --- | ---- | - | ---- | - | - | ---- | -
|                                         |  | 2007 |     | 2006 |   | 2005 |  
|                                         |  |      |     |      |   |      |   |   |      |  
|Beginning
  balance                      |  | $    | 108 |      | $ | 267  |   | $ | 216  |  
|Provision
  charged to operations        |  |      | 133 |      |   | 90   |   |   | 186  |  
|Amounts
  related to properties disposed |  |      | (34 | )    |   | (249 | ) |   | (135 | )
|                                         |  |      |     |      |   |      |   |   |      |  
|                                         |  |      |     |      |   |      |   |   |      |  
|Balance at
  end of year                 |  | $    | 207 |      | $ | 108  |   | $ | 267  |  
|                                         |  |      |     |      |   |      |   |   |      |  

NOTE 6  GOODWILL

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

|                              |  |      |       |      |   |       | 
|----------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                              |  | 2007 |       | 2006 |  
|                              |  |      |       |      |   |       | 
|                             
|Beginning of
  year           |  | $    | 5,723 |      | $ | 5,723 | 
|UFS stock options
  exercised |  |      | 385   |      |   |      | 
|Impairment                    |  |      |      |      |   |      | 
|                              |  |      |       |      |   |       | 
|                              |  |      |       |      |   |       | 
|End of year                   |  | $    | 6,108 |      | $ | 5,723 | 
|                              |  |      |       |      |   |       | 

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 on page 51.

NOTE 7  DEPOSITS

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

|                                                   |  |      |         |      |   |         | 
|-------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                                   |  | 2007 |         | 2006 |  
|                                                   |  |      |         |      |   |         | 
|                                                  
|Non-interest-bearing
  demand deposits             |  | $    | 94,120  |      | $ | 96,895  | 
|Interest-bearing
  demand deposits                 |  |      | 118,122 |      |   | 113,763 | 
|Savings
  deposits                                 |  |      | 28,250  |      |   | 29,235  | 
|Money market
  deposits                            |  |      | 208,027 |      |   | 255,448 | 
|Time
  deposits $100,000 and greater               |  |      | 226,088 |      |   | 194,664 | 
|Other time
  deposits                              |  |      | 209,578 |      |   | 188,906 | 
|                                                   |  |      |         |      |   |         | 
|Total deposits                                     |  | $    | 884,185 |      | $ | 878,911 | 
|                                                   |  |      |         |      |   |         | 
|                                                   |  |      |         |      |   |         | 
|Brokered
  certificates of deposit included above: |  | $    | 130,856 |      | $ | 120,171 | 
|                                                   |  |      |         |      |   |         | 

67

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

NOTE 7  DEPOSITS(Continued)

At December
31, 2007, the scheduled maturities of time deposits were as follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2008 |  | $ | 354,083 | 
|2009 |  |   | 63,122  | 
|2010 |  |   | 14,640  | 
|2011 |  |   | 3,739   | 
|2012 |  |   | 82      | 
|     |  |   |         | 
|     |  |   |         | 
|     |  | $ | 435,666 | 
|     |  |   |         | 

Deposits from
the Companys directors and officers held by the Bank at December 31, 2007 and
2006, amounted to $4,688 and $4,847, respectively.

NOTE 8  FEDERAL FUNDS PURCHASED AND
REPURCHASE AGREEMENTS

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

|                                                               |  |      |        |      |   |        |  
|-------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                               |  | 2007 |        | 2006 |  
|                                                               |  |      |        |      |  
|                                                               |  |      |        |      |  
|Federal
  funds purchased                                      |  | $    | 16,141 |      | $ | 3,383  |  
|Securities
  sold under agreements to repurchase               |  |      | 11,033 |      |   | 1,097  |  
|                                                               |  |      |        |      |   |        |  
|                                                               |  | $    | 27,174 |      | $ | 4,480  |  
|                                                               |  |      |        |      |   |        |  
|                                                               |  |      |        |      |   |        |  
|Average
  amounts outstanding during year                      |  | $    | 17,048 |      | $ | 8,703  |  
|Maximum
  month-end amounts outstanding                        |  |      | 41,107 |      |   | 29,778 |  
|Average
  interest rates on amounts outstanding at end of year |  |      | 4.73   | %    |   | 5.28   | %
|Average
  interest rates on amounts outstanding during year    |  |      | 5.18   | %    |   | 5.08   | %

68

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BAYLAKE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 9  FEDERAL HOME LOAN BANK ADVANCES

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

|                                   |  |      |        |                       |  |      |   |                       |         |  |  |      |  
|---------------------------------- |  | ---- | ------ | --------------------- |  | ---- | - | --------------------- | ------- |  |  | ---- | -
|Year of  Maturity                  |  | 2007 |        | Weighted
Average
Rate |  | 2006 |   | Weighted Average Rate |        
|                                   |  |      |        |                       |  |      |   |                       |        
|2007                               |  | $    |       |                       |  |     |   |                       | 75,000  |  |  | 5.16 | %
|2008                               |  |      | 85,000 |                       |  | 4.40 | % |                       | 40,000  |  |  | 5.36 | %
|                                   |  |      |        |                       |  |      |   |                       |         |  |  |      |  
|Total fixed maturity               |  |      | 85,000 |                       |  | 4.40 | % |                       | 115,000 |  |  | 5.23 | %
|Advances with amortizing principal |  |      | 172    |                       |  | 3.78 | % |                       | 179     |  |  | 3.78 | %
|                                   |  |      |        |                       |  |      |   |                       |         |  |  |      |  
|                                   |  |      |        |                       |  |      |   |                       |         |  |  |      |  
|Total                              |  | $    | 85,172 |                       |  | 4.40 | % | $                     | 115,179 |  |  | 5.23 | %
|                                   |  |      |        |                       |  |      |   |                       |         |  |  |      |  

Maximum month-end amounts outstanding were $115,179 and $125,185 at December 31, 2007 and 2006,
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 $20,732 of real estate mortgages and $83,542 of mortgage-backed and U.S. agency
securities. Of the advances, none have call provisions at December 31, 2007. All advances in the table above are at fixed rates
with the exception of $50,000 due January 2008 priced at one month FHLB Fed Fund Rate plus 4 basis points and the interest rate is
reset daily.

NOTE 10  SUBORDINATED DEBENTURES

In 2001, Baylake Corp. 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 (the 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 $16.6 million which constitutes the $16.1 million stated principal values of those amounts
plus $415 in accrued interest.

The redemption of these securities were funded through the issuance of $16.1 million of trust
preferred securities and $498 of trust common securities issued under the names Baylake Capital Trust II (Trust II)
that will adjust quarterly at a rate equal to 1.35% over the three month LIBOR (6.58% at December 31, 2007). For banking
regulatory purposes, these securities are considered Tier 1 capital.

The trust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 constitute a full and unconditional 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 their
right to defer payment of interest on the Debentures or if certain related defaults occurred.

69

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BAYLAKE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007, 2006 and 2005
 (Dollar amounts in thousands)

NOTE 11  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 2007 and 2006, the most recent regulatory notifications categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or events since that notification that management
believes have changed the institution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 2007, $4.5 million in dividends were declared and $2.3 million was paid to the Company by its subsidiary,
which was in excess of the subsidiarys net income for the year. In order to pay dividends in 2008, the subsidiary will need
to seek prior approval from WDFI, as well as the Federal Reserve Board. The cash holdings at December 31, 2007 along with the
dividend receivable from the bank which was paid in January of 2008 are considered adequate to service the expected interest
expense of the subordinated debentures in 2008. Due to regulatory constraints, the Company filed Form 8-K on
February 28, 2008 indicating that the Company would not pay a dividend in the first quarter of 2008.

The Companys and Baylake Banks risk-based capital and leverage ratios are presented
below at year-end as follows:

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BAYLAKE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 11  CAPITAL MATTERS(Continued)

|                                                |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|----------------------------------------------- |  | ------ | ------- | ------------------------------- |  | ---------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                                |  | Actual |         | For Capital
  Adequacy Purposes |  | To Be Well
  Capitalized Under
  Prompt Corrective
  Action Provisions |  
|                                                |  |        |         |                                 |  |                                                                        |  
|                                                |  | Amount |         | Ratio                           |  | Amount                                                                 |   | Ratio |        | Amount |  | Ratio |  
|                                                |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |  
|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                                                                   | % |       | 35,739 |        |  | 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  | %
|                                                |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|2006                                            |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total Capital to
  risk-weighted assets         |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                    |  | $      | 101,489 |                                 |  | 10.87                                                                  | % | $     | 74,721 |        |  | 8.00  | % |   | N/A    |  |  | N/A   |  
|Bank                                            |  |        | 99,249  |                                 |  | 10.63                                                                  | % |       | 74,685 |        |  | 8.00  | % | $ | 93,356 |  |  | 10.00 | %
|Tier 1 (Core) Capital to
  risk-weighted assets |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                    |  |        | 93,430  |                                 |  | 10.00                                                                  | % |       | 37,360 |        |  | 4.00  | % |   | N/A    |  |  | N/A   |  
|Bank                                            |  |        | 91,191  |                                 |  | 9.77                                                                   | % |       | 37,342 |        |  | 4.00  | % |   | 56,014 |  |  | 6.00  | %
|Tier 1 (Core) Capital to
  average assets       |  |        |         |                                 |  |                                                                        |   |       |        |        |  |       |   |   |        |  |  |       |  
|Consolidated                                    |  |        | 93,430  |                                 |  | 8.53                                                                   | % |       | 43,826 |        |  | 4.00  | % |   | N/A    |  |  | N/A   |  
|Bank                                            |  |        | 91,191  |                                 |  | 8.33                                                                   | % |       | 43,789 |        |  | 4.00  | % |   | 54,736 |  |  | 5.00  | %

NOTE 12  OTHER COMPREHENSIVE INCOME (LOSS)

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

|                                                                                            |  |      |       |      |   |      |   |   |        |  
|------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | - | - | ------ | -
|                                                                                            |  | 2007 |       | 2006 |   | 2005 |  
|                                                                                            |  |      |       |      |   |      |  
|                                                                                            |  |      |       |      |   |      |   |   |        |  
|Unrealized
  holding gains/ (losses) on securities available for sale arising during period |  | $    | 2,389 |      | $ | 872  |   | $ | (4,636 | )
|Reclassification
  adjustment for net gains realized in income                              |  |      | 352   |      |   |     |   |   | 52     |  
|                                                                                            |  |      |       |      |   |      |   |   |        |  
|Net
  unrealized gains/ (losses)                                                            |  |      | 2,037 |      |   | 872  |   |   | (4,584 | )
|Tax effect                                                                                  |  |      | (723  | )    |   | (315 | ) |   | 1,629  |  
|                                                                                            |  |      |       |      |   |      |   |   |        |  
|                                                                                           
|Comprehensive
  income (loss)                                                               |  | $    | 1,314 |      | $ | 557  |   | $ | (2,955 | )
|                                                                                            |  |      |       |      |   |      |   |   |        |  

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BAYLAKE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 13  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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 Bank uses the same credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.

|                                                                      |  |                                |         |      |   |         | 
|--------------------------------------------------------------------- |  | ------------------------------ | ------- | ---- | - | ------- | 
|                                                                      |  | Contract or 
  Notional Amount |        
|                                                                      |  |                                |        
|                                                                      |  | 2007                           |         | 2006 |  
|                                                                      |  |                                |         |      |  
|Financial instruments whose contract
  amounts represent credit risk: |  |                                |         |      |   |         | 
|Commitments to extend credit                                          |  | $                              | 188,457 |      | $ | 227,872 | 
|Standby letters of credit                                             |  |                                | 19,386  |      |   | 21,327  | 

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 Bank evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank 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 $14,712 and $11,514 at
December 31, 2007 and 2006 respectively, with rates ranging from 3.0% to 12.0% in 2007 and 4.0% to 10.0% in 2006.

Standby letters of credit are conditional commitments issued by the Bank 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 Bank does not require collateral as support for the commitments. Collateral is secured
as commitments are funded.

In 2007, 2006 and 2005, impairment charges of $0, $27 and $2,191 were taken on a standby letter of
credit which was issued by the Company on behalf of a customer to accommodate their borrowings with a third party. The provision
for impairment charges relates to the establishment of a liability for the Companys exposure on that letter of credit. The
initial letter of credit to the third party was for $8.8 million but prior to year-end 2005, the Company distributed $1.8 million
to reduce the outstanding balance to $7.0 million. The Company continues to monitor the financial condition of the borrower on an
ongoing basis, and if it continues to deteriorate, may need to provide additional reserves with respect to the off-balance
commitment. The balance of the letter of credit totaled $7,029 at December 31, 2007 and 2006.

72

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BAYLAKE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 13  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)

FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, establishes guidance for guarantees and related
obligations. At December 31, 2007 and 2006, the carrying value recorded by the Company as a liability for those guarantees
was $419.

NOTE 14  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 $1,184 in 2007, $1,173 in 2006, and $1,066
in 2005.

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 $467 in 2007, $1,051 in 2006, and $767 in 2005. The aggregate amount of
deferred compensation included in other liabilities in the consolidated balance sheets is $3,845 and $3,494 in 2007 and 2006,
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 $246, $799, and $534 are included in the amounts
charged to expense for 2007, 2006, and 2005 respectively. The Company has ceased contributions to the Plan for the foreseeable
future.

NOTE 15  INCOME TAX EXPENSE

Income taxes consist of the following:

|                          |  |      |        |      |   |       |   |   |       | 
|------------------------- |  | ---- | ------ | ---- | - | ----- | - | - | ----- | 
|                          |  | 2007 |        | 2006 |   | 2005  |  
|                          |  |      |        |      |   |       |  
|Taxes
  currently payable |  |      |        |      |   |       |   |   |       | 
|Federal                   |  | $    | (215   | )    | $ | 3,013 |   | $ | 2,592 | 
|State                     |  |      | 4      |      |   | 592   |   |   | 335   | 
|                          |  |      |        |      |   |       |   |   |       | 
|                          |  |      | (211   | )    |   | 3,605 |   |   | 2,927 | 
|                          |  |      |        |      |   |       |   |   |       | 
|Deferred income taxes     |  |      |        |      |   |       |   |   |       | 
|Federal                   |  |      | (1,636 | )    |   | (688  | ) |   | 605   | 
|State                     |  |      | (569   | )    |   | (152  | ) |   | 304   | 
|                          |  |      |        |      |   |       |   |   |       | 
|                          |  |      | (2,205 | )    |   | (840  | ) |   | 909   | 
|                          |  |      |        |      |   |       |   |   |       | 
|                          |  |      |        |      |   |       |   |   |       | 
|Income tax expense        |  | $    | (2,416 | )    | $ | 2,765 |   | $ | 3,836 | 
|                          |  |      |        |      |   |       |   |   |       | 

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

NOTE 15  INCOME TAX EXPENSE(Continued)

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:

|                                               |  |      |        |      |   |       |   |   |       |  
|---------------------------------------------- |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                               |  | 2007 |        | 2006 |   | 2005  |  
|                                               |  |      |        |      |   |       |  
|                                               |  |      |        |      |   |       |   |   |       |  
|Income tax based on statutory rate             |  | $    | (712   | )    | $ | 3,448 |   | $ | 4,331 |  
|State income taxes net of federal tax
 benefit |  |      | (427   | )    |   | 253   |   |   | 341   |  
|                                               |  |      |        |      |   |       |   |   |       |  
|                                               |  |      | (1,139 | )    |   | 3,701 |   |   | 4,672 |  
|Effect of tax-exempt interest income           |  |      | (833   | )    |   | (691  | ) |   | (760  | )
|Life insurance death benefit and earnings      |  |      | (294   | )    |   | (304  | ) |   | (265  | )
|Equity in income of service center             |  |      | (189   | )    |   | (174  | ) |   | (133  | )
|Other                                          |  |      | 39     |      |   | 233   |   |   | 322   |  
|                                               |  |      |        |      |   |       |   |   |       |  
|                                               |  |      |        |      |   |       |   |   |       |  
|Provision based on effective tax rates         |  | $    | (2,416 | )    | $ | 2,765 |   | $ | 3,836 |  
|                                               |  |      |        |      |   |       |   |   |       |  

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, 2007 and 2006:

|                                                      |  |      |       |      |   |       | 
|----------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                                      |  | 2007 |       | 2006 |  
|                                                      |  |      |       |      |  
|                                                      |  |      |       |      |   |       | 
|Deferred tax assets                                   |  |      |       |      |   |       | 
|Allowance for loan losses                             |  | $    | 4,643 |      | $ | 3,158 | 
|Off-balance sheet credit losses                       |  |      | 164   |      |   | 164   | 
|Deferred loan fees                                    |  |      | 137   |      |   | 147   | 
|Deferred compensation                                 |  |      | 1,927 |      |   | 1,746 | 
|Non accrual loans                                     |  |      | 1,919 |      |   | 981   | 
|Accrued vacation pay                                  |  |      | 344   |      |   | 374   | 
|OREO property valuation                               |  |      | 81    |      |   | 43    | 
|Net unrealized loss on securities available
 for sale |  |      |      |      |   | 704   | 
|Donations                                             |  |      | 90    |      |   | 138   | 
|Other                                                 |  |      | 95    |      |   | 380   | 
|                                                      |  |      |       |      |   |       | 
|Gross deferred tax assets                             |  |      | 9,400 |      |   | 7,835 | 
|                                                      |  |      |       |      |   |       | 
|Deferred tax liabilities                              |  |      |       |      |   |       | 
|Depreciation                                          |  |      | 1,976 |      |   | 1,930 | 
|FHLB stock dividends                                  |  |      | 791   |      |   | 791   | 
|Mortgage loan servicing                               |  |      | 177   |      |   | 157   | 
|Net unrealized gain on securities available
 for sale |  |      | 19    |      |   |      | 
|Prepaid
 expenditures                                 |  |      | 109   |      |   | 97    | 
|Other                                                 |  |      | 90    |      |   | 103   | 
|                                                      |  |      |       |      |   |       | 
|Gross deferred tax liabilities                        |  |      | 3,162 |      |   | 3,078 | 
|                                                      |  |      |       |      |   |       | 
|                                                      |  |      |       |      |   |       | 
|Net deferred tax asset                                |  | $    | 6,238 |      | $ | 4,757 | 
|                                                      |  |      |       |      |   |       | 

74

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

NOTE 15  INCOME TAX EXPENSE(Continued)

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.

NOTE 16  EARNINGS PER SHARE

Earnings per share are 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:

|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|--------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                                                                    |  | 2007 |           | 2006 |   | 2005      | 
|                                                                                                    |  |      |           |      |   |           | 
|Basic                                                                                               |  |      |           |      |   |           |  |   |           | 
|Net income                                                                                          |  | $    | 166       |      | $ | 7,376     |  | $ | 8,903     | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Weighted average common shares outstanding                                                          |  |      | 7,851,508 |      |   | 7,802,208 |  |   | 7,727,636 | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Basic earnings per common share                                                                     |  | $    | 0.02      |      | $ | 0.95      |  | $ | 1.15      | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Diluted                                                                                             |  |      |           |      |   |           |  |   |           | 
|Net income                                                                                          |  | $    | 166       |      | $ | 7,376     |  | $ | 8,903     | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Weighted average common shares outstanding
 for basic earnings per share                            |  |      | 7,851,508 |      |   | 7,802,208 |  |   | 7,727,636 | 
|Add: Dilutive effects of assumed exercises
 of stock options                                        |  |      | 1,271     |      |   | 33,315    |  |   | 74,713    | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Average shares and dilutive potential
 common shares                                                |  |      | 7,852,779 |      |   | 7,835,523 |  |   | 7,802,349 | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per common share                                                                   |  | $    | 0.02      |      | $ | 0.94      |  | $ | 1.14      | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 
|Additional common stock option shares that
 have not been included due to their antidilutive effect |  |      | 166,700   |      |   | 60,000    |  |   | 60,000    | 
|                                                                                                    |  |      |           |      |   |           |  |   |           | 

75

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands, except per share data)

NOTE 17  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, net of income
tax, that has been charged against income for the plan was $21, $48, and $0 for
2007, 2006, and 2005, respectively. The total income tax benefit was $8, $19,
and $0.

There were no
stock options granted in 2007, 2006 or 2005.

Activity in
the stock option plan for 2007 follows:

|                                  |  |        |          |                                    |   |                                                 |  |                             |      |  |   |   | 
|--------------------------------- |  | ------ | -------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | ---- |  | - | - | 
|                                  |  | Shares |          | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 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 |  | $ |  | 
|                                  |  |        |          |                                    |   |                                                 |  |                             |      |  |   |   | 

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

|                                           |  |      |       |      |   |      |  |   |     | 
|------------------------------------------ |  | ---- | ----- | ---- | - | ---- |  | - | --- | 
|                                           |  | 2007 |       | 2006 |   | 2005 | 
|                                           |  |      |       |      |   |      | 
|Intrinsic value of options exercised       |  | $    | 239   |      | $ | 648  |  | $ | 789 | 
|Cash received from option exercises        |  |      | 1,184 |      |   | 932  |  |   | 812 | 
|Tax benefit realized from option exercises |  |      | 94    |      |   | 272  |  |   | 296 | 

As of December
31, 2007, there was $5 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 5 months.

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 18  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 or deposits and for 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.

|                                                   |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|-------------------------------------------------- |  | ---------------- | ------- | ----------- | - | ---------------- |  | ----------- | ------- |  | - | ------- | 
|                                                   |  | 2007             |         | 2006        |  
|                                                   |  |                  |         |             |  
|                                                   |  | Carrying
 Amount |         | Fair
 Value |   | Carrying
 Amount |  | Fair
 Value |        
|                                                   |  |                  |         |             |   |                  |  |             |        
|Financial
 assets                                  |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Cash and cash equivalents                          |  | $                | 46,381  |             | $ | 46,381           |  | $           | 22,685  |  | $ | 22,685  | 
|Securities available for sale                      |  |                  | 222,475 |             |   | 222,475          |  |             | 188,315 |  |   | 188,315 | 
|Loans held for sale                                |  |                  | 741     |             |   | 749              |  |             | 889     |  |   | 901     | 
|Loans, net                                         |  |                  | 748,370 |             |   | 746,084          |  |             | 811,510 |  |   | 802,908 | 
|Federal Home Loan Bank stock                       |  |                  | 6,792   |             |   | n/a              |  |             | 6,792   |  |   | n/a     | 
|Accrued interest receivable                        |  |                  | 5,394   |             |   | 5,394            |  |             | 6,183   |  |   | 6,183   | 
|                                                  
|Financial
 liabilities                             |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Deposits                                           |  |                  | 884,185 |             |   | 885,975          |  |             | 878,911 |  |   | 878,344 | 
|Federal funds purchased and repurchase
 agreements |  |                  | 27,174  |             |   | 27,174           |  |             | 4,480   |  |   | 4,480   | 
|Federal Home Loan Bank advances                    |  |                  | 85,172  |             |   | 85,247           |  |             | 115,179 |  |   | 115,264 | 
|Subordinated debentures                            |  |                  | 16,100  |             |   | 16,100           |  |             | 16,100  |  |   | 16,100  | 
|Accrued interest payable                           |  |                  | 4,743   |             |   | 4,743            |  |             | 4,501   |  |   | 4,501   | 
|                                                  
|Off balance
 sheet credit related items            |  |                  |         |             |   |                  |  |             |         |  |   |         | 
|Letter of credit                                   |  |                  | 418     |             |   | 418              |  |             | 418     |  |   | 418     | 

77

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY

CONDENSED BALANCE SHEETSDecember 31

|                                           |  |      |        |      |   |        | 
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ | 
|                                           |  | 2007 |        | 2006 |  
|                                           |  |      |        |      |  
|ASSETS                                     |  |      |        |      |   |        | 
|Cash and
 cash equivalents                 |  | $    | 588    |      | $ | 2,453  | 
|Securities
 available for sale             |  |      |       |      |   | 1,016  | 
|Interest receivable                        |  |      |       |      |   | 4      | 
|Receivable
 from subsidiary                |  |      | 2,231  |      |   | 26     | 
|Deferred
 income taxes                     |  |      | 25     |      |   | 10     | 
|Investment in subsidiaries                 |  |      | 94,787 |      |   | 96,044 | 
|                                           |  |      |        |      |   |        | 
|                                          
|Total assets                               |  | $    | 97,631 |      | $ | 99,553 | 
|                                           |  |      |        |      |   |        | 
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |      |        |      |   |        | 
|Liabilities                                |  |      |        |      |   |        | 
|Dividends payable                          |  | $    | 1,262  |      | $ | 1,253  | 
|Interest Payable                           |  |      | 7      |      |   | 7      | 
|Debentures                                 |  |      | 16,100 |      |   | 16,100 | 
|                                           |  |      |        |      |   |        | 
|Total liabilities                          |  |      | 17,369 |      |   | 17,360 | 
|                                          
|Stockholders
 equity                      |  |      | 80,262 |      |   | 82,193 | 
|                                           |  |      |        |      |   |        | 
|                                          
|Total liabilities and stockholders
equity |  | $    | 97,631 |      | $ | 99,553 | 
|                                           |  |      |        |      |   |        | 

78

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BAYLAKE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands)

NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY
(Continued)

CONDENSED STATEMENTS OF INCOMEYears ended December 31

|                                                                                     |  |      |        |      |   |       |   |   |       |  
|------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                                                     |  | 2007 |        | 2006 |   | 2005  |  
|                                                                                     |  |      |        |      |   |       |  
|Income                                                                               |  |      |        |      |   |       |   |   |       |  
|Dividends from subsidiaries                                                          |  | $    | 4,500  |      | $ | 5,400 |   | $ | 3,600 |  
|Interest income                                                                      |  |      | 87     |      |   | 152   |   |   | 149   |  
|                                                                                     |  |      |        |      |   |       |   |   |       |  
|Total income                                                                         |  |      | 4,587  |      |   | 5,552 |   |   | 3,749 |  
|                                                                                    
|Expenses                                                                             |  |      |        |      |   |       |   |   |       |  
|Interest                                                                             |  |      | 1,089  |      |   | 1,705 |   |   | 2,039 |  
|Other                                                                                |  |      | 70     |      |   | 175   |   |   | 154   |  
|Income tax benefit                                                                   |  |      | (365   | )    |   | (587  | ) |   | (695  | )
|                                                                                     |  |      |        |      |   |       |   |   |       |  
|Total expenses                                                                       |  |      | 794    |      |   | 1,293 |   |   | 1,498 |  
|                                                                                     |  |      |        |      |   |       |   |   |       |  
|                                                                                    
|Income before equity in undistributed net
 income of subsidiaries                    |  |      | 3,793  |      |   | 4,259 |   |   | 2,251 |  
|                                                                                    
|Equity in undistributed net income of subsidiaries (dividends in
excess of earnings) |  |      | (3,627 | )    |   | 3,117 |   |   | 6,652 |  
|                                                                                     |  |      |        |      |   |       |   |   |       |  
|                                                                                    
|Net income                                                                           |  | $    | 166    |      | $ | 7,376 |   | $ | 8,903 |  
|                                                                                     |  |      |        |      |   |       |   |   |       |  

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BAYLAKE CORP. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2007, 2006 and 2005 
(Dollar amounts in thousands)

NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY  (Continued)

CONDENSED STATEMENT OF CASH FLOWSYears ended December 31

|                                                                                  |  |      |        |      |   |         |   |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | - | - | ------ | -
|                                                                                  |  | 2007 |        | 2006 |   | 2005    |  
|                                                                                  |  |      |        |      |   |         |  
|Cash flows from operating activities:                                             |  |      |        |      |   |         |   |   |        |  
|Net income                                                                        |  | $    | 166    |      | $ | 7,376   |   | $ | 8,903  |  
|Adjustments to reconcile net income to net cash
provided by operating activities:
|Undistributed earnings of subsidiary (dividends
in excess of earnings)            |  |      | 3,627  |      |   | (3,117  | ) |   | (6,652 | )
|Stock Compensation Expense                                                        |  |      | 21     |      |   | 48      |   |   |       |  
|Amortization of debt issue costs                                                  |  |      |       |      |   | 475     |   |   | 429    |  
|Net amortization of securities                                                    |  |      | (1     | )    |   | (3      | ) |   | (2     | )
|Net change in intercompany receivable                                             |  |      | (2,205 | )    |   | 142     |   |   | (115   | )
|Tax benefit from exercise of stock
options                                        |  |      | (94    | )    |   | (272    | ) |   |       |  
|Other changes, net                                                                |  |      | 92     |      |   | 261     |   |   | 296    |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|Net cash provided by operating
activities                                         |  |      | 1,606  |      |   | 4,910   |   |   | 2,859  |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|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     |   |   | 812    |  
|Tax benefit from exercise of stock
options                                        |  |      | 94     |      |   | 272     |   |   |       |  
|Treasury stock repurchases                                                        |  |      | (1,823 | )    |   | (1,101  | ) |   |       |  
|Dividend reinvestment plan                                                        |  |      | 1,096  |      |   | 268     |   |   |       |  
|Dividends paid                                                                    |  |      | (5,022 | )    |   | (4,982  | ) |   | (4,628 | )
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|Net cash used in financing activities                                             |  |      | (4,471 | )    |   | (4,611  | ) |   | (3,816 | )
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|Net change in cash and cash equivalents                                           |  |      | (1,865 | )    |   | 299     |   |   | (957   | )
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|Beginning cash and cash equivalents                                               |  |      | 2,453  |      |   | 2,154   |   |   | 3,111  |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  
|Ending cash and cash equivalents                                                  |  | $    | 588    |      | $ | 2,453   |   | $ | 2,154  |  
|                                                                                  |  |      |        |      |   |         |   |   |        |  

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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, 2007. 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.

Managements Report on Internal Control over Financial Reporting:
The report of our management on our internal control over financial reporting appears on page 43 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) subsequent to the date of the evaluation performed by our Chief
Executive Officer and Chief Financial Officer.

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 2008 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 2008 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 2008 Annual Meeting of Stockholders is
incorporated herein by reference.

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, 2007.

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|                                                                |  |                                                                                                      |         |                                                                                     |   |                                                                                                                                                              |  |  |   | 
|--------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | - | 
|                                                                |  | Number of securities to 
  be issued upon exercise 
  of outstanding options, 
  warrants and rights |         | Weighted-average 
  exercise price of 
  outstanding options,
  warrants and rights |   | Number of securities 
  remaining available for 
  future issuance under 
  equity compensation 
  plans (excluding 
  securities reflected in 
  column (a) | 
|Plan
  Category                                                 |  | (a)                                                                                                  |         | (b)                                                                                 |   | (c)                                                                                                                                                          | 
|                                                                |  |                                                                                                      |         |                                                                                     |   |                                                                                                                                                              | 
|Equity compensation plans approved by
  security holders        |  |                                                                                                      | 196,734 |                                                                                     | $ | 16.79                                                                                                                                                        |  |  |  | 
|Equity compensation plans not approved by
  security holders ** |  |                                                                                                      | 15,400  |                                                                                     |   | 14.15                                                                                                                                                        |  |  |  | 
|Total                                                           |  |                                                                                                      | 212,134 |                                                                                     | $ | 16.60                                                                                                                                                        |  |  |  | 

** 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 2008 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 2008 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 31, 2008

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 31, 2008.

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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                                                                  
|            |  |                                                                                                                                                                                                                                                                              
|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*                                
|            |  |                                                                                                                                                                                                                                                                              
|21.1        |  | List of
  Subsidiaries                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                              
|23.1        |  | Consent of
  Crowe Chizek and Company LLC                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                              
|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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