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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-8679
 BAYLAKE CORP.
  Wisconsin
    
    39-1268055(State or other jurisdiction of
    
    (I.R.S. Employerincorporated 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)-743-5551Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock $5 Par Value
 o þ
 o þ
 o þ
 o
  o þ o
 o þ
   Part of Form 10-K Into WhichDocument
    
    Portions of Documents are IncorporatedDefinitive Proxy Statement for 2006
Annual Meeting of Shareholders to be
Filed within 120 days of the fiscal
Year ended December 31, 2005
    
    Part III




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##### 



DESCRIPTION
    
    PAGE NO.PART IITEM 1.
    
    Business
    
    
    4ITEM 1A.
    
    Risk Factors
    
    
    9ITEM 1B.
    
    Unresolved Staff Comments
    
    
    11ITEM 2.
    
    Properties
    
    
    12ITEM 3.
    
    Legal Proceedings
    
    
    12ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
    
    
    12ITEM 6.
    
    Selected Financial Data
    
    
    13ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    50ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    51ITEM 9.
    
    Changes and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    91ITEM 9A
    
    Controls and Procedures
    
    
    91ITEM 9B
    
    Other Information
    
    
    91PART IIIITEM 10.
    
    Directors and Executive Officers of the Registrant
    
    
    92ITEM 11.
    
    Executive Compensation
    
    
    92ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
    
    
    92ITEM 13.
    
    Certain Relationships and Related Transactions
    
    
    93ITEM 14.
    
    Principal Accountant Fees and Services
    
    
    93PART IVITEM 15.
    
    Exhibits and Financial Statement Schedules
    
    
    93Signatures
    
    
    93Computation of RatiosConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFOStatement of Computation of RatiosList of SubsidiariesConsent of Independent Registered Public Accounting FirsmCertificationCertificationCertificationCertification
  2




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Special Note Regarding Forward-Looking Statements
  
 ITEM 1. BUSINESS
 General
  Baylake Bank
   Subsidiaries
 3




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Corporate Governance Matters
 www.baylake.com. www.sec.gov
 Lending
   Investments
  Deposits
  4




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Other Customer Services and Products
  Seasonality
   Competition
  Regulation and Supervision
  Baylake Corp.
 5




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Baylake Bank.
   6




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7




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Employees
  
 ITEM 1A. RISK FACTORS
  If we have significant loan losses, 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.
 8




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Our operations are geographically limited and significantly concentrated in the tourism industry,
which makes us more at risk for downturns in those areas
   A significant portion of our lending is concentrated in the commercial real estate sector, which
makes us more at risk for downturns in those areas
  An increasing interest rate environment could affect our results and our equity
    9




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Competition may affect our results
   Wisconsin tax developments could reduce our earnings
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  10




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ITEM 2. PROPERTIES
    
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 The Milwaukee Journal
Sentinel
  11




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##### Table of Contents



Cash dividends perCalendar period
    
    High
    
    Low
    
    share2004
    
    1st Quarter
    
    $15.00
    
    $13.90
    
    $0.142nd Quarter
    
    $16.00
    
    $14.10
    
    $0.143rd Quarter
    
    $16.00
    
    $14.20
    
    $0.144th Quarter
    
    $18.55
    
    $14.30
    
    $0.152005
    
    1st Quarter
    
    $18.50
    
    $17.25
    
    $0.152nd Quarter
    
    $18.50
    
    $17.95
    
    $0.153rd Quarter
    
    $18.60
    
    $17.85
    
    $0.154th Quarter
    
    $18.25
    
    $16.05
    
    $0.16
     
 ITEM 6. SELECTED FINANCIAL DATA
 BAYLAKE CORP.
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
  2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands, except per share data)Results of operations:Interest and dividend income
    
    $
    61,538
    
    
    $
    50,362
    
    
    $
    47,474
    
    
    $
    51,564
    
    
    $
    59,023Interest expense
    
    
    26,660
    
    
    
    16,357
    
    
    
    18,416
    
    
    
    22,188
    
    
    
    32,053Net interest income
    
    
    34,878
    
    
    
    34,005
    
    
    
    29,058
    
    
    
    29,376
    
    
    
    26,970
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2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands, except per share data)Provision for loan losses
    
    
    3,217
    
    
    
    1,599
    
    
    
    5,650
    
    
    
    5,700
    
    
    
    2,880Net interest income after
provision for loan losses
    
    
    31,661
    
    
    
    32,406
    
    
    
    23,408
    
    
    
    23,676
    
    
    
    24,090Other income:Fees from fiduciary
activities
    
    
    780
    
    
    
    703
    
    
    
    677
    
    
    
    637
    
    
    
    664Fees from loan servicing
    
    
    1,131
    
    
    
    1,079
    
    
    
    1,470
    
    
    
    1,587
    
    
    
    1,461Fees for other services to
customers
    
    
    4,759
    
    
    
    4,608
    
    
    
    4,053
    
    
    
    3,573
    
    
    
    2,444Gain from sale of loans
    
    
    1,013
    
    
    
    1,372
    
    
    
    2,449
    
    
    
    1,425
    
    
    
    1,077Securities gains, net
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    509
    
    
    
    Increase in cash surrender
value of life insurance
    
    
    784
    
    
    
    772
    
    
    
    821
    
    
    
    450
    
    
    
    140Gains (losses), net from
sales and disposals of
fixed assets
    
    
    2,383
    
    
    
    475
    
    
    
    (1
    )
    
    
    
    
    
    
    Gain on sale of Arborview
    
    
    
    
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    Rental income
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    705
    
    
    
    Death benefit of life
insurance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    754
    
    
    
    Other
    
    
    695
    
    
    
    517
    
    
    
    566
    
    
    
    1,373
    
    
    
    725Total other income
    
    
    11,597
    
    
    
    9,526
    
    
    
    10,640
    
    
    
    11,013
    
    
    
    6,511Non-interest expense:Salaries and employee
benefits
    
    
    16,733
    
    
    
    15,283
    
    
    
    14,183
    
    
    
    13,743
    
    
    
    11,923Occupancy
    
    
    2,441
    
    
    
    2,156
    
    
    
    2,087
    
    
    
    2,163
    
    
    
    1,834Equipment
    
    
    1,564
    
    
    
    1,373
    
    
    
    1,438
    
    
    
    1,422
    
    
    
    1,401Data processing and courier
    
    
    1,163
    
    
    
    1,125
    
    
    
    1,087
    
    
    
    1,040
    
    
    
    986Provision for impairment of
letter of credit
    
    
    2,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operation of other real
estate
    
    
    399
    
    
    
    599
    
    
    
    378
    
    
    
    203
    
    
    
    248Other operating expenses
    
    
    6,028
    
    
    
    5,943
    
    
    
    4,858
    
    
    
    4,820
    
    
    
    4,583Total non-interest expense
    
    
    30,519
    
    
    
    26,479
    
    
    
    24,031
    
    
    
    23,391
    
    
    
    20,975Income before income tax
    
    
    12,739
    
    
    
    15,453
    
    
    
    10,017
    
    
    
    11,298
    
    
    
    9,626Income tax provision
    
    
    3,836
    
    
    
    4,680
    
    
    
    2,060
    
    
    
    2,575
    
    
    
    2,091Net income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957
    
    
    $
    8,723
    
    
    $
    7,535Per Share Data:(1)Net income per share (basic)
    
    $
    1.15
    
    
    $
    1.41
    
    
    $
    1.06
    
    
    $
    1.17
    
    
    $
    1.01Net income per share
(diluted)
    
    
    1.14
    
    
    
    1.40
    
    
    
    1.04
    
    
    
    1.15
    
    
    
    0.99Cash dividends per common
share
    
    
    0.61
    
    
    
    0.57
    
    
    
    0.53
    
    
    
    0.49
    
    
    
    0.45Book value per share
    
    
    10.09
    
    
    
    9.91
    
    
    
    9.16
    
    
    
    8.74
    
    
    
    7.91Selected Financial
Condition Data (at end of
period):Total assets
    
    $
    1,089,408
    
    
    $
    1,047,748
    
    
    $
    974,740
    
    
    $
    904,656
    
    
    $
    845,713Securities
    
    
    171,638
    
    
    
    197,392
    
    
    
    176,815
    
    
    
    133,139
    
    
    
    144,895Gross loans
    
    
    812,296
    
    
    
    757,228
    
    
    
    715,022
    
    
    
    682,512
    
    
    
    627,492Total deposits
    
    
    856,711
    
    
    
    844,541
    
    
    
    783,292
    
    
    
    740,324
    
    
    
    669,812Short-term borrowings (2)
    
    
    1,315
    
    
    
    1,284
    
    
    
    23,359
    
    
    
    10,056
    
    
    
    2,837Other borrowings (3)
    
    
    125,185
    
    
    
    100,192
    
    
    
    75,092
    
    
    
    65,000
    
    
    
    90,000
 13




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2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands, except per share data)Subordinated debentures
    
    
    16,100
    
    
    
    16,100
    
    
    
    16,100
    
    
    
    16,100
    
    
    
    16,100Total shareholders equity
    
    
    78,544
    
    
    
    76,205
    
    
    
    69,628
    
    
    
    65,400
    
    
    
    59,130Performance Ratios:Return on average assets
    
    
    0.82
    %
    
    
    1.07
    %
    
    
    0.87
    %
    
    
    1.00
    %
    
    
    0.93
    %Return on average total
shareholders equity
    
    
    11.51
    %
    
    
    14.88
    %
    
    
    11.86
    %
    
    
    13.82
    %
    
    
    13.37
    %Dividend payout ratio
    
    
    52.99
    %
    
    
    40.49
    %
    
    
    50.22
    %
    
    
    41.99
    %
    
    
    44.62
    %Net interest margin (4)
    
    
    3.60
    %
    
    
    3.76
    %
    
    
    3.56
    %
    
    
    3.80
    %
    
    
    3.79
    %Net interest spread (4)
    
    
    3.27
    %
    
    
    3.52
    %
    
    
    3.27
    %
    
    
    3.47
    %
    
    
    3.34
    %Non-interest income to
average assets
    
    
    1.07
    %
    
    
    0.94
    %
    
    
    1.16
    %
    
    
    1.26
    %
    
    
    0.78
    %Non-interest expense to
average assets
    
    
    2.81
    %
    
    
    2.63
    %
    
    
    2.62
    %
    
    
    2.68
    %
    
    
    2.57
    %Net overhead ratio (5)
    
    
    1.74
    %
    
    
    1.68
    %
    
    
    1.46
    %
    
    
    1.42
    %
    
    
    1.79
    %Average loan-to-average
deposit ratio
    
    
    94.16
    %
    
    
    93.63
    %
    
    
    93.01
    %
    
    
    94.71
    %
    
    
    98.87
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    112.73
    %
    
    
    113.59
    %
    
    
    113.19
    %
    
    
    111.71
    %
    
    
    110.33
    %Asset Quality Ratios:(6)Non-performing loans to
total loans
    
    
    0.85
    %
    
    
    0.78
    %
    
    
    2.27
    %
    
    
    3.24
    %
    
    
    2.34
    %Allowance for loan losses
to:Total loans
    
    
    1.18
    %
    
    
    1.38
    %
    
    
    1.70
    %
    
    
    1.67
    %
    
    
    1.27
    %Non-performing loans
    
    
    137.58
    %
    
    
    176.44
    %
    
    
    74.95
    %
    
    
    51.66
    %
    
    
    54.47
    %Net charge-offs to average
loans
    
    
    0.52
    %
    
    
    0.45
    %
    
    
    0.70
    %
    
    
    0.35
    %
    
    
    0.31
    %Non-performing assets to
total assets
    
    
    0.94
    %
    
    
    0.81
    %
    
    
    1.90
    %
    
    
    2.76
    %
    
    
    1.93
    %Capital Ratios:(7)Shareholders equity to
assets
    
    
    7.21
    %
    
    
    7.27
    %
    
    
    7.14
    %
    
    
    7.23
    %
    
    
    6.99
    %Tier 1 risk-based capital
    
    
    9.70
    %
    
    
    9.75
    %
    
    
    9.53
    %
    
    
    9.74
    %
    
    
    10.10
    %Total risk-based capital
    
    
    10.73
    %
    
    
    10.95
    %
    
    
    10.78
    %
    
    
    10.99
    %
    
    
    11.29
    %Leverage ratio
    
    
    8.27
    %
    
    
    8.27
    %
    
    
    8.38
    %
    
    
    8.24
    %
    
    
    8.22
    %
 
 (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 Company 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 Baylake and the
Banks 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. 14




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 General
  Critical Accounting Policies
  Allowance for Loan Losses:
    15




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Foreclosed Assets:
 Provision for Impairment of Standby Letter of Credit:
 Income Tax Accounting
    16




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Overview
     Performance Summary
   §
    
    Net interest income and net interest margin were impacted in 2005 by an increasing
interest rate environment for most of 2005, thereby decreasing interest spread. The
continued pressure from the rise in short-term interest rates in addition to the concurrent
flattening of the yield curve affected net interest margin for 2005 relative to a year
earlier.§
    
    Tax-equivalent net interest income was $36.2 million for 2005, an increase of $1.1
million or 3.1% over 2004. Tax-equivalent interest income increased $11.4 million, while
interest expense increased $10.3 million. The increase in tax-equivalent net interest
income was attributable to favorable volume variances (with balance sheet growth and
differences in the mix of average earning assets and average interest-
 17




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bearing liabilities adding $2.6 million to tax-equivalent net interest income). Offsetting
the increase were unfavorable rate variances reducing tax-equivalent net interest income by
$1.5 million. This was primarily due to the increase in short-term interest rates which had
a direct influence on wholesale and retail funding costs for 2005. Average earning assets
increased $68.9 million to $1.0 billion, while interest-bearing liabilities increased $67.4
million to $890.2 million.§
    
    The net interest margin for 2005 was 3.60%, compared to 3.76% in 2004. The 16 basis
points (bps) decrease in net interest margin is the result of a 25 bps decrease in
interest rate spread (the net of a 100 bps increase in the cost of interest-bearing
liabilities, offset by a 75 bps increase in the yields on earning assets), and a 9 bps
higher contribution from net free funds.§
    
    Total loans were $812.3 million at December 31, 2005, an increase of $55.1 million or
7.3%, from December 31, 2004. Commercial real estate loans increased $43.2 million (10.2%)
and represented 57.6% of total loans at December 31, 2005, compared to 56% at year-end
2004. Total deposits were $856.7 million at December 31, 2005, an increase of $12.2
million or 1.4% from year-end 2004.§
    
    Asset quality had mixed results during 2005. Net loan charge-offs were $4.1 million, an
increase of $798,000 over 2004 results. Net loan charge-offs for commercial loans
represented $3.3 million of the total in 2005. Net loan charge-offs were 0.52% of average
loans in 2005 compared to 0.45% in 2004. On the other hand, there was improvement of
approximately $29.4 million in average impaired loans for 2005. The provision for loan
losses increased to $3.2 million compared to $1.6 million in 2004. The ratio of allowance
for loan losses to total loans was 1.18% and 1.38% at December 31, 2005 and 2004,
respectively. Non-performing loans were $6.9 million at December 31, 2005, representing
0.85% of total loans, compared to $5.9 million or 0.78% at year-end 2004.§
    
    Non-interest income was $11.6 million for 2005, an increase of $2.1 million or 21.7%
from 2004 results. An increase in net gains from sales of fixed assets totaling $1.9
million and gain on the sale of Pulse stock totaling $200,000 accounted for the balance of
the increase. An increase in fees for other services to customers of $151,000 offset by a
decrease in gains from sales of loans of $359,000 were primarily attributable for the
remainder of the change in non-interest income.§
    
    Non-interest expense was $30.5 million, an increase of $4.0 million over 2004 results.
This was the result of increases in personnel expense, occupancy and equipment expense,
professional services expense, and costs provided for impairment expense on an off-balance
sheet letter of credit.§
    
    As mentioned above, an impairment expense of $2.2 million was provided for an
off-balance sheet letter of credit. The impairment charge on the standby letter of credit
relates to the establishment of a liability for the Companys exposure on a standby letter
of credit. Of that amount, $1.8 million was provided in the third quarter and upon an
updated impairment analysis an additional $345,000 was expensed in the fourth quarter of
2005.§
    
    Income tax expense decreased to $3.8 million, a decrease of $844,000 from 2004. The
decrease was primarily attributable to lower taxable income. The effective tax rate was
30.1% in 2005 compared to 30.3% in 2004 primarily related to an increase in non-taxable
income as a percentage of net income before income tax expense.
 INCOME STATEMENT ANALYSIS
 2005 compared to 2004
 Net Interest Income
   18




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Table 1: Average Balances and Interest Rates (interest and rates on a tax-equivalent basis)
  2005
    
    
    
    
    

    
    
    
    2004
    
    
    
    
    
    
    
    
    
    2003Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(dollars in thousands)ASSETS:Earning AssetsLoans (1)(2)(3)
    
    $
    789,316
    
    
    
    52,946
    
    
    
    6.71
    %
    
    $
    740,605
    
    
    
    42,583
    
    
    
    5.75
    %
    
    $
    695,669
    
    
    
    41,224
    
    
    
    5.93
    %U.S. Treasuries
    
    
    195
    
    
    
    9
    
    
    
    4.62
    
    
    
    195
    
    
    
    9
    
    
    
    4.62
    
    
    
    825
    
    
    
    51
    
    
    
    6.18Agencies
    
    
    157,293
    
    
    
    6,326
    
    
    
    4.02
    
    
    
    148,874
    
    
    
    5,922
    
    
    
    3.98
    
    
    
    102,323
    
    
    
    4,115
    
    
    
    4.02State and Municipal
Obligations (1)
    
    
    41,766
    
    
    
    2,835
    
    
    
    6.79
    
    
    
    31,974
    
    
    
    2,252
    
    
    
    7.04
    
    
    
    35,981
    
    
    
    2,601
    
    
    
    7.23Other Securities
    
    
    11,077
    
    
    
    598
    
    
    
    5.40
    
    
    
    10,649
    
    
    
    664
    
    
    
    6.24
    
    
    
    10,063
    
    
    
    668
    
    
    
    6.64Federal funds sold
    
    
    876
    
    
    
    29
    
    
    
    3.31
    
    
    
    170
    
    
    
    4
    
    
    
    2.35
    
    
    
    1,669
    
    
    
    20
    
    
    
    1.20Other money market
Instruments
    
    
    3,010
    
    
    
    94
    
    
    
    3.12
    
    
    
    2,148
    
    
    
    24
    
    
    
    1.12
    
    
    
    4,718
    
    
    
    38
    
    
    
    0.81Total earning assets
    
    $
    1,003,533
    
    
    $
    62,837
    
    
    
    6.26
    %
    
    $
    934,615
    
    
    $
    51,458
    
    
    
    5.51
    %
    
    $
    851,248
    
    
    $
    48,717
    
    
    
    5.72
    %Non-interest
earning Assets
    
    
    81,671
    
    
    
    
    
    
    
    
    
    
    
    73,919
    
    
    
    
    
    
    
    
    
    
    
    64,892Total assets
    
    
    1,085,204
    
    
    
    
    
    
    
    
    
    
    $
    1,008,534
    
    
    
    
    
    
    
    
    
    
    $
    916,140LIABILITIES AND
STOCKHOLDERS
EQUITYInterest
bearing Liabilities
 20




---



##### Table of Contents



2005
    
    
    
    
    

    
    
    
    2004
    
    
    
    
    
    
    
    
    
    2003Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(dollars in thousands)NOW accounts
    
    $
    90,782
    
    
    $
    1,500
    
    
    
    1.65
    %
    
    $
    89,648
    
    
    $
    782
    
    
    
    0.87
    %
    
    $
    74,998
    
    
    $
    674
    
    
    
    0.90
    %Savings accounts
    
    
    221,414
    
    
    
    4,998
    
    
    
    2.26
    
    
    
    199,942
    
    
    
    1,875
    
    
    
    0.94
    
    
    
    196,598
    
    
    
    1,763
    
    
    
    0.90Time deposits>
$100M
    
    
    239,682
    
    
    
    7,752
    
    
    
    3.23
    
    
    
    207,750
    
    
    
    4,983
    
    
    
    2.40
    
    
    
    179,557
    
    
    
    5,626
    
    
    
    3.13Time
deposits<$100M
    
    
    178,912
    
    
    
    5,132
    
    
    
    2.87
    
    
    
    188,571
    
    
    
    4,328
    
    
    
    2.30
    
    
    
    208,160
    
    
    
    6,523
    
    
    
    3.13Total
interest-bearing
Deposits
    
    
    730,790
    
    
    
    19,382
    
    
    
    2.65
    
    
    
    685,911
    
    
    
    11,968
    
    
    
    1.74
    
    
    
    659,313
    
    
    
    14,586
    
    
    
    2.21Federal funds
Purchased
    
    
    25,526
    
    
    
    891
    
    
    
    3.49
    
    
    
    24,402
    
    
    
    388
    
    
    
    1.59
    
    
    
    10,141
    
    
    
    137
    
    
    
    1.35Repurchase
Agreements
    
    
    1,419
    
    
    
    39
    
    
    
    2.75
    
    
    
    1,127
    
    
    
    13
    
    
    
    1.15
    
    
    
    1,202
    
    
    
    12
    
    
    
    1.00FHLB advances
    
    
    116,407
    
    
    
    4,309
    
    
    
    3.70
    
    
    
    95,291
    
    
    
    2,293
    
    
    
    2.41
    
    
    
    65,250
    
    
    
    2,034
    
    
    
    3.12Subordinated
Debentures
    
    
    16,100
    
    
    
    2,039
    
    
    
    12.66
    
    
    
    16,100
    
    
    
    1,695
    
    
    
    10.53
    
    
    
    16,100
    
    
    
    1,645
    
    
    
    10.22Long term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    2
    
    
    
    3.77Total
interest-bearing
Liabilities
    
    $
    890,242
    
    
    $
    26,660
    
    
    
    2.99
    %
    
    $
    822,831
    
    
    $
    16,357
    
    
    
    1.99
    %
    
    $
    752,059
    
    
    $
    18,416
    
    
    
    2.45
    %Demand deposits
    
    
    107,506
    
    
    
    
    
    
    
    
    
    
    
    105,134
    
    
    
    
    
    
    
    
    
    
    
    88,642Accrued expenses
and other
liabilities
    
    
    10,091
    
    
    
    
    
    
    
    
    
    
    
    8,182
    
    
    
    
    
    
    
    
    
    
    
    8,322Stockholders equity
    
    
    77,365
    
    
    
    
    
    
    
    
    
    
    
    72,387
    
    
    
    
    
    
    
    
    
    
    
    67,117Total liabilities
and Stockholders
equity
    
    
    1,085,204
    
    
    
    
    
    
    
    
    
    
    $
    1,008,534
    
    
    
    
    
    
    
    
    
    
    $
    916,140Net interest income
And rate spread
    
    
    
    
    
    $
    36,177
    
    
    
    3.27
    %
    
    
    
    
    
    $
    35,101
    
    
    
    3.52
    %
    
    
    
    
    
    $
    30,301
    
    
    
    3.27
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.60
    %
    
    
    
    
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    
    
    
    
    3.56
    %
 
 (1)
    
    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.(2)
    
    Nonaccrual loans and loans held for sale have been included in the average balances.(3)
    
    Interest income includes loan fees, net of amortization. Table 2: Rate/Volume Analysis (1)
 2005 compared to 2004
    
    
    2004 compared to 2003Increase (Decrease) due to
    
    
    Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    Net(dollars in thousands)Interest income:Loans (2)
    
    $
    2,949
    
    
    $
    7,414
    
    
    $
    10,363
    
    
    $
    2,609
    
    
    $
    (1,250
    )
    
    $
    1,359U.S. treasuries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 32
    )
    
    
    (10
    )
    
    
    (42
    )Agencies
    
    
    338
    
    
    
    66
    
    
    
    404
    
    
    
    1,852
    
    
    
    (45
    )
    
    
    1,807State and municipal
obligations (2)
    
    
    667
    
    
    
    (84
    )
    
    
    583
    
    
    
    ( 284
    )
    
    
    (65
    )
    
    
    (349
    )Other securities
    
    
    26
    
    
    
    (92
    )
    
    
    (66
    )
    
    
    38
    
    
    
    (42
    )
    
    
    (4
    )Federal funds sold
    
    
    23
    
    
    
    2
    
    
    
    25
    
    
    
    (26
    )
    
    
    10
    
    
    
    (16
    )Other money market
instruments
    
    
    13
    
    
    
    57
    
    
    
    70
    
    
    
    (25
    )
    
    
    11
    
    
    
    (14
    )Total earning assets
    
    $
    4,016
    
    
    $
    7,363
    
    
    $
    11,379
    
    
    $
    4,132
    
    
    $
    (1,391
    )
    
    $
    2,741Interest expense:
 21




---



##### Table of Contents



2005 compared to 2004
    
    
    2004 compared to 2003Increase (Decrease) due to
    
    
    Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    Net(dollars in thousands)NOW accounts
    
    $
    10
    
    
    $
    708
    
    
    $
    718
    
    
    $
    128
    
    
    $
    (20
    )
    
    $
    108Savings accounts
    
    
    221
    
    
    
    2,902
    
    
    
    3,123
    
    
    
    30
    
    
    
    82
    
    
    
    112Time deposits
    
    
    617
    
    
    
    2,956
    
    
    
    3,573
    
    
    
    229
    
    
    
    (3,067
    )
    
    
    (2,838
    )Federal funds
Purchased
    
    
    19
    
    
    
    484
    
    
    
    503
    
    
    
    223
    
    
    
    28
    
    
    
    251Repurchase
Agreements
    
    
    4
    
    
    
    22
    
    
    
    26
    
    
    
    (1
    )
    
    
    2
    
    
    
    1FHLB advances
    
    
    588
    
    
    
    1,428
    
    
    
    2,016
    
    
    
    794
    
    
    
    (535
    )
    
    
    259Subordinated
debentures
    
    
    
    
    
    
    344
    
    
    
    344
    
    
    
    
    
    
    
    50
    
    
    
    50Long term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Total
interest-bearing
liabilities
    
    $
    1,459
    
    
    $
    8,844
    
    
    $
    10,303
    
    
    $
    1,401
    
    
    $
    (3,460
    )
    
    $
    (2,059
    )Net interest income
    
    $
    2,557
    
    
    $
    (1,481
    )
    
    $
    1,076
    
    
    $
    2,731
    
    
    $
    2,069
    
    
    $
    4,800
 
 (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. TABLE 3: Interest Rate Spread and Interest Margin (on a tax equivalent basis)
 2005 average
    
    
    2004 average
    
    
    2003 average% of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % ofEarning
    
    
    
    
    
    
    
    
    
    
    Earning
    
    
    
    
    
    
    
    
    
    
    EarningBalance
    
    
    Assets
    
    
    Yield/Rate
    
    
    Balance
    
    
    Assets
    
    
    Yield/Rate
    
    
    Balance
    
    
    Assets
    
    
    Yield/Rate($ in Thousands)Earning assets
    
    
    1,003,533
    
    
    
    100.0
    %
    
    
    6.26
    %
    
    
    934,615
    
    
    
    100.0
    %
    
    
    5.51
    %
    
    
    851,248
    
    
    
    100.0
    %
    
    
    5.72
    %Financed by:Interest-bearing
funds
    
    
    890,242
    
    
    
    88.7
    %
    
    
    2.99
    %
    
    
    822,831
    
    
    
    88.0
    %
    
    
    1.99
    %
    
    
    752,059
    
    
    
    88.3
    %
    
    
    2.45
    %Non-interest
bearing funds
    
    
    113,291
    
    
    
    11.3
    %
    
    
    
    
    
    
    111,784
    
    
    
    12.0
    %
    
    
    
    
    
    
    99,189
    
    
    
    11.7
    %Total fund sources
    
    
    1,003,533
    
    
    
    100.0
    %
    
    
    2.66
    %
    
    
    934,615
    
    
    
    100.0
    %
    
    
    1.75
    %
    
    
    851,248
    
    
    
    100.0
    %
    
    
    2.16
    %Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.27
    %
    
    
    
    
    
    
    
    
    
    
    3.52
    %
    
    
    
    
    
    
    
    
    
    
    3.27
    %Contribution from
net free funds
    
    
    
    
    
    
    
    
    
    
    0.33
    %
    
    
    
    
    
    
    
    
    
    
    0.24
    %
    
    
    
    
    
    
    
    
    
    
    0.29
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.60
    %
    
    
    
    
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    
    
    
    
    3.56
    %Average prime rate *
    
    
    
    
    
    
    
    
    
    
    6.19
    %
    
    
    
    
    
    
    
    
    
    
    4.34
    %
    
    
    
    
    
    
    
    
    
    
    4.12
    %Average federal
funds rate *
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    1.35
    %
    
    
    
    
    
    
    
    
    
    
    1.13
    %
 22




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##### Table of Contents



2005 average
    
    
    2004 average
    
    
    2003 average% of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % ofEarning
    
    
    
    
    
    
    
    
    
    
    Earning
    
    
    
    
    
    
    
    
    
    
    EarningBalance
    
    
    Assets
    
    
    Yield/Rate
    
    
    Balance
    
    
    Assets
    
    
    Yield/Rate
    
    
    Balance
    
    
    Assets
    
    
    Yield/Rate($ in Thousands)Average spread
    
    
    
    
    
    
    
    
    
    297 bps
    
    
    
    
    
    
    
    
    
    299 bps
    
    
    
    
    
    
    
    
    
    299 bps
 
 *
    
    Source: Federal Reserve  Table 4: Selected Average Balances
 2005
    
    
    2004
    
    
    Percent
    
    
    2005 as % of
    
    
    2004 as % ofChange
    
    
    Total Assets
    
    
    Total Assets(dollars in thousands)ASSETSLoans, net of
non-accrual
loans
    
    $
    789,316
    
    
    $
    740,605
    
    
    
    6.6
    %
    
    
    72.7
    %
    
    
    73.4
    %Investment securitiesTaxable
    
    
    168,565
    
    
    
    159,718
    
    
    
    5.5
    %
    
    
    15.5
    
    
    
    15.8Tax-exempt
    
    
    41,766
    
    
    
    31,974
    
    
    
    30.6
    %
    
    
    3.8
    
    
    
    3.2Short-term investments
    
    
    3,886
    
    
    
    2,318
    
    
    
    67.6
    %
    
    
    0.4
    
    
    
    0.2Total earning assets
    
    
    1,003,533
    
    
    
    934,615
    
    
    
    7.4
    %
    
    
    92.5
    
    
    
    92.7Other assets
    
    
    81,671
    
    
    
    73,919
    
    
    
    10.5
    %
    
    
    7.5
    
    
    
    7.3Total assets
    
    $
    1,085,204
    
    
    $
    1,008,534
    
    
    
    7.6
    %
    
    
    100.0
    %
    
    
    100.0
    %LIABILITIES AND
STOCKHOLDERS
EQUITYInterest-bearing
deposits
    
    $
    730,790
    
    
    $
    685,911
    
    
    
    6.5
    %
    
    
    67.3
    %
    
    
    68.0
    %Short-term borrowings
    
    
    26,945
    
    
    
    25,529
    
    
    
    5.5
    %
    
    
    2.5
    
    
    
    2.5Federal Home
Loan Bank
Advances
    
    
    116,407
    
    
    
    95,291
    
    
    
    22.2
    %
    
    
    10.7
    
    
    
    9.4Subordinated
debentures
    
    
    16,100
    
    
    
    16,100
    
    
    
    0
    %
    
    
    1.5
    
    
    
    1.6Long-term debt
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    0.0
    
    
    
    0.0Total
interest-bearing
Liabilities
    
    
    890,242
    
    
    
    822,831
    
    
    
    8.2
    %
    
    
    82.0
    
    
    
    81.6Demand deposits
    
    
    107,506
    
    
    
    105,134
    
    
    
    2.3
    %
    
    
    9.9
    
    
    
    10.4Accrued expenses
    
    
    10,091
    
    
    
    8,182
    
    
    
    23.3
    %
    
    
    0.9
    
    
    
    0.8Stockholders equity
    
    
    77,365
    
    
    
    72,387
    
    
    
    6.9
    %
    
    
    7.1
    
    
    
    7.2Total
liabilities and
Stockholders equity
    
    $
    1,085,204
    
    
    $
    1,008,534
    
    
    
    7.6
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Provision for Loan Losses
  23




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##### Table of Contents



Non-Interest Income
  Table 5: Other Income
 Years ended December 31,
    
    
    % Change from prior year2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004(dollars in thousands)Fees from fiduciary
Activities
    
    $
    780
    
    
    $
    703
    
    
    $
    677
    
    
    
    11.0
    %
    
    
    3.8
    %Fees from loan servicing
    
    $
    1,131
    
    
    $
    1,079
    
    
    $
    1,470
    
    
    
    4.8
    %
    
    
    (26.6
    )%Gains from sale of loans
    
    $
    1,013
    
    
    $
    1,372
    
    
    $
    2,449
    
    
    
    (26.2
    %)
    
    
    (44.0
    )%Service charges on
deposit accounts
    
    $
    3,280
    
    
    $
    3,226
    
    
    $
    2,857
    
    
    
    1.7
    %
    
    
    12.9
    %Other fee income
    
    $
    733
    
    
    $
    675
    
    
    $
    669
    
    
    
    8.6
    %
    
    
    0.9
    %Financial service income
    
    $
    746
    
    
    $
    707
    
    
    $
    527
    
    
    
    5.5
    %
    
    
    34.2
    %Increase in cash
surrender value of life
insurance
    
    $
    784
    
    
    $
    772
    
    
    $
    821
    
    
    
    1.6
    %
    
    
    (6.0
    %)Rental income
    
    $
    0
    
    
    $
    0
    
    
    $
    67
    
    
    NM
    
    NMGain (loss) on
sale-bank assets, net
    
    $
    2,383
    
    
    $
    475
    
    
    $
    (1
    )
    
    NM
    
    NM
 24




---



##### Table of Contents



Years ended December 31,
    
    
    % Change from prior year2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004(dollars in thousands)Gain on sale-Arborview
LLC
    
    $
    0
    
    
    $
    0
    
    
    $
    538
    
    
    NM
    
    NMSecurities gains, net
    
    $
    52
    
    
    $
    0
    
    
    $
    0
    
    
    NM
    
    NMOther income
    
    $
    695
    
    
    $
    517
    
    
    $
    566
    
    
    
    34.4
    %
    
    
    ( 8.7
    %)Total other income
    
    $
    11,597
    
    
    $
    9,526
    
    
    $
    10,640
    
    
    
    21.7
    %
    
    
    (10.5
    %)
      Non-Interest Expense
  Table 6: Non-interest Expense
 Years ended December 31,
    
    
    % Change from prior year(dollars in thousands)2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004Salaries and employee benefits
    
    $
    16,733
    
    
    $
    15,283
    
    
    $
    14,183
    
    
    
    9.5
    %
    
    
    7.8
    %Occupancy
    
    $
    2,441
    
    
    $
    2,156
    
    
    $
    2,087
    
    
    
    13.2
    %
    
    
    3.3
    %
 25




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Years ended December 31,
    
    
    % Change from prior year(dollars in thousands)2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004Equipment
    
    $
    1,564
    
    
    $
    1,373
    
    
    $
    1,438
    
    
    
    13.9
    %
    
    
    (4.5
    %)Data processing and courier
    
    $
    1,163
    
    
    $
    1,125
    
    
    $
    1,087
    
    
    
    3.4
    %
    
    
    3.5
    %Business development and
advertising
    
    $
    1,029
    
    
    $
    742
    
    
    $
    737
    
    
    
    38.7
    %
    
    
    0.7
    %Charitable contributions
    
    $
    216
    
    
    $
    582
    
    
    $
    303
    
    
    
    (62.9
    %)
    
    
    92.1
    %Stationery and supplies
    
    $
    605
    
    
    $
    513
    
    
    $
    499
    
    
    
    17.9
    %
    
    
    2.8
    %Director fees
    
    $
    370
    
    
    $
    293
    
    
    $
    263
    
    
    
    26.3
    %
    
    
    11.4
    %FDIC insurance
    
    $
    112
    
    
    $
    113
    
    
    $
    115
    
    
    
    ( 0.9
    %)
    
    
    ( 1.7
    %)Mortgage servicing rights
Amortization
    
    $
    257
    
    
    $
    273
    
    
    $
    411
    
    
    
    (5.9
    %)
    
    
    (33.6
    %)Legal and professional
    
    $
    625
    
    
    $
    481
    
    
    $
    250
    
    
    
    29.9
    %
    
    
    92.4
    %Operation of other real estate
    
    $
    399
    
    
    $
    599
    
    
    $
    378
    
    
    
    (33.4
    %)
    
    
    58.5
    %Provision for impairment of
letter of credit
    
    $
    2,191
    
    
    $
    
    
    
    $
    
    
    
    NM
    
    NMOther operating expense
    
    $
    2,814
    
    
    $
    2,946
    
    
    $
    2,280
    
    
    
    (4.5
    %)
    
    
    29.2
    %Total noninterest expense
    
    $
    30,519
    
    
    $
    26,479
    
    
    $
    24,031
    
    
    
    15.3
    %
    
    
    10.2
    %
       26




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Income Taxes
    2004 compared to 2003
 General
 27




---



##### Table of Contents



Net Interest Income
     Provision for Loan Losses
  Non-Interest Income
  28




---



##### Table of Contents



Non-Interest Expense
  Income Taxes
   Balance Sheet Items
     29




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BALANCE SHEET ANALYSIS
 Loans
   Table 7: Loan Composition
 (dollars in thousands)2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Amount
    
    % of Total
    
    Amount
    
    % of Total
    
    Amount
    
    % of TotalAmount of loans by type
Real estate-
mortgageCommercial
    
    $
    467,956
    
    
    
    57.6
    %
    
    $
    424,712
    
    
    
    56.1
    %
    
    $
    387,778
    
    
    
    54.2
    %1-4 Family residential
    
    
    148,736
    
    
    
    18.3
    
    
    
    134,350
    
    
    
    17.7
    
    
    
    125,700
    
    
    
    17.6Construction
    
    
    85,729
    
    
    
    10.6
    
    
    
    80,384
    
    
    
    10.6
    
    
    
    77,350
    
    
    
    10.8Commercial,financial
and agricultural
    
    
    80,260
    
    
    
    9.9
    
    
    
    83,787
    
    
    
    11.1
    
    
    
    91,051
    
    
    
    12.7Consumer
    
    
    14,263
    
    
    
    1.8
    
    
    
    13,936
    
    
    
    1.8
    
    
    
    14,460
    
    
    
    2.0Tax exempt
    
    
    15,785
    
    
    
    1.9
    
    
    
    20,457
    
    
    
    2.7
    
    
    
    19,032
    
    
    
    2.7Less: deferred fees,
net
of costs
    
    
    (433
    )
    
    
    -0.1
    
    
    
    (398
    )
    
    
    0.0
    
    
    
    (349
    )
    
    
    0.0Total loans (net of
unearned income)
    
    $
    812,296
    
    
    
    100.0
    %
    
    $
    757,228
    
    
    
    100.0
    %
    
    $
    715,022
    
    
    
    100.0
    %
 2002
    
    
    
    
    
    
    2001Amount
    
    
    % of Total
    
    
    Amount
    
    
    % of TotalAmount of loans by type
Real estate mortgageCommercial
    
    $
    351,425
    
    
    
    51.5
    %
    
    $
    288,385
    
    
    
    46.0
    %1-4 Family residential
    
    
    133,365
    
    
    
    19.5
    
    
    
    143,748
    
    
    
    22.9Construction
    
    
    75,688
    
    
    
    11.1
    
    
    
    67,939
    
    
    
    10.8Commercial,financial
and agricultural
    
    
    89,207
    
    
    
    13.1
    
    
    
    88,649
    
    
    
    14.1Consumer
    
    
    14,916
    
    
    
    2.2
    
    
    
    16,890
    
    
    
    2.7Tax exempt
    
    
    18,227
    
    
    
    2.7
    
    
    
    22,205
    
    
    
    3.5Less: deferred fees, net
of costs
    
    
    (316
    )
    
    
    0.0
    
    
    
    (324
    )
    
    
    0.0Total loans (net of
unearned income)
    
    $
    682,512
    
    
    
    100.0
    %
    
    $
    627,492
    
    
    
    100.0
    %
 30




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31




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32




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Table 8: Loan Maturity and Interest Rate Sensitivity
 MaturityDecember 31, 2005
    
    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
    
    $
    51,419
    
    
    $
    58,876
    
    
    $
    38,441
    
    
    $
    148,736Construction
    
    
    29,454
    
    
    
    56,255
    
    
    
    20
    
    
    
    85,729Commercial real
estate
    
    
    142,622
    
    
    
    215,067
    
    
    
    109,834
    
    
    
    467,523Commercial
    
    
    20,708
    
    
    
    44,160
    
    
    
    15,392
    
    
    
    80,260Tax-exempt
    
    
    6,542
    
    
    
    4,183
    
    
    
    5,060
    
    
    
    15,785Consumer
    
    
    6,201
    
    
    
    7,937
    
    
    
    125
    
    
    
    14,263Total
    
    $
    256,946
    
    
    $
    386,478
    
    
    $
    168,872
    
    
    $
    812,296
 Interest sensitivityFixed rate
    
    Variable rateDue after one year
    
    $
    256,330
    
    
    $
    299,020
   Risk Management and the Allowance for Loan Losses
   33




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Table 9. Loan Loss Experience
 Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands)Daily average amount of loans
    
    $
    789,316
    
    
    $
    740,605
    
    
    $
    695,669
    
    
    $
    655,464
    
    
    $
    607,097Loans, end of period
    
    $
    812,296
    
    
    $
    757,228
    
    
    $
    715,022
    
    
    $
    682,512
    
    
    $
    627,492ALL, at beginning of year
    
    $
    10,445
    
    
    $
    12,159
    
    
    $
    11,410
    
    
    $
    7,992
    
    
    $
    7,006Loans charged off:Real estate-mortgage
    
    
    537
    
    
    
    226
    
    
    
    946
    
    
    
    178
    
    
    
    334Real estate-construction
    
    
    
    
    
    
    3
    
    
    
    79
    
    
    
    
    
    
    
    Real estate-commercial
    
    
    3,363
    
    
    
    1,039
    
    
    
    649
    
    
    
    1,681
    
    
    
    1,239Commercial/agricultural loans
    
    
    651
    
    
    
    2,781
    
    
    
    4,369
    
    
    
    789
    
    
    
    983Consumer loans
    
    
    320
    
    
    
    240
    
    
    
    302
    
    
    
    407
    
    
    
    173Lease financing/other loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total loans charged off
    
    $
    4,871
    
    
    $
    4,289
    
    
    $
    6,345
    
    
    $
    3,055
    
    
    $
    2,729Recoveries of loans previously charged off:Real estate-mortgage
    
    
    392
    
    
    
    79
    
    
    
    263
    
    
    
    126
    
    
    
    173Real estate-construction
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial
    
    
    91
    
    
    
    79
    
    
    
    107
    
    
    
    49
    
    
    
    159Commercial/agricultural loans
    
    
    163
    
    
    
    741
    
    
    
    950
    
    
    
    524
    
    
    
    428Consumer loans
    
    
    114
    
    
    
    76
    
    
    
    124
    
    
    
    74
    
    
    
    75Lease financing/other loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total loans recovered
    
    
    760
    
    
    
    976
    
    
    
    1,444
    
    
    
    773
    
    
    
    835Net loans charged off (NCOs)
    
    
    4,111
    
    
    
    3,313
    
    
    
    4,901
    
    
    
    2,282
    
    
    
    1,894Additions to allowance for loan losses
charged
to operating expense
    
    $
    3,217
    
    
    $
    1,599
    
    
    $
    5,650
    
    
    $
    5,700
    
    
    $
    2,880Allowance to related assets acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ALL, at end of year
    
    $
    9,551
    
    
    $
    10,445
    
    
    $
    12,159
    
    
    $
    11,410
    
    
    $
    7,992Ratio of NCOs during period to average
loans
outstanding
    
    
    0.52
    %
    
    
    0.45
    %
    
    
    0.70
    %
    
    
    0.35
    %
    
    
    0.31
    %Ratio of ALL to NCOs
    
    
    2.3
    
    
    
    3.2
    
    
    
    2.5
    
    
    
    5.0
    
    
    
    4.2Ratio of ALL to total loans end of period
    
    
    1.18
    %
    
    
    1.38
    %
    
    
    1.70
    %
    
    
    1.67
    %
    
    
    1.27
    %
   34




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35




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Table 10 Allocation of the Allowance for Loan Losses
 As of December 31,(dollars in thousands)2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Amount
    
    
    % of total loans
    
    
    Amount
    
    
    % of total loans
    
    
    Amount
    
    
    % of total loansCommercial,
financial
& agricultural
    
    $
    2,317
    
    
    
    9.9
    %
    
    $
    1,982
    
    
    
    11.1
    %
    
    $
    2,386
    
    
    
    12.7
    %Commercial real
estate
    
    
    5,633
    
    
    
    57.5
    
    
    
    6,374
    
    
    
    56.1
    
    
    
    6,772
    
    
    
    54.2Real estateConstruction
    
    
    454
    
    
    
    10.6
    
    
    
    998
    
    
    
    10.61
    
    
    
    702
    
    
    
    10.8Residential
    
    
    482
    
    
    
    18.3
    
    
    
    539
    
    
    
    17.73
    
    
    
    1,325
    
    
    
    17.57Consumer
    
    
    243
    
    
    
    1.8
    
    
    
    198
    
    
    
    1.8
    
    
    
    346
    
    
    
    2.0Tax exempt loans
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    2.7Not specifically
Allocated
    
    
    422
    
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    628Total allowance
    
    $
    9,551
    
    
    
    100
    %
    
    $
    10,445
    
    
    
    100
    %
    
    $
    12,159
    
    
    
    100
    %
 As of December 31,(dollars in thousands)2002
    
    
    
    
    
    
    2001Amount
    
    
    % of total loans
    
    
    Amount
    
    
    % of total loansCommercial,
financial
& agricultural
    
    $
    3,679
    
    
    
    13.0
    %
    
    $
    972
    
    
    
    14.1
    %Commercial real
estate
    
    
    4,639
    
    
    
    51.5
    
    
    
    4,158
    
    
    
    46.0Real estateConstruction
    
    
    814
    
    
    
    11.1
    
    
    
    503
    
    
    
    10.8Residential
    
    
    1,695
    
    
    
    19.53
    
    
    
    1,256
    
    
    
    22.90Consumer
    
    
    222
    
    
    
    2.2
    
    
    
    255
    
    
    
    2.7Tax exempt loans
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    3.5Not specifically
Allocated
    
    
    361
    
    
    
    
    
    
    
    848Total allowance
    
    $
    11,410
    
    
    
    100.0
    %
    
    $
    7,992
    
    
    
    100.0
    %
    Non-Performing Loans, Potential Problem Loans and Other Real Estate
 36




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Table 11: Nonperforming Loans and Other Real Estate Owned
 Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands)Nonaccrual loans
    
    $
    6,942
    
    
    $
    5,920
    
    
    $
    11,079
    
    
    $
    12,244
    
    
    $
    9,929Accruing loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    5,144
    
    
    
    9,844
    
    
    
    4,744Total non-performing loans (NPLs)
    
    $
    6,942
    
    
    $
    5,920
    
    
    $
    16,223
    
    
    $
    22,088
    
    
    $
    14,673Investment subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,994
    
    
    
    Other real estate owned/operating subsidiaries
    
    
    3,333
    
    
    
    2,572
    
    
    
    2,271
    
    
    
    896
    
    
    
    1,673Total non-performing assets (NPAs)
    
    $
    10,275
    
    
    $
    8,492
    
    
    $
    18,494
    
    
    $
    24,978
    
    
    $
    16,346Ratios:NPLs to total loans
    
    
    0.85
    %
    
    
    0.78
    %
    
    
    2.27
    %
    
    
    3.24
    %
    
    
    2.34
    %NPAs to total assets
    
    
    0.94
    %
    
    
    0.81
    %
    
    
    1.90
    %
    
    
    2.76
    %
    
    
    1.93
    %ALL to NPLs
    
    
    137.58
    %
    
    
    176.44
    %
    
    
    74.95
    %
    
    
    51.66
    %
    
    
    54.47
    %
   37




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##### Table of Contents



Table 12: Foregone Loan Interest
 Years ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)Interest income in accordance with
original terms
    
    $
    605
    
    
    $
    688
    
    
    $
    996Interest income recognized
    
    
    (300
    )
    
    
    (383
    )
    
    
    (352
    )Reduction in interest income
    
    $
    305
    
    
    $
    305
    
    
    $
    644
    Table 13: Other Real Estate Operation Summary
 2005
    
    
    2004
    
    
    2003(dollars in thousands)Beginning balance,
    
    $
    2,572
    
    
    $
    2,271
    
    
    $
    896Transfer of net realizable value to other
real estate
    
    $
    2,252
    
    
    $
    3,316
    
    
    $
    3,549Sales proceeds, net
    
    
    ( 1,280
    )
    
    
    (2,992
    )
    
    
    (2,219
    )Net gain (loss) from sale of other real estate
    
    $
    (25
    )
    
    $
    173
    
    
    $
    65Provision for other real estate
    
    
    (186
    )
    
    
    (196
    )
    
    
    (20
    )Total other real estate
    
    $
    3,333
    
    
    $
    2,572
    
    
    $
    2,271Income from operation of ORE
    
    $
    86
    
    
    $
    279
    
    
    $
    86Expense from operation of ORE
    
    
    556
    
    
    
    935
    
    
    
    488Gains taken on ORE properties **
    
    
    86
    
    
    
    282
    
    
    
    88Losses taken on ORE properties
    
    
    111
    
    
    
    109
    
    
    
    23
 
 **
    
    Please note that gains taken on ORE properties may include gains that are deferred for immediate
recognition. Investment Portfolio
  Table 14: Investment Portfolio
 38




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##### Table of Contents



2005
    
    
    2004
    
    
    2003(dollars in thousands)Securities Available for Sale (AFS):U.S. Treasury and other agency
Securities
    
    $
    60,793
    
    
    $
    58,796
    
    
    $
    37,942Obligations of states and political
Subdivisions
    
    
    33,689
    
    
    
    32,417
    
    
    
    32,848Mortgage-backed securities
    
    
    74,544
    
    
    
    99,964
    
    
    
    99,970Private placement
    
    
    996
    
    
    
    994
    
    
    
    991Other equity securities
    
    
    4,421
    
    
    
    3,442
    
    
    
    1,886Total amortized cost
    
    $
    174,443
    
    
    $
    195,613
    
    
    $
    173,637Total fair value and carrying value
    
    $
    171,638
    
    
    $
    197,392
    
    
    $
    176,815
    Table 15: Securities Portfolio Maturity Distribution
 Securities AFS - maturity distribution and weighted average yieldAfter one year
    
    
    After five yearsBut within five
    
    
    But within tenWithin one year
    
    
    Years
    
    
    years
    
    
    After ten years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldTreasury
    
    $
    195
    
    
    
    4.59
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    195
    
    
    
    4.59
    %Agencies
    
    
    7,927
    
    
    
    6.48
    %
    
    
    51,697
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,624
    
    
    
    4.44
    %Mortgage-backed
securities
    
    
    3,199
    
    
    
    3.95
    %
    
    
    66,380
    
    
    
    4.11
    %
    
    
    2,952
    
    
    
    4.47
    %
    
    
    
    
    
    
    
    
    
    
    72,531
    
    
    
    4.12
    %Obligations of
states and
political
subdivisions
    
    
    3,042
    
    
    
    7.37
    %
    
    
    4,114
    
    
    
    7.17
    %
    
    
    7,781
    
    
    
    7.12
    %
    
    
    18,890
    
    
    
    6.17
    %
    
    
    33,827
    
    
    
    6.62
    %Private placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,040
    
    
    
    8.53
    %
    
    
    1,040
    
    
    
    8.53
    %Other
    
    
    2,885
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    7.30
    %
    
    
    1,436
    
    
    
    5.73
    %
    
    
    4,421
    
    
    
    3.52
    %Total carrying
value
    
    $
    17,248
    
    
    
    5.68
    %
    
    $
    122,191
    
    
    
    4.22
    %
    
    $
    10,833
    
    
    
    6.40
    %
    
    $
    21,366
    
    
    
    6.26
    %
    
    
    171,638
    
    
    
    4.75
    %
 39




---



##### Table of Contents



Deposits
  Table 16: Average Deposits Distribution
 2005
    
    
    2004
    
    
    2003Amount
    
    
    % of Total
    
    
    Amount
    
    
    % of Total
    
    
    Amount
    
    
    % of Total(dollars in thousands)Noninterest-bearing
Demand deposits
    
    $
    107,506
    
    
    
    13
    %
    
    $
    105,134
    
    
    
    13
    %
    
    $
    88,642
    
    
    
    12
    %Interest-bearing demand
Deposits
    
    
    90,782
    
    
    
    11
    %
    
    
    89,648
    
    
    
    11
    %
    
    
    74,998
    
    
    
    10
    %Savings deposits
    
    
    221,414
    
    
    
    26
    %
    
    
    199,942
    
    
    
    25
    %
    
    
    196,598
    
    
    
    26
    %Other time deposits
    
    
    178,912
    
    
    
    21
    %
    
    
    188,571
    
    
    
    24
    %
    
    
    208,160
    
    
    
    28
    %Time deposits $100,000
and over (excluding
brokered deposits)
    
    
    64,180
    
    
    
    8
    %
    
    
    75,177
    
    
    
    10
    %
    
    
    81,342
    
    
    
    11
    %Brokered certificates of
Deposit
    
    
    175,502
    
    
    
    21
    %
    
    
    132,573
    
    
    
    17
    %
    
    
    98,215
    
    
    
    13
    %Total deposits
    
    $
    838,296
    
    
    
    100
    %
    
    $
    791,045
    
    
    
    100
    %
    
    $
    747,955
    
    
    
    100
    %
 Table 17: Maturity Distribution-Certificates of Deposit and Other Time Deposits of $100,000 or
More
 40




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##### Table of Contents



December 31, 2005Certificates of DepositThree months or less
    
    $
    42,988Over three months through six months
    
    
    32,232Over six months through twelve months
    
    
    42,976Over twelve months
    
    
    105,967Total
    
    $
    224,163
    Other funding sources
  Table 18: Short-term Borrowings
 41




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##### Table of Contents



December 31,2005
    
    2004
    
    2003(dollars in thousands)Federal funds purchased and repurchase
agreements:Balance end of year
    
    $
    1,315
    
    
    $
    1,284
    
    
    $
    23,359Average amounts outstanding during year
    
    $
    26,945
    
    
    $
    25,529
    
    
    $
    11,343Maximum month-end amounts outstanding
    
    $
    48,804
    
    
    $
    44,600
    
    
    $
    32,641Average interest rates on amounts
Outstanding at end of year
    
    
    3.70
    %
    
    
    1.88
    %
    
    
    1.23
    %Average interest rates on amounts
Outstanding during year
    
    
    3.45
    %
    
    
    1.57
    %
    
    
    1.32
    %Federal Home Loan Bank advances:Balance end of year
    
    $
    125,185
    
    
    $
    100,192
    
    
    $
    75,092Average amounts outstanding during year
    
    $
    116,407
    
    
    $
    95,291
    
    
    $
    65,250Maximum month-end amounts outstanding
    
    $
    125,188
    
    
    $
    100,196
    
    
    $
    75,093Average interest rates on amounts
outstanding at end of year
    
    
    4.35
    %
    
    
    2.88
    %
    
    
    2.41
    %Average interest rates on amounts
outstanding during year
    
    
    3.70
    %
    
    
    2.41
    %
    
    
    3.12
    %
  Long-term Debt
  Off-Balance Sheet Obligations
  Table 19: Commitments
 2005(dollars in thousands)Commitments to fund home equity line loans
    
    $
    45,435Commitments to fund residential real estate construction
    
    
    3,409Commitments unused on various other lines of credit loans
    
    
    164,112Total commitments to extend credit
    
    $
    212,956Financial standby letters of credit
    
    $
    22,160
  42




---



##### Table of Contents



Contractual Obligations
  Table 20: Contractual Obligations
 Payments due by period(dollars in
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    More than 5thousands)
    
    Total
    
    year
    
    1 to 3 years
    
    3 to 5 years
    
    yearsCertificates of
deposit and other
time deposit
obligations
    
    $
    398,557
    
    
    $
    237,447
    
    
    $
    156,670
    
    
    $
    4,440
    
    
    
    Subordinated
debentures **
    
    $
    16,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,100FHLB advances
    
    
    125,185
    
    
    
    85,000
    
    
    
    15,083
    
    
    
    102
    
    
    
    25,000Operating leases
    
    
    68
    
    
    
    41
    
    
    
    27
    
    
    
    
    
    
    
    Totals
    
    $
    539,910
    
    
    $
    322,488
    
    
    $
    171,780
    
    
    $
    4,542
    
    
    $
    41,100
 
 **
    
    Note that the subordinated debentures are potentially redeemable by the Company on March 31,
2006.  Liquidity
     43




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44




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##### Table of Contents



Interest Rate Sensitivity Management
   Table 21: Net Interest Income Sensitivity Analysis
 Net Interest IncomePotential impact on 2006
    
    
    
    
    
    Potential Change in Net
    
    Potential Change in Netnet interest income
    
    Amount
    
    Interest Income ($)
    
    Interest Income (%)(Dollars in thousands)+ 200 bps
    
    $
    40,444
    
    
    $
    2,572
    
    
    
    6.8
    %+ 100 bps
    
    $
    39,714
    
    
    $
    1,842
    
    
    
    4.9
    %Base
    
    $
    37,872
    
    
    
    
    
    
    
    - 100 bps
    
    $
    35,521
    
    
    
    ($2,351
    )
    
    
    (6.2
    %)- 200 bps
    
    $
    32,967
    
    
    
    ($4,905
    )
    
    
    (13.0
    %)
  Potential impact on 2005
    
    Net Interest Incomenet interest income
    
    Amount
    
    Change ($)
    
    Change (%)(Dollars in thousands)+ 200 bps
    
    $
    40,100
    
    
    $
    2,357
    
    
    
    6.2
    %+ 100 bps
    
    $
    38,834
    
    
    $
    1,092
    
    
    
    2.9
    %Base
    
    $
    37,743
    
    
    
    
    
    
    
    - 100 bps
    
    $
    35,987
    
    
    
    ($1,756
    )
    
    
    (4.7
    %)-200 bps
    
    $
    34,086
    
    
    
    ($3,657
    )
    
    
    (9.7
    %)
  45




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Capital Resources
       46




---



##### Table of Contents



Table 22: Capital
 To Be Well CapitalizedUnder PromptFor Capital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    Provisions(dollars in thousands)At December 31, 2005:Total capital (to risk
weighted assets):The Company
    
    $
    99,882
    
    
    
    10.73
    %
    
    $
    74,472
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    97,327
    
    
    
    10.51
    %
    
    $
    74,404
    
    
    
    8.00
    %
    
    $
    93,005
    
    
    
    10.00
    %Tier 1 capital (to risk
Weighted assets):The Company
    
    $
    90,332
    
    
    
    9.70
    %
    
    $
    37,236
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    87,778
    
    
    
    9.44
    %
    
    $
    37,202
    
    
    
    4.00
    %
    
    $
    55,803
    
    
    
    6.00
    %Tier 1 capital (to average
assets):The Company
    
    $
    90,332
    
    
    
    8.27
    %
    
    $
    43,692
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    87,778
    
    
    
    8.11
    %
    
    $
    43,590
    
    
    
    4.00
    %
    
    $
    54,488
    
    
    
    5.00
    %At December 31, 2004:
 47




---



##### Table of Contents



To Be Well CapitalizedUnder PromptFor Capital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    Provisions(dollars in thousands)Total capital (to risk
weighted assets):The Company
    
    $
    95,433
    
    
    
    10.95
    %
    
    $
    69,791
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    91,521
    
    
    
    10.53
    %
    
    $
    69,580
    
    
    
    8.00
    %
    
    $
    86,975
    
    
    
    10.00
    %Tier 1 capital (to risk
Weighted assets):The Company
    
    $
    84,988
    
    
    
    9.75
    %
    
    $
    34,895
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    81,076
    
    
    
    9.33
    %
    
    $
    34,790
    
    
    
    4.00
    %
    
    $
    52,185
    
    
    
    6.00
    %Tier 1 capital (to average
assets):The Company
    
    $
    84,988
    
    
    
    8.27
    %
    
    $
    41,129
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AThe Bank
    
    $
    81,076
    
    
    
    7.91
    %
    
    $
    41,025
    
    
    
    4.00
    %
    
    $
    51,282
    
    
    
    5.00
    %
  Table 23: Selected Quarterly Financial Data
  2005 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share data)Interest income
    
    $
    13,812
    
    
    $
    15,178
    
    
    $
    15,885
    
    
    $
    16,663Interest expense
    
    
    5,198
    
    
    
    6,288
    
    
    
    7,093
    
    
    
    8,081Net interest income
    
    
    8,614
    
    
    
    8,890
    
    
    
    8,792
    
    
    
    8,582Provision for loan losses
    
    
    30
    
    
    
    91
    
    
    
    1,547
    
    
    
    1,549Net interest income after
PLL
    
    
    8,584
    
    
    
    8,799
    
    
    
    7,245
    
    
    
    7,033Non-interest income
    
    
    2,263
    
    
    
    2,026
    
    
    
    2,343
    
    
    
    4,965Non-interest expense
    
    
    7,045
    
    
    
    7,091
    
    
    
    8,943
    
    
    
    7,440Income before income tax
expense
    
    
    3,802
    
    
    
    3,734
    
    
    
    645
    
    
    
    4,558Provision for income tax
    
    
    1,218
    
    
    
    1,174
    
    
    
    (62
    )
    
    
    1,506Net income
    
    
    2,584
    
    
    
    2,560
    
    
    
    707
    
    
    
    3,052Basic earnings per share
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.09
    
    
    $
    0.39Diluted earnings per share
    
    
    0.33
    
    
    
    0.33
    
    
    
    0.09
    
    
    
    0.39
   48




---



##### Table of Contents



2004 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share data)Interest income
    
    $
    11,861
    
    
    $
    12,239
    
    
    $
    12,752
    
    
    $
    13,510Interest expense
    
    
    4,033
    
    
    
    3,887
    
    
    
    3,991
    
    
    
    4,446Net interest income
    
    
    7,828
    
    
    
    8,352
    
    
    
    8,761
    
    
    
    9,064Provision for loan losses
    
    
    775
    
    
    
    3,887
    
    
    
    70
    
    
    
    30Net interest income after
PLL
    
    
    7,053
    
    
    
    7,628
    
    
    
    8,691
    
    
    
    9,034Non-interest income
    
    
    1,982
    
    
    
    2.675
    
    
    
    2,416
    
    
    
    2,465Non-interest expense
    
    
    6,372
    
    
    
    6,512
    
    
    
    6,575
    
    
    
    7,032Income before income tax
Expense
    
    
    7,828
    
    
    
    8,352
    
    
    
    8,761
    
    
    
    9,064Provision for income tax
    
    
    767
    
    
    
    1,198
    
    
    
    1,458
    
    
    
    1,257Net income
    
    
    1,896
    
    
    
    2,593
    
    
    
    3,074
    
    
    
    3,210Basic earnings per share
    
    $
    0.25
    
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.42Diluted earnings per share
    
    
    0.25
    
    
    
    0.33
    
    
    
    0.39
    
    
    
    0.41
 Recent Accounting Pronouncements
  
 ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  49




---



##### Table of Contents



Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission
   50




---



##### Table of Contents



51




---



##### Table of Contents



Internal Control  Integrated Framework
   52




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    (SMITH & GESTELAND, LLP)Madison, WisconsinJanuary 21, 2004
    
    SMITH & GESTELAND, LLP
 53




---



##### Table of Contents



2005
    
    
    2004ASSETSCash and due from financial institutions
    
    $
    32,855
    
    
    $
    20,727Federal funds sold
    
    
    199
    
    
    
    5,445Cash and cash equivalents
    
    
    33,054
    
    
    
    26,172Securities available for sale
    
    
    171,638
    
    
    
    197,392Loans held for sale
    
    
    374
    
    
    
    1,349Loans, net of allowance after $9,551 and $10,445
    
    
    802,745
    
    
    
    746,783Cash value of life insurance
    
    
    22,814
    
    
    
    21,561Premises, held for sale
    
    
    1,167
    
    
    
    1,537Premises and equipment, net
    
    
    24,703
    
    
    
    23,240Federal Home Loan Bank stock
    
    
    8,081
    
    
    
    7,697Foreclosed assets, net
    
    
    3,333
    
    
    
    2,572Goodwill
    
    
    5,723
    
    
    
    5,723Accrued interest receivable
    
    
    5,354
    
    
    
    4,330Other assets
    
    
    10,422
    
    
    
    9,392Total assets
    
    $
    1,089,408
    
    
    $
    1,047,748LIABILITIES AND STOCKHOLDERS EQUITYDepositsNon-interest-bearing
    
    $
    110,641
    
    
    $
    120,511Interest-bearing
    
    
    746,070
    
    
    
    724,030Total deposits
    
    
    856,711
    
    
    
    844,541Federal Home Loan Bank advances
    
    
    125,185
    
    
    
    100,192Federal funds purchased and repurchase agreements
    
    
    1,315
    
    
    
    1,284Subordinated debentures
    
    
    16,100
    
    
    
    16,100Accrued expenses and other liabilities
    
    
    10,310
    
    
    
    8,272Dividends payable
    
    
    1,243
    
    
    
    1,154Total liabilities
    
    
    1,010,864
    
    
    
    971,543Common stock, $5 par value, authorized 50,000,000; issued-7,805,586 shares in 2005, 7,715,936 shares in 2004; outstanding-7,782,427 shares in 2005, 7,692,777 shares in 2004
    
    
    39,028
    
    
    
    38,580Additional paid-in capital
    
    
    9,466
    
    
    
    8,806Retained earnings
    
    
    32,461
    
    
    
    28,275Treasury stock (23,159 shares in 2005 and 2004)
    
    
    (625
    )
    
    
    (625
    )Accumulated other comprehensive income (loss)
    
    
    (1,786
    )
    
    
    1,169Total stockholders equity
    
    
    78,544
    
    
    
    76,205Total liabilities and stockholders equity
    
    $
    1,089,408
    
    
    $
    1,047,748
  54




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Interest and dividend incomeLoans, including fees
    
    $
    52,609
    
    
    $
    42,254
    
    
    $
    40,852Taxable securities
    
    
    6,932
    
    
    
    6,594
    
    
    
    4,857Tax exempt securities
    
    
    1,874
    
    
    
    1,486
    
    
    
    1,689Federal funds sold and other
    
    
    123
    
    
    
    28
    
    
    
    76Total interest and dividend income
    
    
    61,538
    
    
    
    50,362
    
    
    
    47,474Interest expenseDeposits
    
    
    19,382
    
    
    
    11,968
    
    
    
    14,585Federal funds purchased and repurchase agreements
    
    
    930
    
    
    
    401
    
    
    
    150Federal Home Loan Bank advances and other debt
    
    
    4,309
    
    
    
    2,293
    
    
    
    2,036Subordinated debentures
    
    
    2,039
    
    
    
    1,695
    
    
    
    1,645Total interest expense
    
    
    26,660
    
    
    
    16,357
    
    
    
    18,416Net interest income
    
    
    34,878
    
    
    
    34,005
    
    
    
    29,058Provision for loan losses
    
    
    3,217
    
    
    
    1,599
    
    
    
    5,650Net interest income after provision for loan losses
    
    
    31,661
    
    
    
    32,406
    
    
    
    23,408Other incomeFees from fiduciary activities
    
    
    780
    
    
    
    703
    
    
    
    677Fees from loan servicing
    
    
    1,131
    
    
    
    1,079
    
    
    
    1,470Fees for other services to customers
    
    
    4,759
    
    
    
    4,608
    
    
    
    4,053Gains from sales of loans
    
    
    1,013
    
    
    
    1,372
    
    
    
    2,449Securities gains, net
    
    
    52
    
    
    
    
    
    
    
    Net gains (loss) from sale and disposal of premises
and equipment
    
    
    2,383
    
    
    
    475
    
    
    
    (1
    )Increase in cash surrender value of life insurance
    
    
    784
    
    
    
    772
    
    
    
    821Gain on sale of Arborview, LLC
    
    
    
    
    
    
    
    
    
    
    538Rental income
    
    
    
    
    
    
    
    
    
    
    67Other income
    
    
    695
    
    
    
    517
    
    
    
    566Total other income
    
    
    11,597
    
    
    
    9,526
    
    
    
    10,640Noninterest expensesSalaries and employee benefits
    
    
    16,733
    
    
    
    15,283
    
    
    
    14,183Occupancy expense
    
    
    2,441
    
    
    
    2,156
    
    
    
    2,087Equipment expense
    
    
    1,564
    
    
    
    1,373
    
    
    
    1,438Data processing and courier
    
    
    1,163
    
    
    
    1,125
    
    
    
    1,087Operation of other real estate
    
    
    399
    
    
    
    599
    
    
    
    378Provision for impairment of standby letter of credit
    
    
    2,191
    
    
    
    
    
    
    
    Other operating expenses
    
    
    6,028
    
    
    
    5,943
    
    
    
    4,858Total other expenses
    
    
    30,519
    
    
    
    26,479
    
    
    
    24,031Income before income tax expense
    
    
    12,739
    
    
    
    15,453
    
    
    
    10,017Income tax expense
    
    
    3,836
    
    
    
    4,680
    
    
    
    2,060Net income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Basic earnings per common share
    
    $
    1.15
    
    
    $
    1.41
    
    
    $
    1.06Diluted earnings per common share
    
    $
    1.14
    
    
    $
    1.40
    
    
    $
    1.04
  55




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##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    TotalShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Income
    
    
    EquityBalance, January 1, 2003
    
    
    7,483,277
    
    
    $
    37,532
    
    
    $
    7,373
    
    
    $
    17,903
    
    
    $
    (625
    )
    
    $
    3,217
    
    
    $
    65,400Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,957
    
    
    
    
    
    
    
    
    
    
    
    7,957Net changes in unrealized gain (loss) on securities
available for sale, net of $622 deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,132
    )
    
    
    (1,132
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,825Stock options exercised
    
    
    121,700
    
    
    
    609
    
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,220Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179Cash dividends declared ($0.53 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,996
    )
    
    
    
    
    
    
    
    
    
    
    (3,996
    )Balance, December 31, 2003
    
    
    7,604,977
    
    
    
    38,141
    
    
    
    8,163
    
    
    
    21,864
    
    
    
    (625
    )
    
    
    2,085
    
    
    
    69,628Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,773
    
    
    
    
    
    
    
    
    
    
    
    10,773Net changes in unrealized gain (loss) on securities
available for sale, net of $483 deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (916
    )
    
    
    (916
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,857Stock options exercised
    
    
    87,800
    
    
    
    439
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    938Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Cash dividends declared ($0.57 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,362
    )
    
    
    
    
    
    
    
    
    
    
    (4,362
    )Balance, December 31, 2004
    
    
    7,692,777
    
    
    
    38,580
    
    
    
    8,806
    
    
    
    28,275
    
    
    
    (625
    )
    
    
    1,169
    
    
    
    76,205Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,903
    
    
    
    
    
    
    
    
    
    
    
    8,903Net changes in unrealized gain (loss) on securities
available for sale, net of $1,629 deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,955
    )
    
    
    (2,955
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,948Stock options exercised
    
    
    89,650
    
    
    
    448
    
    
    
    364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    812Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296Cash 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
  56




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Reconciliation of net income to net cash provided by
operating activities:Net income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Adjustments to reconcile net income to net cash
provided to operating activities:Depreciation
    
    
    1,585
    
    
    
    1,482
    
    
    
    1,428Amortization of debt issuance costs
    
    
    429
    
    
    
    85
    
    
    
    35Amortization of core deposit intangible
    
    
    52
    
    
    
    49
    
    
    
    6Provision for losses on loans
    
    
    3,217
    
    
    
    1,599
    
    
    
    5,650Provision for impairment of standby letter of credit
    
    
    2,191
    
    
    
    
    
    
    
    Net amortization of securities
    
    
    578
    
    
    
    567
    
    
    
    620Increase in cash surrender value of life insurance
    
    
    (784
    )
    
    
    (772
    )
    
    
    (821
    )Federal Home Loan Bank stock dividend
    
    
    (384
    )
    
    
    (450
    )
    
    
    (533
    )Net realized gain on sale of securities
    
    
    (52
    )
    
    
    
    
    
    
    Net gain on sale of loans
    
    
    (1,013
    )
    
    
    (1,372
    )
    
    
    (2,449
    )Proceeds from sale of loans held for sale
    
    
    50,333
    
    
    
    63,204
    
    
    
    141,877Origination of loans held for sale
    
    
    (48,345
    )
    
    
    (63,410
    )
    
    
    (138,530
    )Provision for valuation allowance on other real estate owned
    
    
    186
    
    
    
    196
    
    
    
    20Gain on sale of Arborview, LLC
    
    
    
    
    
    
    
    
    
    
    (538
    )Net (gain) loss from sale and disposal of premises
and equipment
    
    
    (2,383
    )
    
    
    (475
    )
    
    
    1Net gain from disposal of other real estate owned
    
    
    25
    
    
    
    (173
    )
    
    
    (65
    )Change in deferred tax expense
    
    
    910
    
    
    
    119
    
    
    
    156Changes in assets and liabilities:Accrued interest receivable and other assets
    
    
    (892
    )
    
    
    532
    
    
    
    1,031Accrued expenses and other liabilities
    
    
    1,021
    
    
    
    2,117
    
    
    
    (309
    )Net cash provided by operating activities
    
    
    15,577
    
    
    
    14,071
    
    
    
    15,536Cash flows from investing activities:Proceeds from sale of securities available-for-sale
    
    
    36,516
    
    
    
    
    
    
    
    Principal payments on securities available-for-sale
    
    
    20,228
    
    
    
    16,859
    
    
    
    68,096Purchase of securities available-for-sale
    
    
    (36,101
    )
    
    
    (39,402
    )
    
    
    (114,953
    )Proceeds from sale of other real estate owned
    
    
    1,280
    
    
    
    2,992
    
    
    
    2,219Proceeds from sale of subsidiary assets
    
    
    
    
    
    
    
    
    
    
    2,595Cash paid in completion of acquisition
    
    
    
    
    
    
    (754
    )
    
    
    Proceeds from sale of premises and equipment
    
    
    5,428
    
    
    
    774
    
    
    
    Loan originations and payments, net
    
    
    (63,232
    )
    
    
    (48,884
    )
    
    
    (40,189
    )Additions to premises and equipment
    
    
    (5,723
    )
    
    
    (4,600
    )
    
    
    (2,001
    )Investment in bank-owned life insurance
    
    
    (469
    )
    
    
    
    
    
    
    (4,000
    )Net cash used in investing activities
    
    
    (42,073
    )
    
    
    (73,015
    )
    
    
    (88,233
    )
  57




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Cash flows from financing activities:Net change in deposits
    
    $
    12,170
    
    
    $
    61,249
    
    
    $
    42,968Net change in federal funds purchased and
repurchase agreements
    
    
    31
    
    
    
    (22,075
    )
    
    
    13,303Proceeds from Federal Home Loan Bank advances
    
    
    100,000
    
    
    
    125,105
    
    
    
    80,093Repayments on Federal Home Loan Bank advances
    
    
    (75,007
    )
    
    
    (100,005
    )
    
    
    (70,001
    )Payments on other borrowings and long-term debt
    
    
    
    
    
    
    (53
    )
    
    
    (53
    )Proceeds from exercise of stock options
    
    
    812
    
    
    
    938
    
    
    
    1,220Cash dividends paid
    
    
    (4,628
    )
    
    
    (4,269
    )
    
    
    (3,907
    )Net cash provided by financing activities
    
    
    33,378
    
    
    
    60,890
    
    
    
    63,623Net change in cash and cash equivalents
    
    
    6,882
    
    
    
    1,946
    
    
    
    (9,074
    )Beginning cash and cash equivalents
    
    
    26,172
    
    
    
    24,226
    
    
    
    33,300Ending cash and cash equivalents
    
    $
    33,054
    
    
    $
    26,172
    
    
    $
    24,226Supplemental cash flow information:Interest paid
    
    $
    25,186
    
    
    $
    16,078
    
    
    $
    19,147Income taxes paid
    
    
    3,257
    
    
    
    3,405
    
    
    
    2,019Supplemental noncash disclosures:Transfers from loans to other real estate owned
    
    
    2,252
    
    
    
    3,316
    
    
    
    3,549
  58




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##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    Use of Estimates
 Cash Flows
  59




---



##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Securities
   Loans Held for Sale
  Loans
   60




---



##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Allowance for Loan Losses
   Servicing Rights
   61




---



##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Cash Value of Life Insurance
 Transfers of Financial Assets
 Foreclosed Assets
 Premises, held for sale:
 Premises and Equipment
  62




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##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Goodwill and Other Intangible Assets
  Long-Term Assets
 Loan Commitments and Related Financial Instruments
 Trust Fee Income
 Advertising Expense
  63




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##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Stock Compensation Accounting for Stock-Based Compensation.
 2005
    
    
    2004
    
    
    2003Net incomeAs reported
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Stock-based compensation expense
determined under the fair value
based method
    
    
    57
    
    
    
    110
    
    
    
    183Pro forma
    
    $
    8,846
    
    
    $
    10,663
    
    
    $
    7,774Basic earnings per common shareAs reported
    
    $
    1.15
    
    
    $
    1.41
    
    
    $
    1.06Pro forma
    
    
    1.14
    
    
    
    1.39
    
    
    
    1.03Diluted earnings per common shareAs reported
    
    $
    1.14
    
    
    $
    1.40
    
    
    $
    1.04Pro forma
    
    
    1.13
    
    
    
    1.38
    
    
    
    1.02
   64




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##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  2005
    
    2004
    
    2003Weighted average grant date fair value
    
    
    n/a
    
    
    $
    1.53
    
    
    $
    3.28Assumptions:Risk-free interest rates
    
    
    n/a
    
    
    
    2.25
    %
    
    
    3.73
    %Expected volatility
    
    
    n/a
    
    
    
    17.03
    %
    
    
    25.10
    %Expected term (in years)
    
    
    n/a
    
    
    
    6.98
    
    
    
    8.00Expected dividend yield
    
    
    n/a
    
    
    
    3.75
    %
    
    
    3.65
    %
  Income Taxes
 Earnings Per Common Share
 Comprehensive Income
 Effect of Newly Issued But Not Yet Effective Accounting Standards
  65




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##### Table of Contents



NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Loss Contingencies
 Restrictions on Cash
 Fair Value of Financial Instruments
 Dividend Reinvestment Plan
 Operating Segments
 Reclassifications
  66




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##### Table of Contents



NOTE 2
 SECURITIES
  2005Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    LossesU.S. Treasury and other
U.S. government agencies
    
    $
    59,819
    
    
    $
    179
    
    
    $
    1,153Obligations of states and
political subdivisions
    
    
    33,827
    
    
    
    407
    
    
    
    269Mortgage-backed securities
    
    
    72,531
    
    
    
    2
    
    
    
    2,015Private placement
    
    
    1,040
    
    
    
    44
    
    
    
    Other equity securities
    
    
    4,421
    
    
    
    
    
    
    
    $
    171,638
    
    
    $
    632
    
    
    $
    3,437
 2004Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    LossesU.S. Treasury and other
U.S. government agencies
    
    $
    59,547
    
    
    $
    965
    
    
    $
    214Obligations of states and
political subdivisions
    
    
    33,973
    
    
    
    1,556
    
    
    
    Mortgage-backed securities
    
    
    99,360
    
    
    
    190
    
    
    
    794Private placements
    
    
    1,070
    
    
    
    76
    
    
    
    Other equity securities
    
    
    3,442
    
    
    
    
    
    
    
    $
    197,392
    
    
    $
    2,787
    
    
    $
    1,008
   2005
    
    2004
    
    2003Proceeds
    
    $
    36,516
    
    
    $
    
    
    
    $
    Gross realized gains
    
    
    465
    
    
    
    
    
    
    
    Gross realized losses
    
    
    413
    
    
    
    
    
    
    
    
  67




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##### Table of Contents



NOTE 2  SECURITIES
  EstimatedMarketValueDue in one year or less
    
    $
    11,164Due after one year through five years
    
    
    55,811Due after five years through ten years
    
    
    7,781Due after ten years
    
    
    19,93094,686Other equity securities
    
    
    4,421Mortgage-backed securities
    
    
    72,531$
    171,638
   Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss2005U.S. government agencies
    
    $
    24,356
    
    
    $
    440
    
    
    $
    20,199
    
    
    $
    713
    
    
    $
    44,555
    
    
    $
    1,153Mortgage-backed securities
    
    
    26,535
    
    
    
    495
    
    
    
    45,801
    
    
    
    1,520
    
    
    
    72,336
    
    
    
    2,015Obligations states and
Political subdivisions
    
    
    14,182
    
    
    
    267
    
    
    
    498
    
    
    
    2
    
    
    
    14,680
    
    
    
    269Total temporarily
impaired
    
    $
    65,073
    
    
    $
    1,202
    
    
    $
    66,498
    
    
    $
    2,235
    
    
    $
    131,571
    
    
    $
    3,437
  68




---



##### Table of Contents



NOTE 2  SECURITIES
 2004
 U.S. government agencies
    
    $
    32,329
    
    
    $
    201
    
    
    $
    1,235
    
    
    $
    13
    
    
    $
    33,564
    
    
    $
    214Mortgage-backed securities
    
    
    16,537
    
    
    
    191
    
    
    
    55,441
    
    
    
    603
    
    
    
    71,978
    
    
    
    794Total temporarily
impaired
    
    $
    48,866
    
    
    $
    392
    
    
    $
    56,676
    
    
    $
    616
    
    
    $
    105,542
    
    
    $
    1,008
     69




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##### Table of Contents



NOTE 3  LOANS
  2005
    
    
    2004Commercial
    
    $
    80,260
    
    
    $
    83,787Real estateResidential
    
    
    148,736
    
    
    
    134,350Commercial
    
    
    467,956
    
    
    
    424,712Construction
    
    
    85,729
    
    
    
    80,384Consumer
    
    
    14,263
    
    
    
    13,936Tax exempt loans
    
    
    15,785
    
    
    
    20,457812,729
    
    
    
    757,626Less: Deferred loan origination fees, net of costs
    
    
    433
    
    
    
    398Allowance for loan losses
    
    
    9,551
    
    
    
    10,445Net loans
    
    $
    802,745
    
    
    $
    746,783
    2005
    
    
    2004Balance at beginning of year
    
    $
    4,726
    
    
    $
    3,311New loans made
    
    
    5,549
    
    
    
    4,065Repayments received
    
    
    (4,762
    )
    
    
    (2,627
    )Loans related to former officers and directors
    
    
    (38
    )
    
    
    (23
    )Balance at end of year
    
    $
    5,475
    
    
    $
    4,726
  70




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##### Table of Contents



NOTE 3  LOANS
  2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    10,445
    
    
    $
    12,159
    
    
    $
    11,410Provision charged to operations
    
    
    3,217
    
    
    
    1,599
    
    
    
    5,650Recoveries
    
    
    760
    
    
    
    976
    
    
    
    1,444Loans charged off
    
    
    (4,871
    )
    
    
    (4,289
    )
    
    
    (6,345
    )Balance at end of year
    
    $
    9,551
    
    
    $
    10,445
    
    
    $
    12,159
  2005
    
    
    2004Impaired loans with no allocated allowance
for loan loss
    
    $
    
    
    
    $
    Impaired loans with allocated allowance
for loan loss
    
    
    14,637
    
    
    
    16,116Allowance allocated to impaired loans
    
    
    3,233
    
    
    
    4,169
 2005
    
    
    2004
    
    
    2003Average impaired loans during the period
    
    $
    18,973
    
    
    $
    48,412
    
    
    $
    40,184Interest income recognized during
Impairment
    
    
    979
    
    
    
    2,338
    
    
    
    3,562Cash-basis interest income recognized
    
    
    928
    
    
    
    2,338
    
    
    
    3,562
  2005
    
    
    2004Loans past due over 90 days still on accrual
    
    $
    
    
    
    $
    Loans restructured in a troubled debt restructuring
    
    
    
    
    
    
    Non-accrual loans
    
    
    6,942
    
    
    
    5,920Total nonperforming loans
    
    $
    6,942
    
    
    $
    5,920
   71




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NOTE 4  PREMISES AND EQUIPMENT
 2005
    
    
    2004Land
    
    $
    3,973
    
    
    $
    4,238Buildings and improvements
    
    
    23,354
    
    
    
    21,033Equipment
    
    
    11,543
    
    
    
    10,295Construction in progress
    
    
    
    
    
    
    89138,870
    
    
    
    36,457Less accumulated depreciation
    
    
    14,167
    
    
    
    13,218Premises and equipment
    
    $
    24,703
    
    
    $
    23,240
    2006
    
    $
    412007
    
    
    27$
    68
    72




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##### Table of Contents



NOTE 5  OTHER REAL ESTATE
  2005
    
    
    2004
    
    
    2003Beginning balance
    
    $
    2,572
    
    
    $
    2,271
    
    
    $
    896Transfer of net realizable value to other real estate
    
    
    2,252
    
    
    
    3,316
    
    
    
    3,549Sale proceeds, net
    
    
    (1,280
    )
    
    
    (2,992
    )
    
    
    (2,219
    )Net gain (loss) from sale of other real estate
    
    
    (25
    )
    
    
    173
    
    
    
    65Provision for other real estate
    
    
    (186
    )
    
    
    (196
    )
    
    
    (120
    )Total Other Real Estate
    
    $
    3,333
    
    
    $
    2,572
    
    
    $
    2,271
  2005
    
    
    2004
    
    
    2003Beginning balance
    
    $
    216
    
    
    $
    47
    
    
    $
    33Provision charged to operations
    
    
    186
    
    
    
    196
    
    
    
    20Amounts related to properties disposed
    
    
    (135
    )
    
    
    (27
    )
    
    
    (6
    )Balance at end of year
    
    $
    267
    
    
    $
    216
    
    
    $
    47
 NOTE 6  GOODWILL
  2005
    
    
    2004Beginning of year
    
    $
    5,723
    
    
    $
    4,969Impairment
    
    
    
    
    
    
    Acquired goodwill
    
    
    
    
    
    
    754End of year
    
    $
    5,723
    
    
    $
    5,723
   73




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##### Table of Contents



NOTE 7  DEPOSITS
  2005
    
    
    2004Non-interest-bearing demand deposits
    
    $
    110,641
    
    
    $
    120,511Interest-bearing demand deposits
    
    
    104,074
    
    
    
    94,471Savings deposits
    
    
    33,696
    
    
    
    35,531Money market deposits
    
    
    209,743
    
    
    
    173,737Time deposits $100,000 and greater
    
    
    224,163
    
    
    
    236,008Other time deposits
    
    
    174,394
    
    
    
    184,283Total deposits
    
    $
    856,711
    
    
    $
    844,541Brokered certificates of deposit included above:
    
    $
    155,136
    
    
    $
    175,357
  2006
    
    $
    237,4472007
    
    
    90,1442008
    
    
    66,5262009
    
    
    4,4142010
    
    
    26$
    398,557
  NOTE 8  FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
  2005
    
    
    2004Federal funds purchased
    
    $
    
    
    
    $
    Securities sold under agreements to repurchase
    
    
    1,315
    
    
    
    1,284$
    1,315
    
    
    $
    1,284
  74




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##### Table of Contents



NOTE 8  FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
   NOTE 9  FEDERAL HOME LOAN BANK ADVANCES
  Weighted
    
    
    
    
    
    
    WeightedYear of
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageMaturity
    
    2005
    
    
    Rate
    
    
    2004
    
    
    Rate2005
    
    $
    
    
    
    
    
    
    
    $
    75,000
    
    
    
    2.23
    %2006
    
    
    85,000
    
    
    
    4.27
    %
    
    
    2007
    
    
    15,000
    
    
    
    4.06
    
    
    
    2011
    
    
    25,000
    
    
    
    4.80
    
    
    
    25,000
    
    
    
    4.80Total fixed maturity
    
    
    125,000
    
    
    
    4.35
    
    
    
    100,000
    
    
    
    2.87Amortizing
    
    
    185
    
    
    
    3.78
    
    
    
    192
    
    
    
    3.78Total
    
    $
    125,185
    
    
    
    4.35
    %
    
    $
    100,192
    
    
    
    2.87
    %
   75




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##### Table of Contents



NOTE 10  SUBORDINATED DEBENTURES
    NOTE 11  CAPITAL MATTERS
   76




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NOTE 11  CAPITAL MATTERS
  
  To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2005Total Capital to risk-
weighted assetsConsolidated
    
    $
    99,882
    
    
    
    10.73
    %
    
    $
    74,472
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    97,329
    
    
    
    10.51
    
    
    
    74,404
    
    
    
    8.00
    
    
    $
    93,006
    
    
    
    10.00
    %Tier 1 (Core) Capital to risk-
weighted assetsConsolidated
    
    
    90,332
    
    
    
    9.70
    
    
    
    37,236
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    87,778
    
    
    
    9.44
    
    
    
    37,202
    
    
    
    4.00
    
    
    
    55,803
    
    
    
    6.00Tier 1 (Core) Capital to
average assetsConsolidated
    
    
    90,332
    
    
    
    8.27
    
    
    
    43,692
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    87,778
    
    
    
    8.11
    
    
    
    43,590
    
    
    
    4.00
    
    
    
    54,488
    
    
    
    5.00
  77




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##### Table of Contents



NOTE 11  CAPITAL MATTERS
 To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2004Total Capital to risk-
weighted assetsConsolidated
    
    $
    95,433
    
    
    
    10.95
    %
    
    $
    69,791
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    91,521
    
    
    
    10.53
    
    
    
    69,580
    
    
    
    8.00
    
    
    $
    86,975
    
    
    
    10.00
    %Tier 1 (Core) Capital to risk-
weighted assetsConsolidated
    
    
    84,988
    
    
    
    9.75
    
    
    
    34,895
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    81,076
    
    
    
    9.33
    
    
    
    34,790
    
    
    
    4.00
    
    
    
    52,185
    
    
    
    6.00Tier 1 (Core) Capital to
average assetsConsolidated
    
    
    84,988
    
    
    
    8.27
    
    
    
    41,129
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    81,076
    
    
    
    7.91
    
    
    
    41,025
    
    
    
    4.00
    
    
    
    51,282
    
    
    
    5.00
 NOTE 12  OTHER COMPREHENSIVE INCOME
  2005
    
    
    2004
    
    
    2003Unrealized holding losses on securities
available for sale arising during period
    
    $
    (4,636
    )
    
    $
    (1,399
    )
    
    $
    (1,754
    )Reclassification adjustment for net gains
realized in income
    
    
    52
    
    
    
    
    
    
    
    Net unrealized losses
    
    
    (4,584
    )
    
    
    (1,399
    )
    
    
    (1,754
    )Tax effect
    
    
    1,629
    
    
    
    483
    
    
    
    622Comprehensive loss
    
    $
    (2,955
    )
    
    $
    (916
    )
    
    $
    (1,132
    )
  78




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##### Table of Contents



NOTE 13  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
   Contract orNotional Amount2005
    
    
    2004Financial instruments whose contract amounts
represent credit risk:Commitments to extend credit
    
    $
    212,956
    
    
    $
    186,304Standby letters of credit
    
    
    22,160
    
    
    
    23,428
 
    79




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##### Table of Contents



NOTE 13  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
  NOTE 14  POST-RETIREMENT PLANS
   NOTE 15  INCOME TAX EXPENSE
  2005
    
    
    2004
    
    
    2003Taxes currently payableFederal
    
    $
    2,592
    
    
    $
    3,953
    
    
    $
    2,076State
    
    
    335
    
    
    
    608
    
    
    
    1402,927
    
    
    
    4,561
    
    
    
    2,216Deferred income taxesFederal
    
    
    605
    
    
    
    80
    
    
    
    (134
    )State
    
    
    304
    
    
    
    39
    
    
    
    (22
    )909
    
    
    
    119
    
    
    
    (156
    )Income tax expense
    
    $
    3,836
    
    
    $
    4,680
    
    
    $
    2,060
  80




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##### Table of Contents



NOTE 15  INCOME TAX EXPENSE
  2005
    
    
    2004
    
    
    2004Income tax based on statutory rate
    
    $
    4,331
    
    
    $
    5,254
    
    
    $
    3,406State income taxes net of federal tax benefit
    
    
    341
    
    
    
    485
    
    
    
    934,672
    
    
    
    5,739
    
    
    
    3,499Effect of tax-exempt interest income
    
    
    (760
    )
    
    
    (668
    )
    
    
    (754
    )Life insurance death benefit and earnings
    
    
    (265
    )
    
    
    (262
    )
    
    
    (279
    )Equity in income of service center
    
    
    (133
    )
    
    
    (131
    )
    
    
    (128
    )Other
    
    
    322
    
    
    
    2
    
    
    
    (278
    )Provision based on effective tax rates
    
    $
    3,836
    
    
    $
    4,680
    
    
    $
    2,060
   2005
    
    
    2004Deferred tax assetsAllowance for loan losses
    
    $
    3,718
    
    
    $
    4,096Off-balance sheet credit losses
    
    
    153Deferred loan fees
    
    
    170
    
    
    
    157Deferred compensation
    
    
    1,268
    
    
    
    995Mortgage loan servicing
    
    
    91
    
    
    
    82Nonaccrual loans
    
    
    184
    
    
    
    352Accrued vacation pay
    
    
    321
    
    
    
    283OREO property valuation
    
    
    105
    
    
    
    85Net unrealized loss on securities available for sale
    
    
    1,019
    
    
    
    Donations
    
    
    167
    
    
    
    184Other
    
    
    21
    
    
    
    94Gross deferred tax assets
    
    
    7,217
    
    
    
    6,328
  81




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##### Table of Contents



NOTE 15  INCOME TAX EXPENSE
 Deferred tax liabilitiesDepreciation
    
    
    1,849
    
    
    
    1,302FHLB stock dividends
    
    
    942
    
    
    
    797Net unrealized gain on securities
available for sale
    
    
    
    
    
    
    610Prepaid expenditures
    
    
    116
    
    
    
    107Other
    
    
    78
    
    
    
    Gross deferred tax liabilities
    
    
    2,985
    
    
    
    2,816Net deferred asset
    
    $
    4,232
    
    
    $
    3,512
   82




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##### Table of Contents



NOTE 16  EARNINGS PER SHARE
  2005
    
    
    2004
    
    
    2003BasicNet income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Weighted average common shares
outstanding
    
    
    7,727,636
    
    
    
    7,657,143
    
    
    
    7,531,931Basic earnings per common share
    
    $
    1.15
    
    
    $
    1.41
    
    
    $
    1.06DilutedNet income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Weighted average common shares
outstanding for basic earnings
per share
    
    
    7,727,636
    
    
    
    7,657,143
    
    
    
    7,531,931Add: Dilutive effects of assumed
exercises of stock options
    
    
    74,713
    
    
    
    41,237
    
    
    
    111,149Average shares and dilutive potential
common shares
    
    
    7,802,349
    
    
    
    7,698,380
    
    
    
    7,643,080Diluted earnings per common share
    
    $
    1.14
    
    
    $
    1.40
    
    
    $
    1.04Additional common stock option
shares that have not been included
due to their antidilutive effect
    
    
    60,000
    
    
    
    216,450
    
    
    
    216,450
 NOTE 17  STOCK OPTION PLAN
 
  83




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NOTE 17  STOCK OPTION PLAN
  WeightedAverageNumber
    
    
    Option Price
    
    
    Exerciseof Shares
    
    
    Per share
    
    
    PriceShares under option at January 1, 2003
    
    
    723,759
    
    
    $
    8.92 - 25.00
    
    
    $
    12.31Options granted
    
    
    37,260
    
    
    
    13.30
    
    
    
    13.30Options exercised
    
    
    (121,700
    )
    
    
    8.92 -  11.50
    
    
    
    10.02Shares under option at December 31, 2003
    
    
    639,319
    
    
    $
    8.92 - 25.00
    
    
    $
    12.81Options granted
    
    
    25,000
    
    
    
    14.15
    
    
    
    14.15Options exercised
    
    
    (87,800
    )
    
    
    8.92 - 11.50
    
    
    
    10.68Shares under option at December 31, 2004
    
    
    576,519
    
    
    $
    8.92 - 25.00
    
    
    $
    13.19Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (89,650
    )
    
    
    8.92 - 14.75
    
    
    
    9.06Shares under option at December 31, 2005
    
    
    486,869
    
    
    $
    8.96 - 25.00
    
    
    $
    13.95
  WeightedAverageWeighted-Average
    
    
    RemainingPrice
    
    
    Number of Shares
    
    
    Exercise Price
    
    
    LifeRange
    
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding
    
    
    Exercisable
    
    
    (In Years)$
    
    
    8.96  9.75
    
    
    
    176,700
    
    
    
    176,700
    
    
    $
    9.42
    
    
    $
    9.42
    
    
    
    1.613.00  15.25
    
    
    
    250,169
    
    
    
    188,665
    
    
    
    14.50
    
    
    
    14.77
    
    
    
    4.725.00
    
    
    
    60,000
    
    
    
    60,000
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    4.0486,869
    
    
    
    425,365
    
    
    $
    13.95
    
    
    $
    13.99
    
    
    
    3.5
 NOTE 18  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
  
  84




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NOTE 18  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
  2005
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    33,054
    
    
    $
    33,054
    
    
    $
    26,172
    
    
    $
    26,172Securities available for sale
    
    
    171,638
    
    
    
    171,638
    
    
    
    197,392
    
    
    
    197,392Loans held for sale
    
    
    374
    
    
    
    377
    
    
    
    1,349
    
    
    
    1,369Loans, net
    
    
    802,745
    
    
    
    796,364
    
    
    
    746,783
    
    
    
    745,009Federal Home Loan Bank stock
    
    
    8,081
    
    
    
    8,081
    
    
    
    7,697
    
    
    
    7,697Accrued interest receivable
    
    
    5,354
    
    
    
    5,354
    
    
    
    4,330
    
    
    
    4,330Financial liabilitiesDeposits
    
    
    856,711
    
    
    
    855,766
    
    
    
    844,541
    
    
    
    844,153Federal funds purchased and
repurchase agreements
    
    
    1,315
    
    
    
    1,315
    
    
    
    1,284
    
    
    
    1,284Federal Home Loan Bank
advances
    
    
    125,185
    
    
    
    124,889
    
    
    
    100,192
    
    
    
    100,139Subordinated debentures
    
    
    16,100
    
    
    
    16,551
    
    
    
    16,100
    
    
    
    17,549Accrued interest payable
    
    
    4,049
    
    
    
    4,049
    
    
    
    2,575
    
    
    
    2,575
  85




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##### Table of Contents



NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY
 CONDENSED BALANCE SHEETS
 2005
    
    
    2004ASSETSCash in bank
    
    $
    2,154
    
    
    $
    3,111Interest receivable
    
    
    4
    
    
    
    4Receivable from subsidiary
    
    
    168
    
    
    
    53Prepaid expenses
    
    
    475
    
    
    
    904Securities available for sale
    
    
    1,040
    
    
    
    1,070Investment in subsidiaries
    
    
    92,061
    
    
    
    88,343Total assets
    
    $
    95,902
    
    
    $
    93,485LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDividends payable
    
    $
    1,243
    
    
    $
    1,154Debentures to subsidiary
    
    
    16,100
    
    
    
    16,100Deferred income taxes
    
    
    15
    
    
    
    26Total liabilities
    
    
    17,358
    
    
    
    17,280Stockholders equity
    
    
    78,544
    
    
    
    76,205Total liabilities and stockholders equity
    
    $
    95,902
    
    
    $
    93,485
  86




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##### Table of Contents



NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY
  CONDENSED STATEMENTS OF INCOME
 2005
    
    
    2004
    
    
    2003IncomeDividends from subsidiaries
    
    $
    3,600
    
    
    $
    4,600
    
    
    $
    4,200Interest income
    
    
    149
    
    
    
    113
    
    
    
    107Total income
    
    
    3,749
    
    
    
    4,713
    
    
    
    4,307ExpensesInterest
    
    
    2,039
    
    
    
    1,695
    
    
    
    1,645Other
    
    
    154
    
    
    
    126
    
    
    
    86Income tax benefit
    
    
    (695
    )
    
    
    (581
    )
    
    
    (552
    )Total expenses
    
    
    1,498
    
    
    
    1,240
    
    
    
    1,179Income before equity in
undistributed net income
of subsidiaries
    
    
    2,251
    
    
    
    3,473
    
    
    
    3,128Equity in undistributed net income
of subsidiaries
    
    
    6,652
    
    
    
    7,300
    
    
    
    4,829Net income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957
  87




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##### Table of Contents



NOTE 19  CONDENSED FINANCIAL INFORMATION  PARENT COMPANY ONLY
  CONDENSED STATEMENT OF CASH FLOWS
 2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    8,903
    
    
    $
    10,773
    
    
    $
    7,957Adjustments to reconcile net income to
net cash provided by operating activities:Undistributed earnings of subsidiary
    
    
    (6,652
    )
    
    
    (7,300
    )
    
    
    (4,829
    )Amortization of debt issue costs
    
    
    429
    
    
    
    85
    
    
    
    35Net amortization of securities
    
    
    (2
    )
    
    
    (3
    )
    
    
    (3
    )Net change in intercompany receivable
    
    
    (115
    )
    
    
    81
    
    
    
    Accrued expenses and other liabilities
    
    
    296
    
    
    
    141
    
    
    
    181Net cash provided by
operating activities
    
    
    2,859
    
    
    
    3,777
    
    
    
    3,341Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    812
    
    
    
    938
    
    
    
    1,220Dividends paid
    
    
    (4,628
    )
    
    
    (4,269
    )
    
    
    (3,907
    )Net cash used in financing activities
    
    
    (3,816
    )
    
    
    (3,331
    )
    
    
    (2,687
    )Net change in cash and cash equivalents
    
    
    (957
    )
    
    
    446
    
    
    
    654Beginning cash and cash equivalents
    
    
    3,111
    
    
    
    2,665
    
    
    
    2,011Ending cash and cash equivalents
    
    $
    2,154
    
    
    $
    3,111
    
    
    $
    2,665
 88




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 Disclosures Controls and Procedures:
 Managements Report on Internal Control over Financial Reporting
  Internal Control  Integrated Framework
  Changes in Internal Control Over Financial Reporting:
 
 ITEM 9B. OTHER INFORMATION
  89




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##### Table of Contents



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  Equity compensation plan information:
  Number of securitiesremaining available forfuture issuance underNumber of securities to
    
    
    Weighted-average
    
    
    equity compensationbe issued upon exercise
    
    
    exercise price of
    
    
    plans (excludingof outstanding options,
    
    
    outstanding options,
    
    
    securities reflected inwarrants and rights
    
    
    warrants and rights
    
    
    column (a)1 Plan Category
    
    (a)
    
    
    (b)
    
    
    ©Equity compensation
plans approved by
security holders
    
    
    461,869
    
    
    $
    13.93
    
    
    
    0Equity compensation
plans not approved
by security holders
**
    
    
    25,000
    
    
    
    14.15
    
    
    
    0Total
    
    
    486,869
    
    
    $
    13.95
    
    
    
    0
 
 **
    
    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 90




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was less than the total authorized under the Plan, which was adopted with
shareholder approval. The Company previously announced that it does not intend to grant further
stock options. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
  
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
       91




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BAYLAKE CORP.By:
    /s/ Steven D. JennerjohnSteven D. JennerjohnDate:  March 15, 2006
    
    Treasurer 92




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/s/ Thomas L. Herlache
    
    /s/ Richard A. BraunThomas L. Herlache
    
    Richard A. Braun, DirectorPresident, Chief Executive Officer and
    
    Vice-Chairman of the Board and ExecutiveDirector (Principal Executive Officer)
    
    Vice-President/s/ Steven D. Jennerjohn
    
    /s/ Robert W. AgnewSteven D. Jennerjohn
    
    Robert W. Agnew, DirectorTreasurer(Principal Financial and Accounting Officer)/s/ Dee Geurts-Bengtson
    
    /s/ Ronald D. BergDee Geurts-Bengtson, Director
    
    Ronald D. Berg, DirectorJohn W. Bunda, Director
    
    George Delveaux, Jr., Director/s/ Roger G. Ferris
    
    /s/ Joseph J. MorganRoger G. Ferris, Director
    
    Joseph J. Morgan, Director/s/ William Parsons
    
    /s/ Paul Jay SturmWilliam Parsons, Director
    
    Paul Jay Sturm, Director
 
  93




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ExhibitNo.
    
    Description3.1
    
    Articles of Incorporation, as amended (1)3.2
    
    Bylaws, as amended (2)3.3
    
    Amendment to increase authorized shares of common stock of Baylake Corp.
from 10,000,000 to 50,000,000 shares (3)4.1
    
    Junior subordinated debenture dated February 16, 2002, by and between
Company and Wilmington Trust Company, as Indenture Trustee (4)10.2
    
    Baylake Banks Pay-for-Performance (bonus) program* (5)10.3
    
    Baylake Banks Deferred Compensation Program with Thomas L. Herlache* (6)10.4
    
    Baylake Banks Agreement for Early Retirement with Ronald D. Berg* (7)10.5
    
    Baylake Banks Deferred Compensation and Salary Continuation Agreement
with Richard A. Braun* (8)10.6
    
    Baylake Corp. Stock Purchase Plan* (9)10.7
    
    Baylake Corp. 1993 Stock Option Plan, as amended in 1998* (10)10.8
    
    Baylake Bank Supplemental Executive Retirement Plan* (11)12.1
    
    Statement Re Computation of Ratios (12)21.1
    
    List of Subsidiaries (12)23.1
    
    Consent of Crowe Chizek and Company LLC (12)23.2
    
    Consent of Smith & Gesteland, LLP (12)24.1
    
    Power of Attorney (contained on the Signature Page)31.1
    
    Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (12)31.2
    
    Certification of the CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (12)32.1
    
    Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (12)32.2
    
    Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (12)
 
  (1)
    
    Incorporated by reference to Exhibit 3.1 from the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.(2)
    
    Incorporated by reference to Exhibit 3.2 from the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.(3)
    
    Incorporated by reference to Exhibit 3.3 from the Companys Proxy Statement for the 2001
Annual Meeting of Shareholders.(4)
    
    Incorporated by reference to Exhibit 4.1 from the Companys Form S-3 filed February 12, 2001
for Trust Preferred Securities issued under Baylake Capital Trust I on February 16, 2001.(5)
    
    Incorporated by reference to Description thereof under Board Directors/Compensation
Committee Report on Managements Compensation in the Companys Proxy Statement for the 1994
Annual Meeting of Shareholders.(6)
    
    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.(7)
    
    Incorporated by reference to Exhibit 10.4 from the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.(8)
    
    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.(9)
    
    Incorporated by reference to Exhibit 4 from the Companys Form S-8 filed on February 10,
1998.(10)
    
    Incorporated by reference to Exhibit 99.1 from the Companys Form S-8 filed on September 21,
1998.(11)
    
    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.(12)
    
    Filed herewith.
 94