0000892712-07-000541.txt : 20070514 0000892712-07-000541.hdr.sgml : 20070514 20070514113352 ACCESSION NUMBER: 0000892712-07-000541 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070514 DATE AS OF CHANGE: 20070514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYLAKE CORP CENTRAL INDEX KEY: 0000275119 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391268055 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16339 FILM NUMBER: 07844753 BUSINESS ADDRESS: STREET 1: 217 N FOURTH AVE STREET 2: PO BOX 9 CITY: STURGEON BAY STATE: WI ZIP: 54235-0009 BUSINESS PHONE: 9207435551 10-Q 1 blk10qsec.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED

MARCH 31, 2007

{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to &n bsp;

Commission file number 0-8679 &n bsp;

BAYLAKE CORP.

(Exact name of registrant as specified in its charter)


Wisconsin	39-1268055
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)

217 North Fourth Avenue, Sturgeon Bay, WI	54235
(Address of principal executive offices)	(Zip Code)

(920)-743-5551

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer [ ]	Accelerated filer [X]	Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

Number of outstanding shares of common stock as of May 1, 2007: 7,839,262 shares

BAYLAKE CORP. AND SUBSIDIARIES

INDEX


PART I – FINANCIAL INFORMATION	PAGE NO.

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December 31, 2006	3
Consolidated Statements of Income and Comprehensive Income (Unaudited) for three months ended March 31, 2007 and 2006	4
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2007	5
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2007 and 2006	6 – 7

Notes to the Consolidated Unaudited Financial Statements	8 – 13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14 – 31

Item 3. Quantitative and Qualitative Disclosure about Market Risk	31 – 32

Item 4. Controls and Procedures	32 – 33

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	33

Item 1A. Risk Factors	33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3. Default Upon Senior Securities	33

Item 4. Submission of Matters to a Vote of Security Holders	34

Item 5. Other Information	34

Item 6. Exhibits	34

Signatures
Exhibit 10.1 – Preferred Compensation Agreement between Baylake Bank (successor in interest to Bank of Sturgeon Bay) and Thomas L. Herlache dated January 1, 1988
Exhibit 10.2 – Baylake Bank (successor in interest of Bank of Sturgeon Bay) Non-qualified Retirement Trust effective December 31, 1992

Exhibit 31.1 Certification pursuant to Section 302

Exhibit 31.2 Certification pursuant to Section 302

Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350

Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

BAYLAKE CORP.

CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 2007 and December 31, 2006

(Dollar amounts in thousands except share data)


	March 31,	December 31,
	2007	2006


ASSETS
Cash and due from financial institutions	$	17,523	$	22,685
Federal funds sold		5,233		-
Cash and cash equivalents		22,756		22,685

Securities available for sale		188,917		188,315
Loans held for sale		714		889
Loans, net of allowance of $13,834 and $8,058 at March 31, 2007
and December 31, 2006, respectively		812,946		811,510
Cash value of life insurance		22,715		24,239
Premises held for sale		673		673
Premises and equipment, net		27,506		27,732
Federal Home Loan Bank stock		6,792		6,792
Foreclosed assets, net		7,113		5,760
Goodwill		5,840		5,723
Accrued interest receivable		6,607		6,183
Other assets		13,309		11,183

Total assets	$	1,115,888	$	1,111,684

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest-bearing	$	96,161	$	96,895
Interest-bearing		790,920		782,016
Total deposits		887,081		878,911

Federal Home Loan Bank advances		115,177		115,179
Federal funds purchased and repurchase agreements		4,921		4,480
Subordinated debentures		16,100		16,100
Accrued expenses and other liabilities		12,394		13,568
Dividends payable		-		1,253
Total liabilities		1,035,673		1,029,491

Common stock, $5 par value, authorized 50,000,000; issued-
7,978,030 shares in 2007, 7,922,154 shares in 2006; outstanding-
7,836,017 shares in 2007, 7,830,141 shares in 2006		39,890		39,611
Additional paid-in capital		10,993		10,403
Retained earnings		32,624		35,134
Treasury stock (142,013 shares in 2007 and 92,013 shares in 2006)		(2,494)		(1,726)
Accumulated other comprehensive loss		(798)		(1,229)
Total stockholders’ equity		80,215		82,193

Total liabilities and stockholders’ equity	$	1,115,888	$	1,111,684

See accompanying notes to Unaudited Consolidated Financial Statements.

BAYLAKE CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

Three months ended March 31, 2007 and 2006

(Dollar amounts in thousands, except per share data)



	2007	2006
Interest and dividend income
Loans, including fees	$ 15,495	$ 14,664
Taxable securities	1,597	1,571
Tax exempt securities	506	360
Federal funds sold and other	53	51
Total interest and dividend income	17,651	16,646

Interest expense
Deposits	7,952	6,342
Federal funds purchased and repurchase agreements	88	175
Federal Home Loan Bank advances and other debt	1,482	1,362
Subordinated debentures	284	889
Total interest expense	9,806	8,768

Net interest income	7,845	7,878
Provision for loan losses	5,985	200
Net interest income after provision for loan losses	1,860	7,678
Non-interest income
Fees from fiduciary activities	267	301
Fees from loan servicing	271	260
Fees for other services to customers	1,213	1,139
Gains from sales of loans	106	201
Increase in cash surrender value of life insurance	224	226
Other income	164	111
Total other income	2,245	2,238

Non-interest expenses
Salaries and employee benefits	5,151	4,992
Occupancy expense	609	579
Equipment expense	372	395
Data processing and courier	313	300
Operation of other real estate	280	43
Other operating expenses	1,741	1,815
Total non-interest expenses	8,466	8,124

Income (loss) before income tax expense(benefit)	(4,361)	1,792
Income tax expense (benefit)	(2,064)	468
Net income (loss)	$ (2,297)	$ 1,324
Comprehensive income (loss)	$ (1,866)	$ 964
Basic earnings (loss) per share	$ (0.29)	$ 0.17
Diluted earnings (loss) per share	$ (0.29)	$ 0.17
Dividends declared per share	$ 0.16	$ 0.16

See accompanying notes to Unaudited Consolidated Financial Statements 4

BAYLAKE CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)

Three months ended March 31, 2007

(Dollar amounts in thousands except for share and per share data)



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



Balance, January 1, 2007	7,830,141	$	39,611	$	10,403	$	35,134	$	(1,726)	$	(1,229)	$	82,193
Net loss for the period	-		-		-		(2,297)		-		-		(2,297)
Net changes in unrealized gain on securities
available for sale, net of $242 deferred taxes	-		-		-		-		-		431		431
Total comprehensive (loss)													(1,866)
UFS stock options exercised	-		-		-		(51)		-		-		(51)
Adjustment for adoption of FIN 48	-		-		-		980		-		-		980
Adjustment for adoption of FASB 156, net of tax of $74	-		-		-		117		-		-		117
Stock compensation expense recognized	-		-		7		-		-		-		7
Stock options exercised	20,749		104		197		-		-		-		301
Common stock issued under dividend reinvestment plan	35,127		175		376		-		-		-		551
Treasury stock purchases	(50,000)		-		-		-		(768)		-		(768)
Tax benefit from exercise of stock options	-		-		10		-		-		-		10
Cash dividends declared ($0.16 per share)	-		-		-		(1,259)		-		-		(1,259)
Balance, March 31, 2007	7,836,017	$	39,890	$	10,993	$	32,624	$	(2,494)	$	(798)	$	80,215

See accompanying notes to Unaudited Consolidated Financial Statements 5

BAYLAKE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three months ended March 31, 2007 and 2006

(Dollar amounts in thousands)



		2007		2006

Cash flows from operating activities:
Reconciliation of net income (loss) to net cash provided by
operating activities:
Net income (loss)	$	(2,297)	$	1,324
Adjustments to reconcile net income (loss) to net cash
provided to operating activities:
Depreciation and amortization		389		402
Amortization of debt issuance costs		-		475
Amortization of core deposit intangible		13		13
Provision for losses on loans		5,985		200
Net amortization of securities		32		44
Increase in cash surrender value of life insurance		(224)		(226)
Net gain on sale of loans		(106)		(201)
Proceeds from sale of loans held for sale		11,697		9,003
Origination of loans held for sale		(11,416)		(8,904)
Net change in valuation on mortgage servicing rights		83		-
Provision for valuation allowance on other real estate owned		64		47
Net gain from disposal of other real estate		(14)		(78)
Net loss from disposal of bank premises and equipment		1		2
Stock option compensation expense recognized		7		13
Tax benefit from exercised of stock options		(10)		(70)
Changes in assets and liabilities:
Accrued interest receivable and other assets		(1,940)		(693)
Accrued expenses and other liabilities		(1,174)		122
Net cash provided by operating activities		1,090		1,473

Cash flows from investing activities:
Principal payments on securities available-for-sale		4,096		4,195
Purchase of securities available-for-sale		(4,057)		(6,545)
Proceeds from sale of other real estate owned		394		1,764
Loan originations and payments, net		(9,218)		(19,928)
Additions to premises and equipment		(164)		(461)
Proceeds from life insurance		2,431		-
Investment in bank-owned life insurance		(683)		(583)
Net cash used in investing activities		(7,201)		(21,558)

See accompanying notes to Unaudited Consolidated Financial Statements 6

BAYLAKE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three months ended March 31, 2007 and 2006

(Dollar amounts in thousands)



		2007		2006

Cash flows from financing activities:
Net change in deposits	$	8,170	$	(5,625)
Net change in federal funds purchased and
repurchase agreements		441		24,545
Proceeds from Federal Home Loan Bank advances		-		10,000
Repayments on Federal Home Loan Bank advances		(2)		(15,001)
Redemption of subordinated debt		-		(16,100)
Proceeds from issuance of subordinated debt		-		16,100
Proceeds from exercise of stock options		301		161
Treasury stock purchases		(768)		-
Dividend reinvestment plan		552		-
Cash dividends paid		(2,512)		(2,489)
Net cash provided by financing activities		6,182		11,591

Net change in cash and cash equivalents		71		(8,494)

Beginning cash and cash equivalents		22,685		33,054

Ending cash and cash equivalents	$	22,756	$	24,560

See accompanying notes to Unaudited Consolidated Financial Statements 7

Notes to the Consolidated Unaudited Financial Statements

The accompanying consolidated financial statements should be read in conjunction with Baylake Corp.’s 2006 annual report on Form 10-K. The accompanying consolidated financial statements are unaudited. These interim financial statements are prepared in accordance with the requirements of Form 10-Q, and accordingly do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited financial information included in this report reflects all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of the financial position as of March 31, 2007 and results of operations for the periods ending March 31, 2007 and 2006. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of results to be expect ed for the entire year.

Use of Estimates

To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, foreclosed assets, uncertain tax positions and fair values of financial instruments are particularly subject to change.

Earnings Per Share

Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by weighted average number of common shares and common stock equivalents. The following table shows the computation of the basic and diluted earnings per share for the three months ended March 31 (dollars in thousands, except per share amounts):


	Three months ended March 31,
	2007	2006
(Numerator):
Net income (loss)	($2,297)	$1,324
(Denominator):
Weighted average number of common shares outstanding-basic	7,851,949	7,784,960
Dilutive effect of stock options	-	53,796
Weighted average of common shares outstanding and assumed conversion-diluted	7,851,949	7,838,756
Basic EPS	($0.29)	$0.17
Diluted EPS	($0.29)	$0.17

For the quarters ended March 31, 2007 and 2006, there are 357,491 and 60,000 outstanding stock options, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

Cash Dividends

Baylake Corp. paid a cash dividend of $0.16 per share on March 15, 2007 to shareholders of record as of March 1, 2007.

Notes to the Consolidated Unaudited Financial Statements

Adoption of New Accounting Standards:

The company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is being recorded.

In 2002, we purchased Bank Owned Life Insurance (BOLI) in two separate issuances. At the time of our purchases, there were uncertainties with respect to the tax treatment of these BOLI products in general that served as a basis for establishing a tax liability. The primary concern revolved around the taxability of the income derived from the separate account BOLI product due to issues surrounding the concept of investor control and other issues that arose in Corporate-Owned-Life Insurance (COLI). We conducted a review of this uncertain tax position as of January 1, 2007 in accordance with FIN 48. As a result of that analysis, we concluded that no tax liability was required. Subsequent to our analysis, we reviewed IRS Revenue Ruling (2007-7), which clarifies their prior ruling positions on this subject and further supported our analysis. Based on this new ruling, it appears much of the un certainty regarding the IRS position has been resolved and the favorable tax status has been confirmed.

We have recorded a cumulative effect adjustment as of January 1, 2007 as follows (dollars in thousands):


Gross tax liability, beginning of period	$1,552
Current period change in tax benefits	6
Reduction in tax liability due to adoption of FIN 48	(980)

Gross tax liability, end of period	$ 578

The gross tax liability, end of period, is related to income earned by our subsidiary located in the state of Nevada. Due to the State of Wisconsin Department of Revenue’s (DOR) change in position on the taxability of income from Nevada subsidiaries, and based on our analysis of FIN 48, we have accrued a liability of $578,000 as of March 31, 2007. Our liability was $572,000 as of December 31, 2006. Although these amounts have been accrued for, we anticipate to challenge any settlement proposal offered by the DOR, if offered.

We and our subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We are no longer subject to examination by U.S. Federal taxing authorities for years before 2002 and for Wisconsin state income taxes through 2000. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The company recognizes interest and/or penalties related to income tax matters in income tax expense. Included in the $578,000 referred to above, is $116,000 of interest and penalties, net of federal tax benefit.

On January 1, 2007, we adopted FASB Statement No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, and have elected to use the “fair value measurement method” to account for servicing assets This statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur;

Notes to the Consolidated Unaudited Financial Statements

4) upon initial adoption, permits a one time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. As of January 1, 2007, the market value of our servicing assets was $191,000 higher than the carrying value, as such, we recorded a cumulative affect adjustment on that date in accordance with the provisions of the statement.

We classify servicing assets by the type of underlying loan serviced, which are currently conventional 1 - 4 family mortgage loans, as well as Small Business Administration (“SBA”) loans. The servicing assets are valued based on a model that calculates the present value of expected future cash flows. The model utilizes assumptions for prepayment speeds, discount rates and servicing costs. Changes in prepayment speeds and discount rates could significantly change the value of the servicing assets. Prepayment speeds are derived from the quoted market sources. Discount rates are based on the risk-free rate for periods comparable to the expected life for 1 - 4 family loans. Discount rates for SBA loans use a risk-free rate with an additional risk premium for periods comparable to the expected life.

For periods ended March 31, 2007 and 2006, we recorded $181,000 and $167,000 in servicing fees earned, which are included in “Fees from loan servicing” on the income statement.

A summary of changes in the servicing assets for the periods ended March 31, 2007 and 2006 are as follows:


	March 31, 2007	March 31, 2006
Beginning Balance	$ 1,655	$ 1,688¹
Increase upon adoption of SFAS 156	191	-
Gains recognized	37	81
Amortization expense	-	55
Change in Fair Market Value	83	-
Ending Balance	$1,800	$1,714

¹ – Adjusted for adoption of SAB 108 in 2006, which increased the servicing assets by $477,000 as of January 1, 2006. There was no impact on the 2006 first quarter results of operations as a result of adoption of this standard.

On January 1, 2007, we adopted Emerging Issues Task Force Issue No. 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fisca l years beginning after December 15, 2006. As of year-end 2006, we had not completed our evaluation of this issue, although it was noted in our Form 10-K we expected our maximum exposure to be a reduction in currently recognized cash surrender value of approximately $419,000. We have completed our evaluation of this issue and have determined that there is no impact to our financial statements.

Notes to the Consolidated Unaudited Financial Statements

Newly Issued But Not Yet Effective Accounting Standards:

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. We have not completed our evaluation of the impact of the adoption of this standard.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post–employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. We have completed our evaluation of the adoption of EITF 06-4 and have determined that there is no impact to our financial statements.

In February 2007, the FASB issued FSAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective; however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale or trading securities. For financial instruments elected to be accounted for at fair value, an entity will report the unrealized gains and losses in earnings. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently assessing the financial impact this Statement will have on our financial conditions or results of operations.

Equity Investment

We own a 46% interest in United Financial Services, Inc. (“UFS”), a data processing service, as of March 31, 2007. Our ownership interest totaled $3.4 million at both March 31, 2007 and December 31, 2006 and is reflected in the Other Assets in the “Consolidated Balance Sheets”. In addition to the ownership interest, we appoint a member of the Board of Directors. The investment in this entity is carried under the equity method of accounting, and the pro rata share of its income is included in other income. On June 27, 2006, UFS entered into an amendment to an earlier agreement for employment with a key employee of UFS allowing that individual the option to purchase up to 20%, or 240 shares, of the authorized shares of UFS. The individual exercised 120 shares on January 15, 2007 at $1,000 per share and later sold 37.2854 shares back to UFS. The net result was a reduction of 3.8% to our investment in UFS and recognized goodwill of $117,000 upon redemption of the shares. Current book value of UFS is approximately $6,775 per share. Any future exercise of the options or sale of the shares acquired upon exercise will have an effect of reducing our investment in UFS as well as a decrease of other income as those options are exercised.

Allowance For Loan Losses

During the quarter, our overall credit process was evaluated and enhancements to the process have been made. In January 2007, the position of Chief Credit Officer was created. This position was developed to oversee the credit underwriting, loan processing, documentation, problem loan, credit review and collection areas.

Notes to the Consolidated Unaudited Financial Statements

Both as a result of this process and recent changes with several problem loans, the Provision for Loan Losses (PFLL) for the first three months of 2007 was $5,985,000 as compared to $200,000 for the first three months in 2006. The calculation of the amount during the period took into account overall asset quality in the loan portfolio, including an increase in non-performing assets as well as changes in management philosophy.

Included in the non-accrual numbers are borrowings totaling $4.6 million to three related entities not previously analyzed for impairment since the loans were not on the problem loan list as of year-end 2006. Several developments late in the first quarter resulted in an evaluation of the credit quality and collateral valuation. Significant collateral shortfalls were identified. Based on the findings, a specific allocation of $3.6 million was made for these related credits. Management continues to monitor the credits and is attempting to perfect a lien on additional collateral located outside of the country. In the event this happens, the collateral shortfall may be reduced but there are no assurances that the collateral position will be perfected, nor has the value of this additional collateral been evaluated.

During the quarter, there were several loans not previously analyzed for impairment for which new information became available. As a result of the new developments, the credits were analyzed for impairment and specific allocations were assigned. In addition, several other impaired loans were re-valued based on recent changes to the credits. The result was an increase in the required allocation of the allowance for these loans under SFAS 114 of approximately $2 million.

Changes in the allowance for loan losses were as follows ($ in thousands):


	For the three months ended March 31, 2007	For the three months ended March 31, 2006	For the year ended December 31, 2006
Allowance for Loan Losses (“ALL)
Balance at beginning of period	$ 8,058	$ 9,551	$ 9,551
Provision for loan losses	5,985	200	903
Charge-offs	(301)	(83)	(3,417)
Recoveries	92	70	1,021
Balance at end of period	$ 13,834	$ 9,738	$ 8,058

Net charge-offs (“NCOs:)	($ 209)	($ 13)	($ 2,396)

Information regarding impaired loans is as follows ($ in thousands):


	March 31, 2007	December 31, 2006

Impaired loans with no allocated allowance for loan loss	$7,910	$12,118
Impaired loans with allocated allowance for loan loss	29,819	15,614
Allowance allocated to impaired loans	7,790	2,176
Average impaired loans during the period	31,859	23,952

Notes to the Consolidated Unaudited Financial Statements

Nonperforming loans were as follows ($ in thousands):


	At or for the period ended March 31, 2007	At or for the period ended December 31, 2006

Nonaccrual loans	$ 37,729	$27,352
Loans restructured in a troubled debt restructuring	1,410	496
Accruing loans past due 90 days or more	-	-

Total nonperforming loans ("NPLs")	$ 39,139	$ 27,848

In previous reports, we indicated that one loan of about $8.1 million might be repaid upon sale of collateral real estate under an accepted full price offer to purchase, but that closing was subject to settlement of liens and claims against the property. We then filed and completed foreclosure on a portion of the loans in the amount of $4.0 million. We also previously reported that we were initiating additional foreclosure proceedings on the remaining loans of about $4.1 million. However, despite negotiations with the Borrower and other third parties, the lien claims have not been resolved and previous foreclosure actions have been vacated by rulings granted in the courts. We are seeking a consolidated foreclosure action on all of the loans and have recently commenced a new lawsuit against a municipality third party for damages relating to delays and obstructions of our right to pursue disposition of the property.

On April 30, 2007, management was notified that negotiations to sell or lease the property with a previously interested purchaser had dissolved. No further negotiations with this purchaser are contemplated in the near term. The loans remain on non-accrual, with no impairment valuation recognized (based on the analysis conducted by management under the provisions of SFAS 114.) We believe that the value assigned to the loans in this relationship will not result in a material loss, however, our current intentions are to obtain a certified appraisal within a reasonable timeframe. If, based on any future information, we determine that impairment exists, we will recognize the impairment at that time. As of March 31, 2007, our maximum exposure for these and related credits is $9.6 million.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

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

The following sets forth management’s discussion and analysis of the consolidated financial condition and results of operations of Baylake Corp. for the three months ended March 31, 2007 and 2006 which may not be otherwise apparent from the consolidated financial statements included in this report. For a more complete understanding, this discussion and analysis should be read in conjunction with the financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this report.

Forward-Looking Information

This discussion and analysis of financial condition and results of operations, and other sections of this report, may contain forward-looking statements that are based on the current expectations of management. Such expressions of expectations are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” and other such words are intended to identify in such forward-looking statements. The statements contained herein and in such forward-looking statements involve or may involve certain assumptions, risks and uncertainties, many of which are beyond our control that may cause actual future results to differ materially from what may be expressed or forecasted in such forward-looking statements. Readers should not place undue expectations on any forward-looking statements. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could cause actual results to differ materially from the forward-looking statements: the factors described under “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2006, which are incorporated herein by reference; demand for financial products and financial services; the degree of competition by traditional and non-traditional financial services competitors; changes in banking legislation or regulations; changes in tax laws and the results of recent Wisconsin state tax developments; changes in interest rates; changes in prices; the impact of technological advances; governmental and regulatory policy changes; trends in customer behavior as well as their ability to repay loans; and changes in t he general economic conditions, nationally or in the State of Wisconsin.

Critical Accounting Policies

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

Allowance for Loan Losses: The allowance for loan losses (“ALL”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and the estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

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

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

Income tax accounting: The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of our operations and reported earnings. We believe that the tax assets and liabilities, including tax reserves, are adequate and properly recorded in the consolidated financial statements. The reserve does include specific reserves relative to our Nevada subsidiary. For further discussion of uncertain tax positions, see Note 5 to the Consolidated Unaudited Financial Statements.

Income tax expense may be affected by developments in the state of Wisconsin. Like many financial institutions that are located in Wisconsin, a subsidiary of our bank located in the state of Nevada holds and manages various investment securities. Due to that fact that these subsidiaries are out of state, income from their operations has not been subject to Wisconsin state taxation. Although the Wisconsin Department of Revenue (“Department”) issued favorable tax rulings regarding Nevada subsidiaries of Wisconsin financial institutions, the Department representatives have stated that the Department intends to revoke those rulings and tax some or all these subsidiaries’ income, even though there has been no intervening change in the law. The Department also implemented a program in 2003 for the audit of Wisconsin financial institutions that have formed and contributed assets to subsidiaries located in Neva da; to date, we have not been audited on these matters.

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

Results of Operations

The following table sets forth our net income and related summary information for the three month periods ended March 31, 2007 and 2006.

TABLE 1

SUMMARY RESULTS OF OPERATIONS

($ in thousands, except per share data)


	Three months ended March 31, 2007	Three months ended March 31, 2006
Net income (loss), as reported	($ 2,297)	$ 1,324
EPS-basic, as reported	($ 0.29)	$ 0.17
EPS-diluted, as reported	($ 0.29)	$ 0.17
Cash dividends declared	$ 0.16	$ 0.16
Return on average assets	(0.82%)	0.48%
Return on average equity	(11.07%)	6.81%
Efficiency ratio, as reported (1)	80.91%	78.24%

(1)

Non-interest expense divided by sum of taxable equivalent net interest income plus non-interest income, excluding net investment securities gains.

The decrease in net income for the three-month period is primarily due to a significant increase in the provision for loan losses, along with an increase in non-interest expense. Refer to the “Provision for Loan Losses” and “Non-Interest Expense” sections for additional details.

Net Interest Income

Net interest income is the largest component of our operating income, accounting for 74.98% of total operating income for the three months ended March 31, 2007 compared to 78.5% for the same period in 2006. Net interest income represents the difference between interest earned on loans, investments and other interest earning assets offset by the interest expense attributable to the deposits and the borrowings that fund such assets. Interest fluctuations, together with changes in the volume and types of earning assets and interest-bearing liabilities, combine to affect total net interest income. This analysis discusses net interest income on a tax-equivalent basis in order to provide comparability among the various types of earned interest income. Tax-exempt interest income is adjusted to a level that reflects such income as if it were fully taxable.

Net interest income on a tax equivalent basis was $8.2 million for the three months ended March 31, 2007 and $8.1 million for the same period in 2006. This resulted from an increase in interest income from loans and tax-exempt securities, offset by increased funding costs.

Net interest margin is tax-equivalent net interest income expressed as a percentage of average earning assets. The net interest margin exceeds the interest rate spread because of the use of non-interest bearing sources of funds (demand deposits and equity capital) to fund a portion of earning assets. The net interest margin for the first quarter of 2007 was 3.19%, down 4 basis points (“bps”) from 3.23% for the comparable period in 2006.

As the Federal Reserve Board (“FRB”) steadily increased short-term interest rates during the latter half of 2004 thru the second quarter of 2006 in an attempt to keep inflation in control, average interest rates were higher in the first quarter of 2007 than in the same period of 2006. The Federal Funds rate at March 31, 2007 was at 5.25% compared to 4.75% at March 31, 2006 due to two rate increases during the second

quarter of 2006 totaling 50 basis points. Financial institutions’ competition for deposits continues to drive up the cost of funds and, as a result, net interest margin decreased in the first three months of 2007.

For the three months ended March 31, 2007, average-earning assets increased $20 million, or 2.0%, when compared to the same period last year. An increase in average tax-exempt securities of $17 million, or 52.7% for March 31, 2007 over the same period in 2006, comprised the majority of the volume increase.

Interest rate spread is the difference between the tax-equivalent rate earned on average earning assets and the rate paid on average interest-bearing liabilities. For the first quarter of 2007 compared to the first quarter of 2006, the interest rate spread decreased 4 bps to 2.80%, the net result of a 32 bps increase in the yield on earning assets more than offset by a 36 bps increase in the cost of interest-bearing liabilities. The increase in the rates paid on interest-bearing liabilities occurred as a result of a higher cost of funding from deposits and other wholesale funding such as federal funds purchased and advances from the Federal Home Loan Bank. Interest expense on the subordinated debentures was lower in 2007 due to the reduction in interest rates on the trust preferred securities as well as the elimination of the $475,015 of amortization expenses that were incurred in the first quarter of 2006. This was the amo rtization expense of issuance costs related to the redemption of our trust preferred securities.

TABLE 2

NET INTEREST INCOME ANALYSIS ON A TAX –EQUIVALENT BASIS

($ in thousands)

Three months ended March 31,


	2007			2006
	Average Balance	Interest income/ Expense	Average yield/ Rate	Average Balance	Interest income/ Expense	Average yield/ rate
ASSETS
Earning assets:
Loans, net	$ 831,181	$ 15,607	7.51%	$ 826,052	$ 14,748	7.14%
Taxable securities	144,398	1,597	4.42%	146,309	1,571	4.30%
Tax exempt securities	50,295	767	6.10%	32,938	543	6.59%
Federal funds sold and interest bearing due from banks	4,325	53	4.93%	4,907	51	4.16%
Total earning assets	1,030,199	18,024	7.00%	1,010,206	16,913	6.68%
Non-interest earning assets	91,503			82,334

Total assets	$ 1,121,702			$ 1,092,540

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Total interest-bearing deposits	796,143	7,952	4.00%	754,535	6,342	3.36%

Short-term borrowings	5,419	74	5.50%	13,083	163	4.98%
Customer repurchase agreements	1,294	14	4.14%	1,344	12	3.57%


Federal Home Loan Bank advances	115,179	1,482	5.15%	124,573	1,362	4.37%
Subordinated debentures	16,100	284	7.06%	16,816	889	21.15%
Total interest-bearing liabilities	$934,135	$9,806	4.20%	$ 910,351	$ 8,768	3.84%
Demand deposits	91,211			93,259
Accrued expenses and other liabilities	13,386			11,154
Stockholders’ equity	82,970			77,776

Total liabilities and stockholders’ equity	$ 1,121,702			$ 1,092,540

Interest rate spread		$ 8,218	2.80%		$ 8,145	2.84%
Net interest margin			3.19%			3.23%

The ratio of average earning assets to average total assets measures management’s ability to employ overall assets for the production of interest income. This ratio was 91.8% and 92.5% for the first three months of 2007 and 2006, respectively.

Provision for Loan Losses

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

Please refer to the Notes to the Consolidated Unaudited Financial Statements numbers 8 above for additional discussion on the PFLL and credit processes. As previously discussed in notes 8 , the PFLL for the first three months of 2007 was $5,985,000 compared to $200,000 for the first three months in 2006. The calculation of the PFLL during the current period took into account overall asset quality in the loan portfolio, including an increase in non-performing assets as well as the change in management philosophy discussed above.

As described more fully in Table 6, non-accrual loans increased significantly during the first quarter of 2007. See “Balance Sheet Analysis – Non-Performing Loans, Potential Problem Loans and Other Real Estate” below. Included in the non-accrual numbers are borrowings totaling $4.6 million to three related entities not previously analyzed for impairment since the loans were not on the problem loan list as of year-end 2006. Several developments late in the first quarter and early in the second quarter resulted in an evaluation of the credit quality and collateral valuation. Weaknesses were identified and a significant collateral shortfall is estimated. Based on the findings, a specific allocation of $3.6 million was made for these related credits. Management continues to monitor the credits and is attempting to perfect a lien on additional collateral located outside of the country. In such ev ent, the collateral shortfall may be reduced, but there are no assurances that the collateral position will be perfected, nor has the value of this collateral been evaluated. In addition, several other impaired loans were re-evaluated by the Chief

Credit Officer based on the approach discussed above. The result was an increase in the required allocation of the allowance for these loans under SFAS 114 of approximately $2 million.

As reported in the table in note 8 of the Notes to the Consolidated Unaudited Financial Statements, net loan charge-offs in the first three months of 2007 were $209,000 compared with net charge-offs of $13,000 for the same period in 2006. Net charge-offs to average loans were 0.10% for the first three months of 2007 compared to 0.01% for the same period in 2006. For the three months ended March 31, 2007, non-performing loans increased $11 million. Refer to the “Risk Management and the Allowance for Loan Losses” and “Non-Performing Loans, Potential Problem Loans and Other Real Estate” sections below for more information related to non-performing loans.

Management believes that the current provision conforms to our allowance for loan loss policy and is adequate in view of the present condition of our loan portfolio. However, a further decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market area or otherwise, could affect the adequacy of the allowance. Also, negative developments relating to our non-performing loans, including diminution of value of the collateral or increased costs of collection, could affect the adequacy of the allowance. If there are significant unanticipated charge-offs against the allowance, or we otherwise determine that the allowance is inadequate, we will need to make higher provisions in the future which would negatively affect our earnings.

Non-Interest Income

Total non-interest income remained relatively stable at $2.4 million with an increase of $7,000 or 0.31% for the first quarter of 2007 compared to the first quarter of 2006. The non-interest income to average assets ratio was 0.80% for the three months ended March 31, 2007 compared to 0.82% for the same period in 2006.

Table 3 reflects the various components of non-interest income for the comparable quarters.

TABLE 3

NON-INTEREST INCOME

($ in thousands)


	Three months ended March 31, 2007	Three months ended March 31, 2006	% Change from prior year
Fees from fiduciary activities	$ 267	$ 301	(11.3%)
Fees from loan servicing	271	260	4.2%
Service charges on deposit accounts	827	794	4.2%
Other fee income	173	165	4.8%
Financial services income	213	180	18.3%
Gains from sales of loans	106	201	(47.3%)
Increase in cash surrender value of life insurance	224	226	(0.9%)
Other income	164	111	47.7%

Total Non-Interest Income	$ 2,245	$ 2,238	0.3%

Gains on sales of loans decreased $95,000 for first quarter 2007 compared to the same period in 2006. This was primarily due to adoption of FASB Statement No. 156 as discussed in Note 5 to the consolidated unaudited financial statements, along with a decrease in gain on commercial loan sales offset by an increase in mortgage loan sales gains.

Other income increased $52,000 for the periods compared above. This is primarily due to a $36,000 increase in UFS income for the three months ended March 31, 2007 over the same period in 2006.

Non-Interest Expense

Non-interest expense increased $342,000 or 4.2%, to $8.5 million for the three months ended March 31, 2007 compared to the same period in 2006. This was primarily attributable to an increase in the expenses for the operation of other real estate. The non-interest expense to average assets ratio was 3.02% for the three months ended March 31, 2007 compared to 2.97% for the same period in 2006.

Net overhead expense is total non-interest expense less total non-interest income excluding securities gains. The net overhead expenses to average assets ratio increased to 2.22% for the three months ended March 31, 2007 compared to 2.15% for the same period in 2006. The efficiency ratio is total non-interest expense as a percentage of the sum of net-interest income on a fully taxable equivalent basis and total non-interest income. The efficiency ratio increased to 80.9% for the three months ended March 31, 2007 from 78.2% for the comparable period last year.

TABLE 4

NON-INTEREST EXPENSE

($ in thousands)


	Three months ended March 31, 2007	Three months ended March 31, 2006	% Change from prior year
Salaries and employee benefits	5,151	4,992	3.2%
Occupancy	609	579	5.2%
Equipment	372	395	(5.8%)
Data processing and courier	313	300	4.3%
Operation of other real estate	280	43	551.2%
Business development and advertising	227	234	(3.0%)
Charitable contributions	92	76	21.1%
Stationary and supplies	130	104	25.0%
Director fees	110	119	(7.6%)
FDIC	26	27	(3.7%)
Legal and professional	258	205	25.9%
Other operating	898	1050	(14.5%)

Total non-interest expense	8,466	8,124	4.2%

Salaries and employee benefits showed an increase of $159,000, or 3.2%, to $5.2 million for the first quarter of 2007 compared to the same period in 2006. The number of full-time equivalent employees was 336 as of March 31, 2007 compared to 324 at March 31, 2006, primarily the result of a new branch in Suamico that opened for business in August 2006, the expansion of our Cash Management department and the addition of Market President positions.

Expenses related to the operation of other real estate owned increased $237,000 or 551.2% to $280,000 for the three-month period ended March 31, 2007 compared to $43,000 for the same period in 2006. Real estate property taxes and insurance premiums for parcels comprised approximately $180,000 of the amount. The number of properties in other real estate totaled twenty and seventeen at March 31, 2007 and March 31, 2006, respectively.

Other operating expense decreased $152,000 for the three months ended March 31, 2007 to $898,000 compared to the same period in 2006. The decrease was due in part to the elimination of costs related to

various employee recruitment and search expenses, including those costs related to the searches for a new bank president/chief operating officer and a market president that were incurred during 2006. This accounted for approximately $199,000 of the decrease, partially offset by an increase of $131,000 in loan and collection expense.

Income Taxes

Our income tax benefit for the three months ended March 31, 2007 was $2.1 million, versus an expense of $468,000 for the same period in 2006. The tax benefit for the three-month period ended March 31, 2007 reflected our loss recognized before income tax.

Income tax expense recorded in the consolidated statements of income involves interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. We undergo examinations by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See “Critical Accounting Policies-Income Tax Accounting” above regarding Wisconsin tax matters which may affect our income tax expense in future periods.

Balance Sheet Analysis

Loans

At March 31, 2007, total loans increased $7 million, or 0.9%, to $827 million from $820 million at December 31, 2006. This was primarily due to an increase of $13 million, or 2.8%, in commercial real estate loan totals from December 31, 2006 to March 31, 2007. This increase was partially offset by a $6 million net decline in the remainder of the portfolio during this period.

The following table reflects the composition (mix) of the loan portfolio:

TABLE 5

LOAN PORTFOLIO ANALYSIS

($ in thousands)


	March 31, 2007	December 31, 2006	Percent change
Amount of loans by type
Real estate-mortgage
Commercial	$477,779	$464,843	2.8%
1-4 family residential
First liens	80,414	88,397	(9.0%)
Junior liens	23,713	23,829	(0.5%)
Home equity	31,873	31,647	0.7%
Commercial, financial and agricultural	82,681	82,619	0.1%
Real estate-construction	97,648	94,082	3.8%
Installment
Credit cards and related plans	2,178	2,143	1.6%
Other	12,064	12,750	(5.4%)
Obligations of states and political subdivisions	18,835	19,633	(4.1%)
Less: deferred origination fees, net of costs	(405)	(375)	8.0%
Total	$826,780	$819,568	0.9%

Risk Management and the Allowance for Loan Losses

The loan portfolio is our primary asset subject to credit risk. To reflect this credit risk, we set aside an allowance for probable incurred credit losses through periodic charges to earnings. These charges are shown in our consolidated income statement as provision for loan losses. See "Provision for Loan Losses" above. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and an on-going review of payment performance. With the creation of the Chief Credit Officer, an updated credit procedure has been implemented. The procedures include additional detail in the loan presentations and due diligence in the background research of both companies and guarantors. New credits entering the bank, along with existing credits requesting new money, may require additional verification procedures over past practices. The level of detail for the verif ication procedures will be determined by the risks associated with the request. Asset quality administration, including early identification of problem loans and timely resolution of problems, further enhances management of credit risk and minimization of loan losses. All specifically identifiable and quantifiable losses are charged off against the allowance when collectability is considered unlikely. Charged-off loans are subject to periodic review and specific efforts are taken to achieve maximum recovery of principal and interest.

The ALL at March 31, 2007 was $13.8 million compared with $8.1 million at the end of 2006. This increase was based on management's analysis of the loan portfolio risk at March 31, 2007 as discussed above. As such, a provision expense of $5,985,000 was recorded for the three months ended March 31, 2007 as compared to the $200,000 provision recorded for the same period in 2006.

The provision for loan losses is predominately a function of management’s evaluation of the loan portfolio, with particular emphasis directed toward non-performing and other potential problem loans. During these evaluations, consideration is also given to such factors as management’s evaluation of specific loans, the level and composition of impaired loans, other non-performing loans, historical loan experience, results of examinations by regulatory agencies and various other factors.

On a quarterly basis, management reviews the adequacy of the ALL. Commercial credits are graded by the loan officers and the loan review function validates the officers’ grades. In the event that the loan review function downgrades the loan, it is included in the allowance analysis at the lower grade. The grading system is in compliance with the regulatory classifications and the allowance is allocated to the loans based on the regulatory grading, except in instances where there are known differences (i.e., collateral value is nominal, etc.). To establish the appropriate level of the allowance, a sample of loans (including impaired and non-performing loans) are reviewed and classified as to potential loss exposure.

Based on an estimation computed pursuant to the requirements of Financial Accounting Standards Board (“FASB”) Statement No. 5, “Accounting for Contingencies,” and FASB Statements No. 114 and 118, “Accounting by Creditors for Impairment of a Loan,” the analysis of the ALL consists of two components: (i) specific credit allocation established for expected losses resulting from an analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds its fair value; and (ii) general portfolio allocation based on historical loan loss experience for each loan category and adjusted for economic conditions as well as specific and other factors in the markets in which we operate.

The specific credit allocation of the ALL is based on a regular analysis of loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale.

The general portfolio allocation component of the ALL is determined statistically using a loss migration analysis that examines historical loan loss experience. The loss migration analysis is performed quarterly

and loss factors are updated regularly based on actual experience. The general portfolio allocation element of the ALL also includes consideration of the amounts necessary for concentrations and changes in portfolio mix and volume.

The ALL is based on estimates, and ultimate losses will vary from current estimates. These estimates are reviewed quarterly and as either positive or negative adjustments become necessary, a corresponding increase or decrease is made in the provision for loan losses. The composition of the loan portfolio has not significantly changed since year-end 2006.

Management remains watchful of credit quality issues and believes that issues within the portfolio are reflective of the challenging economic environment experienced over the past few years. Should the economic climate deteriorate from current levels, borrowers may experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in the provision. In addition, declines in real estate values in our market areas may affect collateral values of loans secured by commercial or residential mortgages, which may require further re-evaluation of allowance levels.

Consideration for making such allocations is consistent with the factors discussed above and all of the factors are subject to change; thus, the allocation is not necessarily indicative of the loan categories in which future loan losses will occur. It would also be expected that the amount allocated for any particular type of loan will increase or decrease proportionately to both the changes in the loan balances and to increases or decreases in the estimated loss in loans of that type. In other words, changes in the risk profile of the various parts of the loan portfolio should be reflected in the allowance allocated.

While probable asset quality problems exist in the loan portfolio in view of collateral values, management believes sufficient ALL allocations have been provided in the ALL to absorb probable incurred losses in the loan portfolio at March 31, 2007. Ongoing efforts are being made to collect these loans, and we involve the legal process for collection when necessary to minimize the risk of further deterioration of these loans.

While management uses available information to recognize losses on loans, future adjustments to the ALL may be necessary based on changes in economic conditions and the impact of such change on our borrowers. As an integral part of their examination process, various regulatory agencies also review our ALL. Such agencies may require that changes in the ALL be recognized when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

Non-Performing Loans, Potential Problem Loans and Other Real Estate

Management encourages early identification of non-accrual and problem loans in order to minimize the risk of loss. This is accomplished by monitoring and reviewing credit policies and procedures on a regular basis, as well as reviewing specific credits periodically.

Non-performing loans are a leading indicator of future loan loss potential. Non-performing loans are defined as non-accrual loans, loans 90 days or more past due but still accruing, and restructured loans. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collection of principal or interest on loans, it is the practice of management to place such loans on non-accrual status immediately rather than waiting until the loans become 90 days past due. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than recorded as interest income. Restructuring loans involve the granting of some concession to the borrower involving a loan m odification, such as payment schedule or interest rate changes. Restructured loans involve loans that

have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined using a SFAS 114 analysis.

TABLE 6

NON-PERFORMING ASSETS

($ in thousands)


	At or for the period ended March 31, 2007	At or for the period ended December 31, 2006
Nonperforming Assets:
Nonaccrual loans	$ 37,729	$27,352
Loans restructured in a troubled debt restructuring	1,410	496
Accruing loans past due 90 days or more	-	-

Total nonperforming loans ("NPLs")	$ 39,139	$ 27,848
Other real estate owned	7,113	5,760

Total nonperforming assets ("NPAs")	$ 46,252	$ 33,608
Ratios:
ALL to NCO's (annualized)	16.55	3.36
NCO's to average loans (annualized)	0.10%	0.29%
ALL to total loans	1.67%	0.98%
NPL's to total loans	4.73%	3.39%
NPA's to total assets	4.14%	3.02%
ALL to NPL's	35.35%	28.94%

Non-accrual loans increased during the three months ended March 31, 2007 by $10 million from December 31, 2006. The increase is primarily attributable to three commercial relationships totaling $10 million for businesses that are experiencing difficulties in sales, cash flow, fiscal operations, and/or general management issues. Two of these three non-performing relationships are secured primarily by commercial or residential real estate, and secondarily, by personal guarantees from principals of the respective borrowers. As previously mentioned in the “Provision for Loan Losses” section above, the third relationship has a significant collateral shortfall. This relationship totals $4.6 million and is secured by personal property and a contract assignment. Management has allocated $3.8 million in the ALL on the basis of a SFAS 114 analysis for any loss estimated with respect to these three relationships. ;

Other real estate owned, which represents property that the Company acquired through foreclosure, deed in lieu of foreclosure or in satisfaction of debt, consisted of twenty properties at March 31, 2007 compared to seventeen properties at December 31, 2006.

Information regarding other real estate owned is as follows:

TABLE 7

OTHER REAL ESTATE OWNED

($ in thousands)


	March 31, 2007	December 31, 2006
Beginning Balance	$ 5,760	$ 3,333
Transfer of net realizable value to ORE	1,797	6,399
Sales Proceeds, net	(394)	(3,958)
Net gain from sale of ORE	14	76
Provision for ORE	(64)	(90)

Total Other Real Estate	$ 7,113	$ 5,760

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


	March 31, 2007	December 31, 2006
Beginning Balance	$ 108	$ 267
Provision charged to operations	64	90
Amounts related to properties disposed	-	(249)

Balance at end of period	$ 172	$ 108

Investment Portfolio

The investment portfolio is intended to provide the Company with adequate liquidity, flexibility in asset/liability management and, lastly, an increase in its earning potential.

At March 31, 2007, the investment portfolio (which includes investment securities available for sale) remained relatively stable at $189 million as compared to $188 million at December 31, 2006. At March 31, 2007, the investment portfolio represented 16.93% of total assets compared with 16.94% at December 31, 2006.

Securities available for sale consist of the following:

TABLE 8

INVESTMENT SECURITY ANALYSIS

At March 31, 2007

($ in thousands)


	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value

Securities available for sale
Obligations of U.S. Treasury & other U.S. agencies	90	(735)	57,751
Mortgage-backed securities	181	(1,201)	77,303
Obligations of states & political subdivisions	524	(135)	51,131
Private placement	15	-	1,015
Other securities	-	-	1,717

Total securities available for sale	$ 810	$ (2,071)	$ 188,917

At December 31, 2006

($ in thousands)


	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value

Securities available for sale
Obligations of U.S. Treasury & other U.S. Agencies	$ 69	$ (953)	$ 57,528
Mortgage-backed securities	154	(1,583)	78,226
Obligations of states & political subdivisions	512	(148)	50,059
Private placement	16	-	1,015
Other securities	-	-	1,487

Total securities available for sale	$ 751	$ (2,684)	$ 188,315

The decreases in unrealized losses are related principally to changes in interest rates. As we have the intent and ability to hold these securities until forecasted recovery, which may be maturity in some instances, no declines were deemed to be other than temporary.

Deposits

Total deposits at March 31, 2007 increased $8 million, or 0.9%, to $887 million from $879 million at December 31, 2006. Non-interest bearing deposits at March 31, 2007 decreased slightly to $96 million as compared to $97 million at December 31, 2006. Interest-bearing deposits at March 31, 2007 increased $9 million, or 1.1%, to $791 million from $782 million at December 31, 2006. Brokered CDs were relatively stable and totaled $105 million at March 31, 2007 compared to $104 million at December 31, 2006. If liquidity concerns arise, we have alternative sources of funds such as lines with correspondent banks and borrowing arrangements with FHLB should the need present itself. Increased competition for consumer deposits and customer awareness of interest rates continues to limit our core deposit growth in these types of deposits. Typically, overall deposits for the first six months tend to decline slightly as a resu lt of the seasonality of our customer base as customers draw down deposits during the first half of the year in anticipation of the summer tourist season. Then, in the later half of the year, deposits tend to increase as a result of cash receipts during the tourist season.

Emphasis has been, and will continue to be, placed on generating additional core deposits in 2007 through competitive pricing of deposit products and through the branch delivery systems that have already been established and a new branch located in the Green Bay market that opened in the third quarter of 2006. We will also attempt to attract and retain core deposit accounts through new product offerings and quality customer service. We also may increase brokered time deposits during the remainder of the year 2007 as an additional source of funds to provide for loan growth in the event that core deposit growth goals would not be accomplished. Under that scenario, we will continue to look at other wholesale sources of funds, if the brokered CD market became illiquid or more costly in terms of interest rate.

Other Funding Sources

Securities under agreements to repurchase and federal funds purchased at March 31, 2007 increased $441,000 to $5 million from $4.5 million at December 31, 2006.

Federal Home Loan Bank Advances were stable at $115 million at March 31, 2007 and December 31, 2006. Typically, borrowings increase in order to fund growth in the loan portfolio in periods when loans increase more rapidly than deposits. We will borrow monies if borrowing is a less costly form of funding loans compared to the cost of acquiring deposits or if deposit growth is not sufficient. Additionally, the availability of deposits also determines the amount of funds we need to borrow in order to fund loan demand. We anticipate we will continue to use wholesale funding sources of this nature, if these borrowings add incrementally to overall profitability.

Long-term Debt

In March 2006, we issued $16.1 million of trust preferred securities and $498,000 of trust common securities under the name Baylake Capital Trust II that will adjust quarterly at a rate equal to 1.35% over the three month LIBOR. This was issued to replace the trust preferred securities issued in 2001 under the Baylake Capital Trust I. For banking regulatory purposes, these securities are considered Tier 1 capital.

The trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon us making payment on the related subordinated debentures to the trust. Our obligations under the subordinated debentures constitute a full and unconditional guarantee by us of the trust’s obligation under the trust securities issued by the trust.

Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities

We utilize a variety of financial instruments in the normal course of business to meet the financial needs of our customers. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for discussion with respect to our quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Items disclosed in Form 10-K have not materially changed since that report was filed.

The following is a summary of our off-balance sheet commitments, all of which were lending-related commitments:

TABLE 9

LENDING RELATED COMMITMENTS

($ in thousands)


	March 31, 2007	December 31, 2006
Commitments to fund home equity line loans	$ 50,862	$ 50,702
Commitments to fund residential real estate construction loans	1,654	2,195
Commitments unused on various other lines of credit loans	139,902	174,975
Total commitments to extend credit	$ 192,418	$ 227,872
Financial standby letters of credit	$ 19,907	$ 21,327

The following table summarizes our significant contractual obligations and commitments at March 31, 2007:

TABLE 10

CONTRACTUAL OBLIGATIONS

($ in thousands)


	Within 1 year	1-3 years	3-5 years	After 5 years	Total
Certificates of deposit and other time deposit obligations	$ 315,611	$ 93,626	$ 4,906	$ -	$ 414,143
Federal funds purchased and repurchase agreements	4,921	-	-	-	4,921
Federal Home Loan Bank advances	85,000	30,177	-	-	115,177
Subordinated debentures	-	-	-	16,100	16,100
Operating leases	15	-	-	-	15
Total	$405,547	$ 123,803	$ 4,906	$ 16,100	$ 550,356

Liquidity

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

Our primary sources of funds are dividends from our subsidiary, investment income, and net proceeds from borrowings and the offerings of junior subordinated obligations, in addition to the issuance of our common stock securities. We manage our liquidity position in order to provide funds necessary to pay dividends to our shareholders and repurchase shares. Dividends received from our subsidiary totaled $1.2 million for the first three months of 2007 and will continue to be our main source of long-term liquidity. The dividends from our subsidiary along with existing cash were sufficient to pay cash dividends to our shareholders of $1.3 million in the first three months of 2007.

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

Maturing investments have been a primary source of liquidity. For the three months ended March 31, 2007, principal payments totaling $4 million were received on investments. We purchased $4 million in investments in the first three months of 2007. At March 31, 2007 the investment portfolio contained $135.1 million of U.S. Treasury and federal agency backed securities, representing 71.5% of the total investment portfolio. These securities tend to be highly marketable.

Deposit growth is typically another source of liquidity in the latter half of each year, although deposits typically shrink in the first half resulting in a use of cash. The seasonal pattern results from the tourism-oriented businesses in our market area. As a financing activity reflected in the March 31, 2007 Consolidated Statements of Cash Flows, deposits increased and resulted in $8.2 million of cash flow during the first three months of 2007. Our overall deposit base increased 0.9% for the three months

ended March 31, 2007. Deposit growth is generally the most stable source of liquidity, although brokered deposits, which are inherently less stable than locally generated core deposits, are sometimes used. Our reliance on these deposits remained constant during the three-month period. Affecting liquidity are core deposit growth levels, certificate of deposit maturity structure and retention, and characteristics and diversification of wholesale funding sources affecting the channels by which brokered deposits are acquired. Conversely, deposit outflow will cause a need to develop alternative sources of funds which may not be as liquid and potentially a more costly alternative.

The scheduled maturity of loans can provide a source of additional liquidity. There are $257.8 million, or 31.2%, of loans maturing within one year. Factors affecting liquidity relative to loans are loan origination volumes, loan prepayment rates and the maturity structure of existing loans. The liquidity position is influenced by changes in interest rates, economic conditions and competition. Conversely, loan demand as a need for liquidity will cause us to acquire other sources of funding which could be harder to find; therefore more costly to acquire.

Within the classification of short-term borrowings at March 31, 2007, federal funds purchased and securities sold under agreements to repurchase totaled $5 million compared to $4 million at the end of 2006. Federal funds are purchased from various upstream correspondent banks while securities sold under agreements to repurchase are obtained from a base of business customers. Short-term and long-term borrowings from FHLB are another source of funds, and were stable at $115 million for both March 31, 2007 and December 31, 2006.

The liquidity resources were sufficient in the first three months of 2007 to fund the growth in loans and investments, increase the volume of interest earning assets and meet other cash needs as necessary.

We expect that deposit growth will continue to be the primary funding source of liquidity on a long-term basis, along with a stable earnings base, the resulting cash generated by operating activities and a strong capital position. Although federal funds purchased and borrowings from the FHLB provided funds in the first three months of 2007, we expect deposit growth to be a reliable funding source in the future as a result of branch expansion efforts and marketing efforts to attract and retain core deposits. In addition, we may acquire additional brokered deposits as funding for short-term liquidity needs. Shorter-term liquidity needs will mainly be derived from growth in short-term borrowings, maturing federal funds sold and portfolio investments, loan maturities and access to other funding sources.

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

Capital Resources

Stockholders’ equity at March 31, 2007 and December 31, 2006 was $80 million and $82 million, respectively. In total, stockholders’ equity decreased $2 million or 2.4%. The decrease in stockholders’ equity in 2007 was primarily related to our net loss of $2.4 million; the payment of dividends of $1.3 million and repurchase of 50,000 shares of treasury stock in the amount of $768,000, offset by $301,000 in proceeds from the exercise of stock options, the reversal of a $980,000 BOLI tax reserve and a $431,000 change in accumulated other comprehensive loss (as a result of a decrease in unrealized losses on available for sale securities). Stockholders’ equity to assets at March 31, 2007 was 7.2% compared to 7.4% at the end of 2006.

Cash dividends declared in the first three months of 2007 were $0.16 per share which was the same as those paid in 2006. Total funds utilized in the payment of dividends were stable at $2.5 million for both the first three months of 2007 and the corresponding period of 2006.

On June 5, 2006, our Board of Directors authorized management, in its discretion, to repurchase up to 300,000 shares, representing approximately 3.8% of our common stock, in a timeframe not to extend beyond June 30, 2007. Although we may not repurchase all 300,000 shares within the allotted time period, the program will allow us to repurchase our shares as opportunities arise at prevailing market prices in open market or privately negotiated transactions. Shares repurchased are held as treasury stock and accordingly, are accounted for as a reduction of stockholders' equity. We repurchased 50,000 of our common shares in the first quarter of 2007 with a cash outlay of $768,000, or an average of $15.36 per share.

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

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

At March 31, 2007 and December 31, 2006, we were categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that we believe have changed our category.

To be “well capitalized” under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%.

The following table presents our and our subsidiary’s capital ratios as of March 31, 2007 and December 31, 2006:

TABLE 11

CAPITAL RATIOS

($ in thousands)


	Actual		Required For Capital Adequacy Purposes		Required To Be Well Capitalized under Prompt Corrective Action Provisions
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of March 31, 2007
Total Capital (to Risk Weighted Assets)
Company	$102,601	10.91%	$75,242	8.00%	N/A	N/A
Bank	$100,479	10.69%	$75,202	8.00%	$94,003	10.00%


Tier 1 Capital (to Risk Weighted Assets)
Company	$90,844	9.66%	$37,621	4.00%	N/A	N/A
Bank	$88,728	9.44%	$37,601	4.00%	$56,402	6.00%
Tier 1 Capital (to Average Assets)
Company	$90,844	8.14%	$44,620	4.00%	N/A	N/A
Bank	$88,728	7.97%	$44,541	4.00%	$55,676	5.00%

As of December 31, 2006
Total Capital (to Risk Weighted Assets)
Company	$101,489	10.87%	$74,721	8.00%	N/A	N/A
Bank	$99,249	10.63%	$74,685	8.00%	$93,356	10.00%
Tier 1 Capital (to Risk Weighted Assets)
Company	$93,430	10.00%	$37,360	4.00%	N/A	N/A
Bank	$91,191	9.77%	$37,342	4.00%	$56,014	6.00%
Tier 1 Capital (to Average Assets)
Company	$93,430	8.53%	$43,826	4.00%	N/A	N/A
Bank	$91,191	8.53%	$43,789	4.00%	$54,736	5.00%

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

Our primary market risk exposure is interest rate risk. Interest rate risk is the risk that our earnings and capital will be adversely affected by changes in interest rates. We do not use derivatives to mitigate our interest rate risk.

Our earnings are derived from the operations of our direct and indirect subsidiaries with particular reliance on net interest income, calculated as the difference between interest earned on loans and investments and the interest expense paid on deposits and other interest bearing liabilities, including advances from FHLB and other borrowings. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities, including the monetary policies of the Board of Governors of the Federal Reserve System. Changes in the economic environment may influence, among other matters, the growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing. Fluctuations in interest rates are not predictable or controllable.

As of March 31, 2007, we were in compliance with our management policies with respect to interest rate risk. We have not experienced any material changes to our market risk position since December 31, 2006, as described in our 2006 Form 10-K Annual Report.

Our overall interest rate sensitivity is demonstrated by net interest income analysis. Net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in net interest income in the event of sudden and sustained 1.0%

to 2.0% increases and decreases in market interest rates. The table below presents our projected changes in net interest income for the various rate shock levels at March 31, 2007.

TABLE 12

INTEREST SENSITIVITY

($ in thousands)


Change in Net Interest Income over One Year Horizon
	At March 31, 2007		At December 31, 2006
Change in levels of interest rates	Dollar change	Percentage change	Dollar change	Percentage change
+200 bp	$ 1,479	4.2%	$164	0.5%
+100 bp	528	1.5%	87	0.3%
Base	-	-	-	-
-100 bp	(1,545)	(4.4%)	(1,064)	(3.1%)
-200 bp	(3,160)	(9.0%)	(2,522)	(7.3%)

As shown above, at March 31, 2007, the effect of an immediate 200 basis point increase in interest rates would increase our net interest income by $1.5 million or 4.2%. The effect of an immediate 200 basis point reduction in rates would decrease our net interest income by $3.2 million or 9.0%.

Changes in the mix of earning assets and interest–bearing liabilities decreased our asset sensitivity during the past twelve months.

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the relative levels of market interest rates and loan prepayments, and should not be relied upon as indicative of actual results. Actual values may differ from those projections set forth above, should market conditions vary from the assumptions used in preparing the analyses. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.

Item 4. Controls and Procedures

Disclosures Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2007. Based on such evaluation, our Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in timely alerting them to material information relating to our disclosure controls and procedures required to be included in this quarterly report on Form 10-Q.

Internal Control Over Financial Reporting: During the quarter, our overall credit process was evaluated and enhancements to the process have been made. In January 2007, the position of Chief Credit Officer was created. This position was developed to oversee the credit underwriting, loan processing, documentation, problem loan, credit review and collection areas. The prior operation of these areas was philosophically different from the current structure implemented during the first quarter 2007. With the creation of this position, updated credit procedures have been implemented. The procedures include additional detail in the loan presentations and due diligence in the background research of both companies and guarantors. New credits entering the bank, along with existing credits requesting new money, may require additional verification procedures over the past practices. The level of de tail for the verification procedures will be determined by the risks associated with the request.

The Chief Credit Officer was also tasked with evaluating the portfolio and moving out some long-standing problem credits. Consequently, there is a more aggressive approach to remove the problem

credits and improve asset quality. As facts and circumstances surrounding impaired loans warrant, a re-evaluation by the Chief Credit Officer will be performed. This approach has already led to a change in the impairment valuations. The impairment process has been enhanced to require supplemental market data and support along with the routine site visits in an effort to identify any changes in collateral positions.

There have not been any other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

Baylake and its subsidiaries may be involved from time to time in various routine legal proceedings incidental to its business. Neither Baylake nor any of its subsidiaries is currently engaged in any legal proceedings that are expected to have a material adverse effect on the results of operations or financial position of Baylake.

Item 1A. Risk Factors

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 5, 2006, our Board of Directors authorized management, in its discretion, to repurchase up to 300,000 shares of our common stock, representing approximately 3.8% of our common stock in a timeframe not to extend beyond June 30, 2007. Although we may not repurchase all 300,000 shares within the allotted time period, the program will allow us to repurchase our shares as opportunities arise at prevailing market prices in open market or privately negotiated transactions. Shares repurchased are held as treasury stock and, accordingly, are accounted for as a reduction of stockholders’ equity.

The following table provides the specified information about the repurchases of our shares during the first quarter of 2007.


Period	Total number of shares purchased	Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may be purchased under the plans or programs*
January 2007	-	-	-	231,146
February 2007	-	-	-	231,146
March 2007	50,000	$15.36	50,000	181,146

* At period end.

The “price” used for these purposes is the fair market value of those shares on the date of purchase.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

The following exhibits are furnished herewith:

Exhibit Number Description

10.1

Preferred Compensation Agreement between Baylake Bank (successor in interest to Bank of Sturgeon Bay) and Thomas L. Herlache dated January 1, 1988.

10.2

Baylake Bank (successor in interest of Bank of Sturgeon Bay) Non-qualified Retirement Trust effective December 31, 1992.

31.1

Certification under Section 302 of Sarbanes-Oxley by Thomas L. Herlache, Chief Executive Officer, is attached hereto.

31.2

Certification under Section 302 of Sarbanes-Oxley by Kevin L. LaLuzerne, Acting Chief Financial Officer, is attached hereto.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.

32.2

Certification of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	BAYLAKE CORP.



Date: May 11, 2007	/s/ Thomas L. Herlache
	Thomas L. Herlache
	Chairman (CEO)


Date: May 11, 2007	/s/ Kevin L. LaLuzerne
	Kevin L. LaLuzerne
	Treasurer (Acting CFO)

EX-10.1 2 exh101.htm PREFERRED COMPENSATION AGREEMENT

Exhibit 10.1

PREFERRED COMPENSATION AGREEMENT

FOR

EXECUTIVE OFFICERS OF THE BANK OF STURGEON BAY

(MONEY PURCHASE COMPENSATION PLAN)

AGREEMENT, effective this 1st day of January, 1988 between the undersigned Executive Officer, hereafter referred to as Participant, and the bank of Sturgeon Bay, a Wisconsin banking corporation, hereafter referred to as the Company.

WHEREAS, Participant is an executive employee of the Company who has materially contributed to the Company’s past performance and achievement, and

WHEREAS, the Company desires to establish a future commitment on the part of Participant for the continued successful operation of the Company, increased efficiency, and prospective benefits for Participant’s retirement, death, disability, or other termination of employment.

NOW, THEREFORE, in consideration of Participant’s past services and of services to be performed in future, of the terms and covenants of this Agreement, and of the mutual benefit accruing to the parties,

IT IS HEREBY COVENANTED AND AGREED that the Company establishes this Preferred Executive Compensation Plan, hereafter referred to as the Agreement, to permit Participant to secure certain deferred compensation in accordance with the following terms and conditions:

Definitions. For purposes of this Agreement, the following words and phrases shall have the meanings set forth below, unless a different meaning is plainly required by the context.

“Administrator” shall mean the persons designated and appointed by the Board of Directors as a committee to have general charge of the administration and interpretation of the Plan. In the absence of specifically appointed persons, the Board shall serve as the committee.

“Age” shall mean the age of the Participant as of his or her last birthday prior to the date identified under this Agreement.

“Beneficiary” shall mean the person or persons designated by a Participant to receive payments under the Plan in the event of Participant’s death, provided that if the Participant has failed to designate a Beneficiary or if designated Beneficiaries predecease the Participant, all distributions under the Plan shall be payable to Participant’s surviving spouse or, if none, to surviving issue, per stirpes, or, if none, then to his or her estate.

“Board” shall mean the Board of Directors of the Company.

“Change in Control” shall mean the first to occur of the following: (a) any person or entity becomes the beneficial owner, directly or indirectly, of 51% or more of the issued and outstanding voting stock of the Company, (b) the Company merges or consolidates with or reorganizes, or engages in any similar business combination, with or into corporations other than an affiliate, or (c) the Company sells, assigns, or transfers all or substantially all of its assets, in one or a series of related transactions, except sales to its affiliates.

“Company” shall mean the Bank of Sturgeon Bay, acting for itself or any subsidiaries and for any successor thereto which assumes the rights and obligations of the Company under the Plan.

“Disability” shall mean such total and permanent physical or mental disability as, in the Administrator’s sole and absolute discretion, would prevent the Participant from engaging gainful performance of duty on behalf of the Company. Where Participant is insured under a life insurance policy containing a “waiver of premium” benefit and for which premiums are paid by the Company, then disability shall be defined as provided for under such insurance policy.

“Discharge for Cause” shall mean termination of Participant’s employwment due to at least one of the following: (a) willful and continued failure to substantially perform the duties related to Participant’s present or equivalent duties, other than failure resulting from physical or mental incapacitation), subsequent to a demand for such performance issued by the Company which (i) specifies the failure to perform as well as the requirements which are required to be performed, but that in the event of any Change in Control in the Company which substantially modifies Participant’s duties and responsibilities, does not prescribe materially different job requirements pursuant to such change, and (ii) provides Participant the opportunity to fulfill such requirements prior to discharge; (b) willful misconduct which is materially injurious to the Company, moneterially or otherwise; conviction for criminal conduct of Participant involving the business affairs of the Company or of a felony crime under state or federal law; or (d) removal of Participant from employment under order of a regulatory agency of the state or federal government. For purposes of this definition, acts of Participant performed in good faith or with reasonable belief that such acts are in compliance with the best interests of the Company or of state or federal law shall not be deemed “willful” nor constitute grounds for discharge for cause under the terms of this provision.

“Early Retirement Date” shall mean the first day of the month following the month in which Participant reaches sixty (60) years of age.

“Normal Retirement Date” shall mean the first day of the month following the month in which Participant reaches sixty-five (65) years of age.

“Termination” shall mean cessation of Participant’s employment for any reason whether voluntary or involuntary, for any reason, including death, disability, or retirement.

Eligibility. Participant shall be eligible for benefits hereunder upon the determination of the Board in accordance with the terms of this Agreement and execution of this Agreement by the parties hereto. A Participant shall cease to be a Participant upon Termination of employment. However, termination shall not be deemed terminated by reason of an approved leave of absence in accordance with uniform rules established by the Board and applied in a non-discriminatory manner.

Payment of Deferred Compensation. Subject to limitations set forth under this Agreement, each Participant or designated Beneficiary thereof shall become eligible for distribution of deferred compensation in the following manner:

Normal Retirement Benefits. Upon Participant’s Termination as of the Normal Retirement Date, the Company shall pay, as compensation for services rendered to date, a minimum sum of $20,000.00 per year, payable in monthly installments commencing on the first day of the month next following the date of Termination of Employment and continuing thereafter for a period of ten years until at least a minimum of 120 total payments are made to Participant or his or her beneficiary.

Early Retirement Benefits. Upon Participant’s Termination after Early Retirement Date, but prior to Normal Retirement Date the Company shall pay, as compensation for services rendered to date, benefits which are prorated portions of Normal Retirement Benefits as specified in Schedule “A”, commencing on the first day of the month next following the date of Termination of Employment and continuing thereafter for a period of ten years until at least a minimum of 120 total payments are made to Participant or his or her beneficiary.

Prior to December 1 of the year prior to Termination for Early Retirement, Participant may elect in writing to defer commencement of retirement benefit to a date not later than the Normal Retirement Date. In the event of such deferral, Participant shall receive normal Retirement Benefits. If such deferral is to a date earlier than the Normal Retirement Date, then benefits shall be paid in accordance with Schedule “A” as if Retirement occurred effective such date.

Late Retirement Benefits. Upon Participant’s Termination after Normal Retirement Date, the Company shall pay, in addition to the Normal Retirement Benefit, such incremental increase in benefits resulting from the income earned from the Normal Retirement Date until Termination of Employment, payable in monthly installments commencing on the first day of the month next following the date of Termination of Employment and continuing thereafter for a period of ten years until at least a minimum of 120 total payments are made to Participant or his or her beneficiary.

Disability Benefits. Upon Participant’s Termination for reasons of disability, regardless of date, no separate provision is made for disability benefit under this Agreement. However, such Participant shall be considered to continue under this Agreement until reaching Early Retirement Date at which time Participant shall be entitled to benefits as provided for in Section 3.B, including benefits payable to his or her beneficiary in accordance with Section 3.F.

Other Termination. Upon Participant’s Termination for voluntary reasons prior to reaching Early Retirement Date or for discharge for cause as defined under this Agreement at any time, the Company shall not be obligated to pay any benefit under this Agreement and Participant shall have no further right to receive eligibility for benefits hereunder.

Survivorship Benefits.

(1)

If Participant dies while employed by the Company, prior to Commencement of Retirement Benefits; after Termination of Employment due to Disability; or after Termination of Employment on or after Early Retirement Date but prior to commencement of benefits, the Company shall pay, as a Survivor’s benefit, a minimum of $20,000 per year, payable in monthly installments commencing on the first day of the month next following the

date of Participant’s death and continuing thereafter for a period of ten years until 120 total payments are made. In the event the named beneficiary dies before receiving all benefit payments, the remainder shall be paid to the legal representative of the beneficiary’s estate. Payment of a survivor’s benefit hereunder shall relieve the Company of any obligation to pay any other benefit with Participant might otherwise have received under this Agreement.

(2)

If Participant dies after payments have commenced, but prior to receving the full amount of payments due hereunder, the Company shall pay the remainder to Participant’s beneficiary. In the event the named beneficiary dies before receiving all benefit payments, the remainder shall be paid to the legal representative of the beneficiary’s estate.

Designation of Beneficiary. All payments to be made by the Company shall be made to the Participant, if living. In the event of a Participant’s death prior to the receipt of all benefit payments, all subsequent payments to be made under this Agreement shall be to the beneficiary or beneficiaries of the Participant. The Participant shall designate a beneficiary by filing a written notice of such designation with the Company in such form as the Company may prescribe. The Participant’s beneficiary designation shall be deemed automatically revoked in the event of the death of the beneficiary or, if the beneficiary is the Participant’s spouse, in the event of dissolution of marriage. If no designation shall be in effect at the time when any benefits payable under this Agreement shall become due, the beneficiary shall be the spouse of the Participan t, or if no spouse is then living, the legal representatives of the Participant’s estate.

Administration and Interpretation of this Agreement. The Board of Directors shall appoint an Administrative Committee consisting of three (3) or more persons to administer and interpret this Agreement. Interpretation by the Administrative Committee shall be final and binding upon a Participant. The Administrative Committee may adopt rules and regulations relating to this Agreement as it may deem necessary or advisable for the its administration.

Claims Procedures. If the Participant or the Participant’s beneficiary (hereinafter referred to as a “Claimant”) is denied all or a portion of an expected benefit under this Plan for any reason, he or she may file a claim with the Administrative Committee. The Administrative Committee shall notify the Claimant within 60 days of allowance or denial of the claim, unless the Claimant receives written notice from the Administrative Committee prior to the end of the sixty (60) day period stating that special circumstances require an extension of the time for decision. The notice of the Administrative Committee’s decision shall be in writing, sent by mail to Claimant’s last known address, and, if a denial of the claim, must contain the following information:

the specific reasons for the denial;

specific reference to pertinent provisions of the Plan on which the denial is based; and

if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information or material is necessary, and an explanation of the claims review procedure.

Life Insurance and Funding. The Company in its discretion may apply for and procure as owner and for its own benefit, insurance on the life of the Participant, in such amounts and in such forms as the Company may choose. The Participant shall have no interest whatsoever in any such policy or policies, but at the request of the Company he shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Company has applied for insurance.

The rights of the Participant, or his beneficiary, or estate, to benefits under the Plan shall be solely those of an unsecured creditor of the Company. Any insurance policy or other assets acquired by or held by the Company in connection with the liabilities assumed by it pursuant to the Plan shall not be deemed to be held under any trust for the benefit of the Participant, his beneficiary, or his estate, or to the security for the performance of the obligations of the Company but shall be, and remain, a general, unpledged, and unrestricted asset of the Company.

If this Agreement is funded through insurance on the life of the Participant, then in the event of such Participant’s death during the first two (2) years after the effective date of this Agreement, and if such Participant’s death was a result of suicide or if such Participant made any material misstatement or failed to make a material disclosure of information in any documentation which the Participant is requested to complete in connection with this Agreement, then no death benefits under the terms of this Agreement will be payable, unless and to the extent that the Board of Directors of Company, in their absolute discretion may otherwise determine.

Assignment of Benefits. Neither the Participant nor any other beneficiary under the Plan shall have the right to assign the right to receive any benefits hereunder, and in the event of any attempted assignment or transfer, the Company shall have no further liability hereunder.

Employment Rights. All payments made under the Plan shall be independent of and separate from payments made under any other plan or agreement for compensation which may be in force between the Company and any Participant or Beneficiary thereof. Neither the Plan nor any document executed herewith shall be construed as (i) constituting or creating a contract of employment, (ii) restricting any right of the Company to discharge a Participant, with or without cause, or the right of any Participant to terminate employment, or (iii) establishing any representation or guaranty as to the amount of compensation to be paid by the Company to any Participant for any period of employment as a director.

10.

Taxes. The Company shall deduct from all payments made hereunder all applicable federal or state taxes required by law to be withheld from such payments.

11.

Amendment and Termination. The Board of Directors may, at any time, amend or terminate this Agreement, provided that the Board may not reduce or modify any benefit in pay status to a Participant or beneficiary hereunder or any benefit that would become payable hereunder if the Participant were to have died or were to have become involuntarily terminated under Section 3.5(b) hereof on the day prior to such action by the Board, without the prior written consent of the Participant.

The Company is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes,

in Federal law relating to and allowing the tax-free accumulation of earnings within a life insurance policy, the income tax-free payment of proceeds from life insurance policies or any other law which would result in a material adverse impact upon the Company’s ability to perform its obligations under this Agreement, the Company shall have an option to terminate or modify this Agreement subject to the protections afforded Participants in the preceding paragraph.

12.

Applicable Law. The Plan shall be construed in accordance with the laws of the State of Wisconsin, except to the extent preempted by federal law.

13.

Forms of Communication. Any election, application, claim, notice or other communication required or permitted to be made by a Participant to the Company shall be made in writing and in such form as the Company shall prescribe. Such communication shall be effective upon mailing, if sent by first class mail, postage pre-paid, and addressed to the Company’s office at 217 N. 4th Avenue, Box 9, Sturgeon Bay, WI 54235.

14.

Headings. The headings of articles or sections are inserted for convenience and are not to be regarded as part of the Plan or as indicating or controlling the meaning or construction of any provision contained herein.

15.

Plan Provisions Controlling In the event any term or provisions of any summary or description of the Plan or of any related instrument, agreement, or document are construed as being in conflict with the provisions of the Plan, such Plan provision shall be controlling.

16.

Severability. In the event any Plan provision shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan. The remaining provisions shall be fully severable and the Plan shall, to the extent practicable, be construed and enforced as if such illegal or invalid provisions were not included therein.

17.

Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company and the Participant, and each of their successors, heirs, personal representatives and permitted assigns. No sale of substantially all of the Company’s assets shall be made without the buyer expressly assuming the obligation of this Agreement. The Company further agrees that it will not be a party to any merger, consolidation or reorganization unless and until its obligations hereunder are expressly assumed by the successor or successors.

IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first set forth above.

PARTICIPANT:

/s/ T. L. Herlache

Thomas L. Herlache

BANK OF STURGEON BAY

BY: /s/ illegible

Senior Vice President

DESIGNATION OF BENEFICIARY

FOR

BANK OF STURGEON BAY
DEFERRED COMPENSATION PLAN FOR EXECUTIVE OFFICERS

The undersigned hereby designates Bank of Sturgeon Bay, Trustee under Will dated May 25, 1988 whose address is 217 North 4th Avenue, Sturgeon Bay, Wisconsin as Primary Beneficiary for all payments which may be made after my death pursuant to distribution of benefits under the Bank of Sturgeon Bay Voluntary Deferred Compensation Plan for Executive Officers, hereafter referred to as the Plan, under which I am a Participant.

This designation supersedes any and all prior designations made under the Plan and this Designation shall be effective until such time as it shall be revoked or suspended by a subsequent designation.

Dated this 25th day of May, 1988.

Witnessed:

PARTICIPANT:

/s/ Cheryl Brauer

/s/ T. L. Herlache

EXHIBIT “A”

PREFERRED COMPENSATION AGREEMENT

SCHEDULE OF REDUCED BENEFITS FOR EARLY RETIREMENT


RETIREMENT AGE	MINIMUM ANNUAL BENEFIT

64	$18,700
63	$17,485
62	$16,348
61	$15,285
60	$14,292

* The actual Early Retirement Benefit will depend upon performance of funds allocated for the Participant’s deferred compensation benefit.

DESIGNATION OF BENEFICIARY

FOR

BANK OF STURGEON BAY
DEFERRED COMPENSATION PLAN FOR EXECUTIVE OFFICERS

The undersigned hereby designates Jill H. Herlache, his wife, as Primary beneficiary for all payments which may be made after my death pursuant to distribution of benefits under the Bank of Sturgeon Bay Voluntary Deferred Compensation Plan for Executive Officers, hereafter referred to as the Plan, under which I am a Participant. Contingent beneficiaries per stirpes shall be 25% to Thomas C. Herlache, his son; 25% to April L. Herlache, his daughter; 25% to Jason S. Schick, his step son; and 25% to Jody J. Schick, his step daughter.

This designation supersedes any and all prior designations made under the Plan and this Designation shall be effective until such time as it shall be revoked or suspended by a subsequent designation.

Dated this 28th day of January, 1993.

Witnessed:

PARTICIPANT:

/s/ Nancy Ditewig

/s/ T. L. Herlache

EX-10.2 3 exh102.htm NON-QUALIFIED RETIREMENT TRUST

Exhibit 10.2

BANK OF STURGEON BAY NONQUALIFIED
RETIREMENT TRUST

This Trust Agreement is made and entered into by and between Bank of Sturgeon Bay (called “Employer”) and Bank of Sturgeon Bay Trust Department (called “Trustee”).

Employer hereby establishes with Trustee, effective this 31st day of December, 1992, a Trust to hold all property acceptable to Trustee, together with the income thereon, as shall be paid or transferred to it hereunder in accordance with the terms and conditions of this Agreement.

I. DEFINITIONS

1.1

Board of Directors: “Board of Directors” means the Board of Directors of Employer.

1.2

Code: “Code” means the Internal Revenue Code of 1954, as amended.

1.3

Employee: “Employee” means Thomas L. Herlache.

1.4

Employer: “Employer” means Employer or any corporation which succeeds to its business and succeeds to the position of Employer hereunder in accordance with the provisions of Section 7.3 of the Agreement.

1.5

Fiduciary: “Fiduciary” means the Board of Directors, the Vice-President, Trustee, and any person to whom the responsibilities of such persons under this Agreement are delegated in accordance with Section 2.3 hereof. References to such persons as Fiduciaries herein are for convenience only. Employer and Trustee intend that such persons shall not be subject to the fiduciary responsibility provisions of Part 4 of Title I of the Employee Retirement Income Security Act of 1974, as amended.

1.6

Fiscal Year: “Fiscal Year” means the calendar year.

1.7

Insolvency Creditor: “Insolvency Creditor” shall have the meaning set forth in Section 2.1 hereof.

1.8

Plan: “Plan” refers to the deferred compensation plan entitled the “Thomas L. Herlache Deferred Compensation Plan”, effective December 31, 1992, and any similar prior or successor plan established by Employer and providing deferred compensation for Employee.

1.9

Trust: “Trust” means the trust established by Employer and Trustee pursuant to this Agreement.

1.10

Trustee: “Trustee” means Bank of Sturgeon Bay Trust Department or any successor trustee appointed under Section 6.2.

1.11

Valuation Date: “Valuation Date” means the last business date of each calendar year and such other dates as the Vice-President shall from time to time direct Trustee.

1.12

Vice-President: “Vice-President” means the Vice-President – Accounting unless otherwise designated by Employer or such other person or persons as the Vice-President may designate to act for him under this Trust Agreement.

II. ALLOCATION OF RESPONSIBILITIES

2.1

General Responsibilities: In establishing this Trust, it is the intention of Employer and Trustee that, except in the event of insolvency of Employer or subsequent to the satisfaction of all liabilities of Employer under the Plan, all property and income thereon held pursuant to the Trust shall be only for one of the following purposes: (1) to pay any benefits that become payable to Employee of Employer under the Plan; or (2) to pay the expenses, including Trustee’s fees, incurred in the administration of this Trust and any taxes assessed in accordance with Section 5.9 hereof. In the event of insolvency of Employer, all money or other property contributed by such Employer and income thereon then held pursuant to the Trust shall be available to pay the claims of any creditor of Employer to whom a distribution may be made in accordance with state and federal bankruptcy l aws (hereinafter referred to as an Insolvency Creditor) to the same extent that unencumbered assets held by Employer are available to satisfy such claims. Each Fiduciary, in carrying out the responsibilities assigned to him under this Agreement, shall act in accordance with this intent and the terms of this Agreement using the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

2.2

Designated Fiduciaries: The following Fiduciaries are designated to control and manage the operation and administration of this Trust:

(a)

The Board of Directors;

(b)

The Vice-President; and

(c)

Trustee

2.3

Delegation of Fiduciary Duties: Each Fiduciary (other than Trustee) designated pursuant to Section 2.2 of this Agreement (hereinafter referred to as “a designated Fiduciary”) may delegate any or all of its responsibilities to persons who are not designated Fiduciaries with respect to the specific responsibility or responsibilities so delegated. Any such delegation shall be in writing and shall be made a permanent part of the records of the designated Fiduciary. Such delegation shall be reviewed periodically by the designated Fiduciary and shall be terminable under such conditions and upon such notice as the designated Fiduciary, in its sole discretion, deems reasonable and prudent under the circumstances. In addition, each designated Fiduciary (including Trustee) shall be entitled to employ and conduct with such agents and counsel as may be reasonably necessary in con nection with the performance of such designated

Fiduciary’s responsibilities hereunder, and to pay them or cause them to be paid reasonable compensation out of the Trust.

2.4

Allocation of Responsibility: The responsibilities of the Fiduciaries designated in Section 2.2 of this Agreement shall be allocated among them as provided in Sections 2.5 through 2.8 below, and the Vice-President may allocate among his designees his responsibilities under this Trust, and the Board of Directors may do the same with respect to the responsibilities of the Board hereunder. Except as otherwise provided by applicable law, no Fiduciary shall be liable for a breach by another Fiduciary.

2.5

Duties of the Board of Directors: The Board of Directors acting on behalf of Employer, shall have sole authority and responsibility for the appointment and removal of the Vice-President. The Board of Directors and the Vice-President of Employer shall be obligated to inform Trustee of Employer’s insolvency as soon as practicable after such insolvency becomes known to Employer.

2.6

Duties of the Vice-President: The Vice-President shall have sole authority and responsibility for:

(a)

The amendment of this Agreement, provided Trustee shall be a signatory to such amendment;

(b)

The termination of this Trust;

(c)

Except as provided in Section 2.5, all other acts permitted or required to be performed by Employer under this Agreement;

(d)

The determination of the existence, nature, and extent of the rights and interests of Employee or any beneficiary under the Plan or creditor of Employer in this Trust;

(e)

The allocation of investment responsibilities among and between itself, Trustee, and any person acting hereunder from time to time;

(f)

The determination of investment policies and guidelines to be followed by the fiduciary or Fiduciaries to whom investment responsibilities have been allocated;

(g)

The promulgation of appropriate directions to implement benefit payments from the trust;

(h)

The maintenance of Employee records; and

(i)

The preparation and filing of reports and other information concerning the Trust as may be required by applicable law, except such reports and filed by Trustee.

2.7

Duties of Trustee:

(a)

Trustee shall have sole authority and responsibility for:

(i)

The control, management, investment, and reinvestment of the assets of the Trust, unless and to the extent the Vice-President has allocated such powers to other Fiduciaries acting hereunder;

(ii)

The valuation of the assets of the Trust;

(iii)

The maintenance and production of records and reports pertaining to the administration of this Trust; and

(iv)

The performance of the general administrative powers conferred under Article V of this Agreement; subject, however, to the directions of Fiduciaries specifically authorized to direct Trustee with respect to the exercise of such powers.

(b)

In the event that Trustee is informed of Employer’s insolvency pursuant to Section 2.5, Trustee shall suspend payments to Employee and will hold the assets of the Trust for the benefit of Employer’s Insolvency Creditors. In addition, if Trustee receives other written allegation of Employer’s insolvency, Trustee shall suspend payments to Employee, shall hold the assets of the Trust for the benefit of Employer’s Insolvency Creditors, and shall take such steps as it determines in its sole discretion to be reasonably necessary to determine within 30 days whether Employer is Insolvent. Upon a determination that Employer is solvent, Trustee shall resume payments, including any benefits previously suspended. In the case of Trustee’s actual knowledge of or determination of Employer’s insolvency, Trustee will deliver Trust assets as necessary to satis fy claims of Employer’s Insolvency Creditors as directed by a court of competent jurisdiction.

2.8

Board of Directors and Vice-President Directions: Trustee shall not be liable for losses or unfavorable results arising from its compliance with proper directions of the Board of Directors or the Vice-President made in accordance with the terms of this Agreement.

2.9

Indemnification of Trustee: Employer hereby indemnifies Trustee against, and agrees to hold Trustee harmless from, all liabilities and claims (including reasonable attorneys’ fees and expenses in defending against such liabilities and claims) against Trustee as a result of any breach of Fiduciary responsibility by a Fiduciary other than Trustee unless Trustee participates knowingly in such breach, has actual knowledge of such breach or, through its negligence in performing its own specific Fiduciary responsibilities, has enabled such other Fiduciary to commit a breach of the latter’s fiduciary responsibilities.

III. CONTRIBUTIONS: RIGHTS IN TRUST ASSETS,
NONTRANSFERABILITY

3.1

Contributions: Trustee acknowledges receipt of the sum of Twenty Thousand Five Hundred and no/100 ($20,500.00) Dollars from Employer on the date of establishment of this Trust. Employer shall make such other annual contributions to the Trust as it determines are necessary or desirable (on the basis of actuarial computations) to provide sufficient funds to satisfy Employer’s contractual obligations to Employee under this Plan when and as they arise. Such contributions may be in cash or other property valued at fair market value and acceptable to

Trustee. All contributions shall be paid to Trustee for investment and reinvestment pursuant to the terms of this instrument. Trustee shall have no duty to determine or inquire whether any contributions to this Trust are in compliance with the Plan, or to compute any amount to be paid to Trustee; nor shall Trustee be responsible for the collection or adequacy of any contributions to the Trust or for the adequacy of the Trustee to meet and discharge liabilities to Employee under the Plan or to other creditors of Employer.

3.2

Rights in Trust Assets: This Trust shall not be revocable by Employer; however, the assets of this Trust shall at all times be subject to the claims of the Insolvency Creditors of Employer. It shall be impossible, at any time prior to satisfaction of all liabilities with respect to Employee under the Plan and to the Insolvency Creditors of Employer, if any, for any part of the corpus or income of the Trust, other than such part as is required to pay taxes and administration expenses as herein provided, to be used for, or diverted to, purposes other than for the exclusive benefit of Employee or such Insolvency Creditors. All trust assets remaining after all amounts due under the Plan and all amounts due to Employer’s Insolvency Creditors are paid shall be to Employer.

3.3

Nontransferability: The interest, if any, of Employee in this Trust shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance, nor to legal process, nor to the debts, contracts, liabilities, engagements or torts of any of them; provided, however, that payments may be made to beneficiaries of Employee in accordance with any benefit payment option selected by Employee pursuant to the Plan.

IV. INVESTMENTS

4.1

Allocation of Investment Responsibilities: Trustee shall control and manage the assets of the trust, and shall invest and reinvest same without distinction between income and principal; provided, however, that the Vie-President may allocate and reallocate investment responsibility with respect to any assets of the Trust among the Vice-President and Trustee. Any such allocations shall be made by the Vice-President in a written instrument delivered to Trustee and, if appropriate, and shall continue in force and effect until revoked by the Vice-President in writing.

4.2

General Investments: The assets of this Trust may be invested and reinvested in such investments as the Fiduciary having investment responsibility, in its sole discretion, may deem appropriate and consistent with the investment policies developed and communicated by the Vice-President, including without limitation, the generality of the foregoing: improved and unimproved real property whether or not income producing; common and preferred stocks; trust and participation certificates; bonds, debentures; mortgages; deeds of trust; insurance and annuity contracts; covered call options; notes secured by real and personal property; leases; ground leases; limited partnership interests; real or personal property interests owned, developed or managed by joint ventures or limited partnerships; obligations or governmental bodies, both domestic and foreign; notes, commercial paper; and other evidences of indebtedness, secured or unsecured, including variable amount notes; convertible securities of all types and kinds; mutual fund shares; interest-bearing savings or deposit accounts with any federally-insured bank (including Trustee) or savings and loan association; and any other property permitted as investments under applicable law.

V. ADMINISTRATION PROVISIONS

5.1

General Administrative Powers: Trustee shall have the rights, powers, and privileges of an absolute owner when dealing with property of the Trust, including without limitation, the powers listed below. Except as otherwise specified below, Trustee’s exercise of such powers shall be subject to the direction of a Fiduciary authorized to direct Trustee under this Agreement with respect to the management or control of the Trust assets:

(a)

To hold, manage, improve, repair, and control all property, real or personal; to sell, convey, transfer, exchange, partition, lease, and otherwise dispose of same from time to time in such manner, for such consideration, and upon such terms and conditions, including credit, as may be deemed proper;

(b)

To exercise any option, conversion privilege, or subscription right given the Trustee as the owner of any security held in the Trust; to vote any corporate stock either in person or by proxy, with or without power of substitution; to consent to or oppose any reorganization, consolidation, merger, readjustment of financial structure, sale, lease, or other disposition of the assets or any corporation or other organization, the securities of which may be an asset of the Trust, and to take any action in connection therewith and receive and retain any securities resulting therefrom;

(c)

To deposit any security with any protective or reorganization committee, and to delegate to such committee such power and authority with respect thereto as may be deemed proper, and to pay out of the Trust an appropriate portion of the expenses and compensation of such committee;

(d)

Regardless of whether Trustee or any other Fiduciary has responsibility to manage or control the assets of the Trust, to cause any property of the Trust to be issued, held, or registered in the name of Trustee as Trustee, or in the name of a nominee, or in such form that title will pass by delivery, provided, that the records of Trustee shall in all events indicate the true ownership of such property;

(e)

To renew or extend the time of payment of any obligation due or to become due;

(f)

To commence or defend suits or legal or administrative proceedings, and to compromise, arbitrate, or settle claims, debts, or damages in favor of or against Trustee and to deliver or accept, in either total or partial satisfaction of any indebtedness or other obligation, any property, to continue to hold for such period of time as may be deemed appropriate any property so received, and to pay all costs and reasonable attorneys’ fees in connection therewith out of the assets of the Trust; and to select counsel acceptable to the Vice-President and Trustee and to conduct the prosecution or defense of any litigation or legal dispute subject to the control of the Vice-President;

(g)

Regardless whether Trustee or any other Fiduciary has responsibility to manage or control the assets of the Trust, to deposit any securities held in the trust with a securities depository; and

(h)

To hold such part of the assets of the Trust uninvested for such limited periods of time as may be necessary for purposes of orderly account administration or pending required directions, without liability for payment of interest; provided, however, that regardless of whether Trustee or any other Fiduciary has responsibility to manage assets of the Trust, Trustee shall be authorized in its discretion to invest funds of the Trust, pending receipt of such directions, in savings accounts (including savings accounts established with Trustee) or units of investment vehicles (referred to in Section 4.2 of this instrument) in all cases where it is reasonable and feasible to do so.

5.2

Valuation of Trust Assets: Trustee shall determine the fair market value of the assets of the Trust as of each Valuation Date. In determining the “net” fair market value of the assets of the Trust, Trustee shall deduct from the fair market value of such assets all payables, accrued expenses, fees, and other liabilities properly chargeable against the Trust.

5.3

Method of Valuation: Trustee shall compute gain (or loss) from investment activities (including net unrealized appreciation or depreciation in assets) at such Valuation Date. In determining the value of assets, Trustee shall use a uniform and consistent method or basis of valuation which is consistent with generally accepted accounting principles and based upon such sources of information as will, in Trustee’s direction, result in the fair and equitable valuation of Trust assets. Trustee may utilize published quotations or pricing services that Trustee considers reliable. If Trustee determines that any assets of the Trust consist of property not freely traded on a recognized exchange, or that information necessary to ascertaining the fair market value thereof is not readily available to Trustee, Trustee shall take such action as it deems necessary to determine fair market value at the expense of the trust, including but not limited to, estimates or appraisals or value from sources familiar with the type or property involved. The valuations by Trustee shall be binding upon all interested persons.

5.4

Payment of Deferred Compensation: Trustee shall, subject to the claims of Employer’s Insolvency Creditors, make payment of deferred compensation due to Employee under the Plan directly to Employee. Such payments shall be made in accordance with the written directions issued to Trustee, from time to time, by the Vice-President. Employer hereby indemnifies Trustee against, and agrees to hold Trustee harmless from, all liabilities and claims (including reasonable attorneys’ fees and expenses in defending against such liabilities and claims) against Trustee as a result of Trustee’s actions in following the written payment directions of the Vice-President. Since the assets of this Trust are, in the event of Employer’s insolvency, subject to the claims of Employer’s Insolvency Creditors, Trustee shall suspend further payments to Employee in the event of Emplo yer’s insolvency or any written allegation of such insolvency and shall apply the assets of the Trust in accordance with Section 2.7(b) of this Agreement.

5.5

Commencement of Distributions: Distribution of benefits to Employee shall commence on the first day of the month following the later of (1) the month in which the employee attains the age of 55 of (2) the month in which the employee ceases to be an officer of Employer.

5.6

Account Records: All accounting records, valuation schedules, periodic statements, and audits pertaining to the Trust shall be retained as a part of the permanent records

of Trustee. The Vice-President may, in its discretion, direct Trustee to retain, at the expense of the Trust, independent certified public accountants to audit such records provided, however, that nothing in this Agreement shall be construed so as to deprive Trustee of the right to seek and obtain a judicial settlement of its accounts at the expense of the Trust.

5.7

Notices, Directions, etc.: All notices, direction, and other communications by a Fiduciary pursuant to this Agreement shall be given in writing by the person or persons specifically authorized by the Fiduciary to act on its behalf, and shall be deemed effective upon receipt by the addressee; provided, however, that transmission of such directions by photostatic teletransmission with duplicate or facsimile signatures or transmission of such directions by telephone shall be authorized methods of communication under the Fiduciary is notified by the Vice-President to the contrary. Any direction transmitted by telephone shall be promptly confirmed by a written instrument. Trustee shall be entitled to act upon and settle any investment transaction in reliance upon directions transmitted by telephone as recorded and transcribed by Trustee. If Trustee fails to receive a written confirm ation of an investment direction transmitted by telephone within five (5) business days following the date of receipt of such direction, or if a written confirmation received conflicts with the oral direction received by telephone. Trustee shall promptly notify the Fiduciary giving the direction orally of such fact and request (i) delivery of such written confirmation forthwith if it has not been received, or (ii) an additional direction if there is a conflict between the oral directions and the written confirmation. Notwithstanding the foregoing, Trustee is authorized to settle trades effected by a Fiduciary having investment authority through a securities depository utilizing an institutional delivery system, in which event, Trustee may deliver or receive securities in accordance with appropriate trade reports or statements given Trustee by such depository without having received communications or instruction directly from the Fiduciary.

5.8

Reports by Trustee: Trustee shall submit to the Vice-President such interim valuations, reports, or other information as the Vice-President and Trustee shall mutually agree. Within sixty (60) days after (i) the end of each Fiscal year, (ii) the effective date of Trustee’s removal or resignation, or (iii) the effective date of the termination of this Trust, shall submit to the Vice-President a written report relating to the period following the period covered by its last report. Such report shall set forth all transactions relating to the Trust during the applicable period, including but not limited to, investment purchases and sales, receipts, disbursements, and a listing of the assets of the Trust showing carrying and market values as of the end of the report period.

5.9

Tax Assessments: In the event that any income or other tax or assessment is levied upon or assessed against the Trust or any portion thereof, or upon or against the interest, if any, or any portion thereof, or upon or against the interest, if any, of any person in the Trust or any portion thereof, or the transfer or payment of such interest to any such person, or upon Trustee by reason of the existence of this Trust, or anything done by Trustee pursuant thereto; Trustee shall immediately notify the Vice-President thereof. If Trustee receives no notice or direction from the Vice-President, Trustee shall have the power to pay such tax or assessment from such portion of the Trust against which the tax or assessment has been levied; or if such tax or assessment is not applicable to any specific portion of the Trust or to the interest, if any, of any specific person therein, Trustee shall have authority to pay such tax or assessment from the Trust. In the event that the Vice-President desires to contest the validity in whole or in part of

any such tax or assessment, it shall give Trustee notice thereof and the trustee, upon receiving reasonable indemnity therefor from Employer, shall take such steps as the Vice-President directs with respect to contesting the validity in whole or in part of any such tax or assessment. Trustee shall further, upon receiving reasonable indemnity from Employer, either permit the Vice-President to bring such action or proceeding in the name of Trustee as said Vice-President deems advisable to test the validity of such tax or assessment, or Trustee itself shall bring such action. Whether the action is brought in the name of Trustee by the Vice-President or prosecuted directly by Trustee, the Vice-President shall have the right to select counsel acceptable to Trustee and to control the prosecution of said action or proceeding. Trustee, however, shall not be required to bring any action or p roceeding to test the validity in whole or in part of any such tax or assessment unless so directed by the Vice-President, and upon giving said Vice-President notice or question the validity of such tax or assessment. Prior to making any payments, transfers, or distributions of or from any portion of the Trust as provided in this Agreement, Trustee may require such lease or other documents from any lawful taxing authorities as its shall deem necessary or advisable.

5.10

Validity of Contracts: Trustee shall not be responsible for the validity of proper execution of any contract delivered to it, nor for any act of any person which may render any such contract void or voidable.

VI. PROVISIONS RELATING TO TRUSTEE

6.1

Resignation and Removal: Trustee may resign at any time upon sixty (60) days written notice to Employer, unless a shorter period is acceptable to Employer. Employer may at any time remove Trustee upon sixty (60) days written notice to Trustee, unless a shorter period is acceptable to Trustee.

6.2

Appointment of Successor: In the event of the removal or resignation of Trustee, Employer shall appoint a successor. If Employer fails to appoint a successor by the end of the sixty (60) day period referred to in Section 6.1, Trustee may secure the appointment of a successor by a court of competent jurisdiction at the expense of the Trust. Upon its acceptance in writing of such appointment delivered to Employer and the retiring Trustee, the successor Trustee shall be vested with all the rights, powers, and duties of Trustee under this Agreement, and the retiring Trustee shall be released and discharged from all further liability with respect to the Trust. The retiring trustee shall endorse, transfer, assign, convey, and deliver to its successor all of the property then held by it under the Trust, except such amount as shall be agreed upon between the Trustee and Employer as rea sonable compensation and expenses in connection with the settlement of accounts and the delivery of the assets to the successor Trustee. If the retiring trustee holds any property unsuitable for transfer, it shall, except as otherwise directed by Employer, retain such property, and as to such property alone it shall continue to be Trustee; its duties, obligations, and compensation being solely limited to any such property. If the successor trustee accepts fiduciary responsibility as to such property, the retiring trustee shall retain only custodial duties with respect to such property.

6.3

Expenses and Trustee Compensation: Trustee shall be entitled to reasonable compensation for its services and shall be reimbursed for all reasonable expenses incurred by it in performing its duties hereunder including, but not limited to, legal and accounting expenses.

Such compensation is set forth in a separate schedule. Such schedule may be modified from time to time as agreed by Employer and Trustee. All such compensation and expenses shall be paid to Trustee by Employer; provided, however, that such compensation and expenses shall constitute a charge upon the Trust, and may be withdrawn by Trustee from the Trust upon prior written notice to Employer if not otherwise paid. Any costs or expenses that are chargeable to the Trust but which, for administrative convenience and efficiency, are paid or incurred by Employer shall be fully reimbursed by the Trust to Employer upon presentation to Trustee of an accounting of such costs and expenses, including any costs and expenses incurred by the Vice-President or other employees in connection with Plan administrative activities. In all cases Trustee shall be entitled to rely upon Employer’s statements and directions concerning the payment of any such Plan administration expenses and shall be fully protected in making such payments pursuant to the directions of Employer.

VII. AMENDMENT AND TERMINATION

7.1

Amendments: The parties may amend the provisions of this Agreement at any time by a written instrument signed by Employer and Trustee, provided, however, that no such amendment shall allow a return of Trust assets to Employer other than in accordance with the provisions of Sections 3.2 and 7.2.

7.2

Termination: Employer retains the right to terminate this Trust in accordance with the following procedures. Employer shall be required to provide written notice to Trustee of its intent to terminate the Trust. The Trust shall be prohibited from terminating the Trust for at least twelve (12) months after its receipt of notice of Employer’s intent to terminate. In the event of Employer’s insolvency during the twelve month period after receipt of such notice by Trustee, this section shall become ineffective and disposition of the Trust’s assts shall be governed by Sections 2.1 and 2.7 of this Agreement. Subject to these notice requirements, in the event Employer terminates the Trust, the assets of the Trust shall be paid to Employee or to Employer’s Insolvency Creditors, in accordance with the written directions issued to Trustee, from time to time, by t he Vice-President. Any Trust assets remaining after all amounts due under the Plan or due to Employer’s Insolvency Creditors, as the case may be, are paid shall be paid to Employer. In the event of insolvency of Employer, this section shall be governed by Sections 2.1 and 2.7 of this Agreement.

7.3

Merger of Consolidation of Employer: In the event of the merger, consolidation, or liquidation of Employer into or with any other corporation, or the sale or other transfer by Employer of all or substantially all of its operating assets, the resulting successor or purchaser corporation shall automatically be substituted for Employer under this Trust unless such successor by resolution of its Board of Directors, shall elect not to become such successor under this Trust. If, within ninety (90) days from the effective date of such merger, consolidation, liquidation, sale or other transfer of assets, such successor or purchaser corporation adopts such a resolution electing not to become the successor Employer hereunder, as herein provided, the Trust shall automatically be terminated insofar as said successor or purchaser corporation and its employees are concerned, and the Trust shall be dispo sed of as provided in this Agreement. In the event of insolvency of the successor or purchaser corporation, this section shall become ineffective and disposition of the Trust’s assets shall be governed by Sections 2.1 and 2.7 of this Agreement.

VIII. MISCELLANEOUS PROVISIONS

8.1

Governing Law: This Agreement shall be construed and enforced according to the laws of the State of Wisconsin.

8.2

Conflicting Provisions: In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of this Agreement shall control.

8.3

Invalid Provisions: In any paragraph, section, sentence, clause, or phrase contained in this Agreement shall become illegal, null, or void, or against public policy, for any reason, or shall be held by any court of competent jurisdiction to be incapable of being construed or limited in a manner to make it enforceable, or is otherwise held by such court to be illegal, null, or void, or against public policy the remaining paragraphs, sections, sentences, clauses, or phrases contained in this Agreement shall not be affected thereby.

8.4

Successor and Assigns: This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns, except as is expressly provided to the contrary herein.

Employer and Trustee have caused this Agreement to be executed by their respective duly authorized officers on the dates set forth below.

EMPLOYER:

BANK OF STURGEON BAY

By: /s/ Steven D. Jennerjohn

TRUSTEE:

BANK OF STURGEON BAY TRUST DEPARTMENT

By: /s/ Paul C. [illegible]

EX-31.1 4 exh311.htm CERTIFICATION PURSUANT TO SECTION 302

EXHIBIT 31.1

CERTIFICATION PURSUANT TO 18 U.S.C.

SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas L. Herlache, certify that:

I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2007 of Baylake Corp (the “Registrant”);

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2007

/s/ Thomas L. Herlache

Thomas L. Herlache

Chairman and CEO

EX-31.2 5 exh312.htm CERTIFICATION PURSUANT TO SECTION 302

EXHIBIT 31.2

CERTIFICATION PURSUANT TO 18 U.S.C.

SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin L. LaLuzerne, certify that:

I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2007 of Baylake Corp (the “Registrant”);

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) an 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-a5(f)) for the registrant and have:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2007

/s/ Kevin L. LaLuzerne

Kevin L. LaLuzerne

Senior Vice President and Acting Chief Financial Officer

EX-32.1 6 exh321.htm CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q for the three months ended March 31, 2007 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Thomas L. Herlache, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas L. Herlache

Thomas L. Herlache

President and Chief Executive Officer

May 11, 2007

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Baylake Corp. and will be retained by Baylake Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 7 exh322.htm CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q for the three months ended March 31, 2007 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Kevin L. LaLuzerne, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Kevin L. LaLuzerne

Kevin L. LaLuzerne

Senior Vice President and Acting Chief Financial Officer

May 11, 2007