10-Q

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 September 30, 2010
OR
	o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 001-16339

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required and to submit and post such files).

Yes o No o

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

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

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

Yes o No x

Number of outstanding shares of common stock as of November 15, 2010: 7,911,539 shares

BAYLAKE CORP. AND SUBSIDIARIES

INDEX

	PAGE NO.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009	3
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2010 and 2009	4
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the nine months ended September 30, 2010	5
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2010 and 2009	6– 7
Notes to the Unaudited Consolidated Financial Statements	8 – 20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 – 42
Item 3. Quantitative and Qualitative Disclosure about Market Risk	41
Item 4T. Controls and Procedures	42
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. [Reserved]	43
Item 5. Other Information	43
Item 6. Exhibits	44
Signatures	45
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

2

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 2010 (Unaudited) and December 31, 2009
(Dollar amounts in thousands)

	September 30, 2010			December 31, 2009
ASSETS
Cash and due from financial institutions	$	67,685		$	86,442
Federal funds sold		49			84
Cash and cash equivalents		67,734			86,526
Securities available for sale		254,900			204,834
Loans held for sale		4,446			2,567
Loans, net of allowance of $13,226 and $9,600 at September 30, 2010 and December 31, 2009, respectively		620,055			642,294
Cash value of life insurance		24,274			24,062
Premises and equipment, net		23,844			23,523
Federal Home Loan Bank stock		6,792			6,792
Foreclosed assets, net		15,498			14,995
Goodwill		6,299			6,108
Deferred income taxes		7,471			8,856
Accrued interest receivable		4,288			3,376
Other assets		16,212			20,524
Total assets	$	1,051,813		$	1,044,457
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	92,874		$	81,336
Interest-bearing		752,480			750,293
Total deposits		845,354			831,629
Federal Home Loan Bank advances		70,000			85,000
Repurchase agreements		22,471			21,122
Subordinated debentures		16,100			16,100
Convertible promissory notes		9,450			5,350
Accrued expenses and other liabilities		8,673			10,658
Total liabilities		972,048			969,859
Common stock, $5 par value, authorized 50,000,000 shares; Issued-8,132,552 shares at September 30, 2010 and December 31, 2009; Outstanding-7,911,539 shares at September 30, 2010 and December 31, 2009		40,662			40,662
Additional paid-in capital		11,980			11,979
Retained earnings		27,483			25,828
Treasury stock (221,013 shares at September 30, 2010 and December 31, 2009)		(3,549	)		(3,549	)
Accumulated other comprehensive income (loss)		3,189			(322	)
Total stockholders’ equity		79,765			74,598
Total liabilities and stockholders’ equity	$	1,051,813		$	1,044,457

3

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and nine months ended September 30, 2010 and 2009
(Dollar amounts in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Interest and dividend income
Loans, including fees	$	8,872		$	9,668		$	26,897		$	29,367
Taxable securities		1,983			1,755			6,007			5,204
Tax exempt securities		382			368			1,119			1,274
Federal funds sold		28			37			81			77
Total interest and dividend income		11,265			11,828			34,104			35,922
Interest expense
Deposits		2,248			3,679			7,567			12,121
Repurchase agreements		16			28			78			139
Federal Home Loan Bank advances and other debt		484			579			1,539			1,697
Subordinated debentures		77			80			209			299
Convertible promissory notes		245			44			615			44
Total interest expense		3,070			4,410			10,008			14,300
Net interest income		8,195			7,418			24,096			21,622
Provision for loan losses		4,550			1,200			6,850			3,600
Net interest income after provision for loan losses		3,645			6,218			17,246			18,022
Noninterest income
Fees from fiduciary activities		214			162			714			463
Fees from loan servicing		123			161			397			538
Fees for other services to customers		1,320			1,329			3,797			3,867
Net gains from sales of loans		324			105			725			753
Net change in mortgage servicing rights		(12	)		(60	)		26			(247	)
Net gains from sale of securities		973			—			1,406			2,943
Loss on sale of other bank assets		(81	)		(3	)		(83	)		—
Increase in cash surrender value of life insurance		205			242			271			493
Income in equity of UFS subsidiary		185			142			423			367
Other income		16			12			75			42
Total noninterest income		3,267			2,090			7,751			9,219
Noninterest expenses
Salaries and employee benefits		4,207			4,147			12,156			12,316
Occupancy expense		584			592			1,782			1,846
Equipment expense		287			313			961			992
Data processing and courier		221			246			662			724
Operation of foreclosed properties		894			461			1,837			714
Other operating expenses		2,045			1,670			6,045			6,079
Total noninterest expenses		8,238			7,429			23,443			22,671
Income/(loss) before provision for income taxes		(1,326	)		879			1,554			4,570
Provision for/(benefit from) income taxes		(814	)		44			(101	)		919
Net income/(loss)	$	(512	)	$	835		$	1,655		$	3,651
Basic earnings/(loss) per share	$	(0.06	)	$	0.11		$	0.21		$	0.46
Diluted earnings/(loss) per share	$	(0.06	)	$	0.11		$	0.21		$	0.46
Dividends declared per share	$	—		$	—		$	—		$	—

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS) (Unaudited)
Nine months ended September 30, 2010
(Dollar amounts in thousands except per share data)

					Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Equity
	Common Stock
	Shares		Amount
Balance, December 31, 2009		7,911,539	$	40,662	$	11,979	$	25,828	$	(3,549	)	$	(322	)	$	74,598
Net income for the period		—		—		—		1,655		—			—			1,655
Net changes in unrealized gain on securities available for sale		—		—		—		—		—			7,334			7,334
Reclassification adjustment for net gains realized in income													(851	)		(851	)
Tax effect													(2,972	)		(2,972	)
Total comprehensive income																3,511
Stock compensation expense						1										1
Balance, September 30, 2010		7,911,539	$	40,662	$	11,980	$	27,483	$	(3,549	)	$	3,189		$	79,765

5

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 2010 and 2009
(Dollar amounts in thousands)

	2010			2009
Cash flows from operating activities:
Reconciliation of net income to net cash provided by operating activities:
Net income	$	1,655		$	3,651
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		997			997
Amortization of core deposit intangible		39			39
Amortization of debt issuance costs		25			4
Goodwill on UFS option exercise		191			—
Provision for losses on loans		6,850			3,600
Increase in valuation allowance for impairment of letters of credit		51			20
Net amortization of premium/discount on securities		1,056			948
Increase in cash surrender value of life insurance		(271	)		(493	)
Net gain on sale of securities		(1,406	)		(2,943	)
Net gain on sale of loans		(725	)		(753	)
Proceeds from sale of loans held for sale		46,580			66,424
Origination of loans held for sale		(47,817	)		(65,650	)
Net change in valuation on mortgage servicing rights		(26	)		247
Provision for valuation allowance on foreclosed properties		1,374			491
Net gain from disposal of foreclosed properties		(39	)		(205	)
Net gain from disposal of bank premises and equipment		83			—
Equity in income of UFS subsidiary		(423	)		(226	)
Provision/(benefit) for deferred tax expense		(1,030	)		1,010
Tax expense from exercise/forfeiture of stock options		—			2
Changes in assets and liabilities:
Prepaid FDIC assessment		1,155			—
Accrued interest receivable and other assets		(687	)		603
Income tax refunds		2,415			—
Payment to reduce LOC valuation allowance		(2,980	)		—
Accrued expenses and other liabilities		944			(851	)
Net cash provided by operating activities		8,011			7,141
Cash flows from investing activities:
Principal payments on securities available-for-sale		58,082			101,139
Proceeds from sale of securities available-for-sale		53,779			163,037
Purchase of securities available-for-sale		(155,651	)		(242,710	)
Proceeds from sale of foreclosed properties		1,560			3,131
Proceeds from sale of premises and equipment		—			11
Loan originations and payments, net		11,992			43,700
Additions to premises and equipment		(936	)		(172	)
Dividend from UFS Subsidiary		144			—
Proceeds from life insurance death benefit		59			—
Net cash (used in)/provided by investing activities		(30,971	)		68,136

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 2010 and 2009
(Dollar amounts in thousands)

	2010			2009
Cash flows from financing activities:
Net change in deposits	$	13,725		$	(17,634	)
Net change in federal funds purchased and repurchase agreements		1,349			(8,953	)
Repayments on Federal Home Loan Bank advances		(55,000	)		(20,095	)
Proceeds from Federal Home Loan Bank advances		40,000			20,000
Debt issuance costs paid		(6	)		(156	)
Proceeds from issuance of convertible promissory notes		4,100			4,200
Net cash provided by/(used in) financing activities		4,168			(22,638	)
Net change in cash and cash equivalents		(18,792	)		52,639
Beginning cash and cash equivalents		86,526			23,482
Ending cash and cash equivalents	$	67,734		$	76,121
Supplemental cash flow information:
Interest paid	$	10,415		$	14,730
Income taxes paid		1,311			—
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties		3,398			6,453
Mortgage servicing rights resulting from sale of loans with servicing retained		83			93

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

1.	The accompanying interim consolidated financial statements should be read in conjunction with our 2009 Annual Report on Form 10-K. The accompanying consolidated financial statements are unaudited. These interim consolidated 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 (“GAAP”) for complete financial statements. In the opinion of management, the unaudited consolidated financial information included in this report reflects all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of the consolidated financial position as of September 30, 2010 and the results of operations for the nine month periods ending September 30, 2010 and 2009. The consolidated results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the entire year. We have evaluated all subsequent events through November 15, 2010, the date the interim consolidated financial statements were issued.
2.	Use of Estimates
	To prepare consolidated financial statements in conformity with GAAP, our management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, foreclosed properties, mortgage servicing rights, income tax expense and fair values of financial instruments are particularly subject to change.
3.	Earnings/(Loss) Per Share
	Diluted earnings/(loss) 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 the weighted average number of common shares outstanding and common stock equivalents. The following table shows the computation of the basic and diluted earnings/(loss) per share:

EARNINGS/(LOSS) PER SHARE
(Dollar amounts in thousands, excluding per share data)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
(Numerator):
Net income/(loss)	$	(512	)	$	835		$	1,655		$	3,652
(Denominator):
Weighted average number of common shares outstanding-basic		7,911,539			7,911,539			7,911,539			7,911,539
Dilutive effect of stock options		—	(1)		—	(1)		—	(1)		—	(1)
Dilutive effect of convertible promissory notes		—	(2)		—	(2)		—	(2)		—	(2)
Weighted average number of common shares outstanding-diluted		7,911,539			7,911,539			7,911,539			7,911,539
Basic Earnings/(Loss) Per Share	$	(0.06	)	$	0.11		$	0.21		$	0.46
Diluted Earnings/(Loss) Per Share	$	(0.06	)	$	0.11		$	0.21		$	0.46

(1)

At September 30, 2010 and 2009, there were 49,628 and 73,628 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

(2)

As of September 30, 2010, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”) the offering of which expired on April 30, 2010. The Convertible Notes are convertible into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $5.00 in aggregate principal amount held on the record date of the conversion. On October 1, 2014, one-half of the original principal amount of the Convertible Notes is mandatorily convertible at the conversion ratio if conversion has not occurred. The mandatorily convertible principal of the Convertible Notes represents 945,000 shares, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive. The remaining half of the principal amount of Convertible Notes is convertible into an additional 945,000 common shares at the discretion of the respective holders. These shares have not been included because of their anti-dilutive effect, if converted.

8

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

4.	Adoption of New Accounting Standards
	In November 2009, the FASB issued an amendment to ASC 860-10, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASC 860-10 eliminates the concept of “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASC 860-10 also requires additional disclosures about all continuing involvements with transferred financial assets, including information about gains and losses resulting from transfers during the period. The amendment to ASC 860-10 became effective January 1, 2010 and did not have any impact on our consolidated financial statements.
	In June 2009, the FASB issued an amendment to ASC 810-10, Consolidation of Variable Interest Entities, to change how an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s economic performance. ASC 810-10 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes to risk exposure due to that involvement as well as its affect on the entity’s financial statements. The amendment to ASC 810-10 became effective January 1, 2010 and did not have any impact on our consolidated financial statements.
	In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosure about Credit Quality of Financing Receivables and Allowance For Credit Losses.” This guidance requires an entity to provide disclosures that facilitate the evaluation of the nature of credit risk inherent in its portfolio of financing receivables; how that risk is analyzed and assessed in determining the allowance for credit losses; and the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, disclosures on a disaggregated basis must be provided on two defined levels: (1) portfolio segment; and (2) class of financing receivable. This guidance makes changes to existing disclosure requirements and included additional disclosure requirements relating to financing receivables. Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value and debt securities are exempt from this guidance. The disclosures related to period-end information are required to be provided in all interim and annual periods ending on or after December 15, 2010. Disclosures of activity that occurs during the reporting period are required in interim and annual periods beginning on or after December 15, 2010. The provisions of this guidance are not expected to have a significant impact on the Company’s consolidated financial condition, results of operations or liquidity.

9

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

5.	Fair Value
	Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
	Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	Level 2:	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
	Level 3:	Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
	The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
	The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. These assumptions include servicing costs, expected loan lives, discount rates, and the determination of whether the loan is likely to be refinanced. We compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).
	The fair value of foreclosed properties is determined using a variety of market information including but not limited to appraisals, professional market assessments and real estate tax assessment information (Level 2 inputs).
	The fair value of impaired loans is based on a review of comparable collateral in similar marketplaces or an analysis of expected cash flows of the loan in relationship to the contractual terms of the loan (Level 3 inputs). Impaired loans are carried at the lower of amortized cost or fair value. Not all impaired loans are carried at fair value if there is sufficient collateral or expected repayments exceed the recorded investments in such loans.

10

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

ASSETS MEASURED ON A RECURRING BASIS
(Dollar amounts in thousands)

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

	September 30, 2010		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agency securities	$	34,186	$	—	$	34,186	$	—
Mortgage-backed securities		142,438		—		142,438		—
Asset-backed securities		5,593		—		5,593		—
Obligations of states and political subdivisions		54,286		—		54,286		—
Private placement and corporate bonds		15,400		—		15,400		—
Other securities		2,997		—		2,997		—
Total securities available for sale		254,900		—		254,900		—
Mortgage servicing rights		718		—		718		—
Foreclosed properties		15,498		—		15,498		—
Total	$	271,116	$	—	$	271,116	$	—

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

11

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

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

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

	September 30, 2010		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	10,045	$	—	$	—	$	10,045

	December 31, 2009		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	8,848	$	—	$	—	$	8,848

Required Financial Disclosures about Fair Value of Financial Instruments

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

	(Dollar amounts in thousands)
	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	67,734	$	67,734	$	86,526	$	86,526
Securities available for sale		254,900		254,900		204,834		204,834
Loans held for sale		4,446		4,514		2,567		2,599
Loans, net		620,055		624,061		642,294		647,102
Cash value of life insurance		24,274		24,274		24,062		24,062
Federal Home Loan Bank stock		6,792		6,792		6,792		6,792
Accrued interest receivable		4,288		4,288		3,376		3,376
Financial liabilities
Deposits	$	845,354	$	848,020	$	831,629	$	833,428
Repurchase agreements		22,471		22,471		21,122		21,122
Federal Home Loan Bank advances		70,000		71,105		85,000		86,305
Subordinated debentures		16,100		16,100		16,100		16,100
Convertible promissory notes		9,450		9,766		5,350		5,350
Accrued interest payable		1,482		1,482		1,889		1,889
Off -balance sheet credit related items
Letters of credit	$	49	$	49	$	2,978	$	2,978

12

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

The methods and assumptions used to estimate fair value are described as follows:

(a) Cash and Cash Equivalents

Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.

(b) Securities Available for Sale

Fair values for securities available for sale are based on market prices or other inputs that are observable or can be corroborated by observable market data.

(c) Loans Held for Sale

The fair value of loans held for sale is based on actual market quotes from third party investors.

(d) Loans, net

For variable-rate loans that reprice frequently, fair values are based on carrying value. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms. Impaired loans are valued at the lower of cost or fair value. Fair value is measured based on the value of the underlying collateral securing those loans less the cost of sale. This evaluation may include obtaining supplemental market data and/or routine site visits to offer support to the valuation process.

(e) Cash Value of Life Insurance

The fair value of life insurance approximates the carrying amount, because upon liquidation of these investments, we would receive the cash surrender value, which equals the carrying amount.

(f) Federal Home Loan Bank Stock

It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) Stock due to restrictions placed on its transferability. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is fair value.

(g) Accrued Interest Receivable

The carrying amounts of accrued interest receivable approximate fair value.

(h) Deposits

The carrying amount of demand deposits (interest bearing and non-interest bearing), savings deposits, and money market deposits approximate fair value. The carrying amount of variable rate time deposits, including certificates of deposit, approximate fair value. For fixed rate time deposits, fair value is based on discounted cash flows using current market interest rates.

13

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

(i) Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(j) Federal Home Loan Bank Advances

The carrying amount of variable rate FHLB advances approximates fair value. For fixed rate advances, fair value is based on discounted cash flows using current market interest rates.

(k) Subordinated Debentures

The carrying amount of variable rate subordinated debentures approximates fair value.

(l) Convertible promissory notes

The fair value of fixed rate convertible promissory notes is based on discounted cash flows using current market interest rates.

(m) Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

(n) Off Balance Sheet Credit Related Items-Letters of Credit

The carrying amount of the off balance sheet letters of credit approximates fair value based on management’s evaluation of the factors affecting the letters of credit.

6.	Investments
INVESTMENT SECURITY ANALYSIS (Dollar amounts in thousands)
	The fair value of securities available for sale and the related unrealized gains and losses as of September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government sponsored agency securities	$	34,186	$	219	$	—
Obligations of states and political subdivisions		54,286		2,586		(8	)
Mortgage-backed securities		142,438		3,259		(376	)
Asset-backed securities		5,593		179		(847	)
Private placement and corporate bonds		15,400		600		(341	)
Other securities		2,997		—		—
	$	254,900	$	6,843	$	(1,572	)

	December 31, 2009
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury securities	$	30,000	$	—	$	—
Obligations of states and political subdivisions		38,820		853		(75	)
Mortgage-backed securities		120,148		1,666		(500	)
Private placement and corporate bonds		12,536		—		(2,601	)
Other securities		3,330		—		—
	$	204,834	$	2,519	$	(3,176	)

14

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

Securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (dollar amounts in thousands):

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
September 30, 2010
Obligations of states and political subdivisions		242		(8	)		—		—			242		(8	)
Mortgage-backed securities		26,316		(357	)		6,785		(19	)		33,101		(376	)
Asset-backed securities		3,929		(847	)		—		—			3,929		(847	)
Private placement and corporate bonds		—		—			7,767		(341	)		7,767		(341	)
Total temporarily impaired	$	30,487		(1,212	)		14,552		(360	)		45,039		(1,572	)
December 31, 2009
U.S. Treasury securities	$	30,000	$	—		$	—	$	—		$	30,000	$	—
Obligations of states and political subdivisions		3,043		(47	)		762		(28	)		3,805		(75	)
Mortgage-backed securities		45,920		(468	)		1,141		(32	)		47,061		(500	)
Private placement and corporate bonds		—		—			12,536		(2,601	)		12,536		(2,601	)
Total temporarily impaired	$	78,963	$	(515	)	$	14,439	$	(2,661	)	$	93,402	$	(3,176	)

At September 30, 2010, the Company held four securities with continuous unrealized losses for twelve months or more, all of which were in the private placement and corporate bond category.

At December 31, 2009, the Company held seven securities with continuous unrealized losses for twelve months or more. One of those was in obligations of states and political subdivisions category, five were in the private placement and corporate bond category, and one was in the mortgage-backed securities category.

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

15

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

7.	Loans
	Loans held for investment are summarized as follows:

	For the nine months ended September 30,			For the twelve months ended December 31,
	2010			2009
Real Estate-Commercial	$	345,150		$	353,110
Real Estate-Residential		129,314			124,830
Real-Estate-Construction		58,947			62,827
Commercial Loans		71,526			83,674
Consumer Loans		10,546			11,804
Obligations of States and Political Subdivisions		18,216			16,009
Less Deferred Fees		(418	)		(360	)
Less Allowance for loan losses		(13,226	)		(9,600	)
Total	$	620,055		$	642,294

8.	Allowance For Loan Losses (“ALL”)
	The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on our consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
	The ALL consists of specific reserves on certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses on impaired loans from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analyses of all impaired non-homogenous loans. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based on our historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, non-accrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values.
	There are many factors affecting the ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional PFLL could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
	As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.
16

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

Changes in the ALL were as follows (dollar amounts in thousands):

ALLOWANCE FOR LOAN LOSSES

	For the three months ended September 30						For the nine months ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	11,455		$	13,021		$	9,600		$	13,561
Provision for loan losses		4,550			1,200			6,850			3,600
Charge-offs		(3,972	)		(304	)		(6,170	)		(3,696	)
Recoveries		1,153			55			2,946			507
Balance at end of period	$	13,226		$	13,972		$	13,226		$	13,972
Net recoveries (charge-offs)	$	(2,819	)	$	(249	)	$	(3,224	)	$	(3,189	)
Information regarding impaired loans is as follows (dollar amounts in thousands):

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

	September 30, 2010		June 30, 2010		March 31, 2010		December 31, 2009		September 30, 2009
Nonperforming loans with no allocated ALL	$	6,492	$	8,740	$	7,070	$	16,587	$	9,098
Nonperforming loans with allocated ALL		12,433		14,970		10,285		10,003		31,376
ALL allocated to non performing loans		2,388		2,520		1,332		1,155		6,414
Average impaired loans during the quarter	$	22,512	$	18,618	$	24,770	$	34,779	$	46,925

Management regularly monitors impaired loan relationships. In the event facts and circumstances change, an additional PFLL may be necessary.

Nonperforming loans are as follows (dollar amounts in thousands):

NON PERFORMING LOANS

	September 30, 2010		June 30, 2010		March 31, 2010		December 31, 2009		September 30, 2009
Nonaccrual Loans	$	18,339	$	23,550	$	16,969	$	23,247	$	40,474
Loans restructured in a troubled debt restructuring		586		160		386		3,343		11
Total Nonperforming Loans (“NPL”)	$	18,925	$	23,710	$	17,355	$	26,590	$	40,485
Restructured loans, accruing	$	11,416	$	9,845	$	9,809	$	2,061	$	11
17

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

9.	Foreclosed Properties, Net
	Foreclosed properties are summarized as follows:

	For the three months ended September 30,						For the nine months ended September 30,
	2010			2009			2010			2009
Beginning balance	$	15,962		$	(7,680	)	$	14,995		$	7,143
Transfer of net realizable value to foreclosed properties		949			3,215			3,398			6,453
Sale proceeds, net		(558	)		(384	)		(1,560	)		(3,131	)
Net gain from sale of foreclosed properties		7			(27	)		39			204
Provision for foreclosed properties		(862	)		(306	)		(1,374	)		(491	)
Total foreclosed properties	$	15,498		$	10,178		$	15,498		$	10,178

Changes in the valuation allowance for losses on foreclosed properties were as follows:

		For the nine months ended September 30,
		2010			2009
	Beginning balance	$	2,773		$	3,391
	Provision charged to operations		1,374			491
	Amounts related to properties disposed		(566	)		(1,122	)
	Balance at end of year	$	3,581		$	2,760
10.	Income Taxes

In accordance with the accounting guidance for income taxes, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

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. The amount recognized is the largest amount of tax benefit that has a greater than 50% chance of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating available evidence, management considers, among other things, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance. Management has concluded that there is no need for an additional valuation allowance as of September 30, 2010 or December 31, 2009.

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

18

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

Changes in the deferred income tax balances were as follows (dollar amount in thousands):

          Deferred taxes – Available for sale securities

	For nine months ended September 30,
	2010			2009
Balances at beginning of period	$	333		$	1,218
Net change during period		(2,415	)		829
Balances at end of period	$	(2,082	)	$	2,047

Deferred taxes – Other than available for sale securities

	For nine months ended September 30,
	2010		2009
Balances at beginning of period	$	8,523	$	12,283
Net change during period		1,030		(684	)
Balances at end of period	$	9,553	$	11,599

11.	Equity Investment
	Baylake Bank owns a 46.4% interest (500 shares) in United Financial Services, Inc., (“UFS”) a data processing service. In addition to the ownership interest, there is one member of UFS’s Board of Directors that also serves on our Board of Directors. The investment in this entity is carried under the equity method of accounting and the pro rata share of its income is included in other income. On June 27, 2006, UFS amended an earlier employment agreement with one of its key employees that provided the individual the option to purchase up to 20%, or 240 shares, of the authorized shares of UFS common stock. The option price is $1,000 per share, less dividends or distributions to owners. The current book value of UFS is approximately $8,343 per share as of September 30, 2010. During 2007, options for 120 shares were exercised by the key employee. In May 2010, options for the remaining shares were exercised by the key employee at $1,000 per share less the dividends previously paid to the owners. Upon exercise, 43.24 shares were immediately redeemed and sold back to UFS. The net result was a reduction of 3.4% in our investment in UFS and a recognition of goodwill of $191,000 upon redemption of the shares. There are no remaining options to be exercised.
12.	Mortgage Servicing Rights
	The Company has obligations to service residential first mortgage loans and commercial loans that have been sold in the secondary market. Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. On a quarterly basis MSRs are valued based on a valuation model that calculates the present value of estimated servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income.
	Changes in the carrying value of MSR’s are as follows:

MORTGAGE SERVICING RIGHTS

	For the three months ended September 30						For the nine months ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	679		$	754		$	609		$	860
Additions from loans sold with servicing retained		51			9			83			93
Changes in valuation		32			45			127			1
Loan payments and payoffs		(44	)		(103	)		(101	)		(249	)
Fair value of MSRs at the end of period	$	718		$	705		$	718		$	705

19

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010

13.	Promissory Notes
	During the third and fourth quarters of 2009 and the first and second quarters of 2010, the Company completed seven separate closings of a private placement of 10% Convertible Notes due June 30, 2017. The Convertible Notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The Company issued $9.45 million principal amount of the Convertible Notes, at par, and received gross proceeds in the same amount. The offering expired on April 30, 2010.
	The Convertible Notes accrue interest at a fixed rate of 10% per annum upon issuance and until maturity or earlier conversion or redemption. Interest is payable quarterly, in arrears, on January 1, April 1, July 1, and October 1 of each year. The Convertible Notes are convertible into shares of the Company’s common stock at a conversion ratio of one share of common stock for each $5.00 in aggregate principal amount held on the record date of the conversion, subject to certain adjustments as described in the Convertible Notes. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of the Company’s common stock at the conversion ratio. On October 1, 2014, one-half of the original principal amounts are mandatorily convertible into common stock at the conversion ratio if voluntary conversion has not occurred. The principal amount, along with accrued but unpaid interest, of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. The Company is not obligated to register the common stock issued on the conversion of the Convertible Notes.
	During 2009 and 2010 the Company incurred debt issuance costs of $0.2 million. These costs were capitalized and are being amortized to interest expense using the effective interest method over the initial conversion term, which ends October 1, 2014.

20

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

General

Baylake Corp. is a Wisconsin corporation that is registered with the Board of Governors of the Federal Reserve (the “Federal Reserve”) as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our wholly-owned banking subsidiary, Baylake Bank, is a Wisconsin state-chartered bank that provides a wide variety of loan, deposit and other banking products and services to its business, retail, and municipal customers, as well as a full range of trust, investment and cash management services. Baylake Bank is a member of the Federal Reserve and the Federal Home Loan Bank of Chicago.

The following sets forth management’s discussion and analysis of our consolidated financial condition at September 30, 2010 and December 31, 2009 and our consolidated results of operations for the three and nine months ended September 30, 2010 and 2009. This discussion and analysis should be read together with the consolidated financial statements and accompanying notes contained in Part I of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2009.

Forward-Looking Information

This discussion and analysis of consolidated 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 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 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 this Quarterly Report on Form 10-Q and of our Annual Report on Form 10-K for the year ended December 31, 2009, which are incorporated herein by reference, and other risks that may be identified or discussed in this Form 10-Q.

Potential Loan Sale

During the fourth quarter of 2010, our Board of Directors authorized us to explore the sale of a pool of performing and nonperforming loans. While the composition of this pool has not yet been finalized, if such a sale does occur, it would reduce our outstanding loans and could have a material adverse effect on our results of operations for the fourth quarter of 2010. We have not yet entered into a loan sale agreement, nor is management obligated to consummate any such sale. There can be no assurances that any such sale will occur, or the magnitude of the resulting impact on our results of operations should it occur.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) into law. This legislation makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. While the full effects of the legislation on us and Baylake Bank cannot yet be determined, this legislation is generally perceived as negatively impacting the banking industry. This legislation may result in higher compliance and other costs, reduced revenues and higher capital and liquidity requirements, among other things, which could adversely affect our business and the business of Baylake Bank.

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 our consolidated financial statements. The following is a summary of what management believes are our critical accounting policies.

21

Allowance for Loan Losses:

The loan portfolio represents the largest asset on our consolidated balance sheet. The ALL on our consolidated balance sheet represents management’s estimate of probable and inherent credit losses in the loan portfolio. Establishing the amount of the ALL requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and qualitative factors such as consideration of current economic trends and conditions, all of which may be susceptible to significant changes. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL.

The ALL consists of specific reserves on impaired loans, general reserves on pools of homogeneous loans and a general portfolio allocation based on qualitative factors such as economic conditions and other factors specific to the markets in which we operate. The reserve component of the ALL on specific loans reflects expected losses based on analyses of impaired loans over a fixed dollar amount. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The reserve component on homogeneous pools of loans is based on our historical loss experience, which is updated quarterly. This component of the ALL also includes consideration of qualitative factors such as 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, non-accrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values. The unallocated component represents the portion of the ALL not specifically identified with specific loans or pools of loans. Allocations of the ALL may be made for specific loans, but the entire ALL is available for any loan that, in management’s judgment, should be charged-off for which a loss is realized.

A PFLL is charged to earnings based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. To the extent actual results differ from management estimates, an additional PFLL could be required that could adversely affect our earnings or financial position in future periods. In addition, management continues to refine the estimation process. Changes in the estimation process could also result in an additional provision for loan losses being recorded. Changes may also be required when our estimates are inconsistent with our regulator’s estimates.

Foreclosed Properties:

Foreclosed properties acquired through or in lieu of loan foreclosure are initially recorded at lower of cost or fair value when acquired less estimated costs to sell, thereby establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Any costs incurred with respect to such assets after acquisition are expensed as incurred, or may be capitalized.

Provision for Impairment of Standby Letters of Credit:

The provision for impairment of standby letters of credit represents management’s estimate of probable incurred losses on off-balance sheet standby letters of credit which are used to support our customers’ business arrangements with an unrelated third party. In the event of impairment, a provision for impairment of standby letters of credit is charged to operations based on management’s periodic evaluation of the factors affecting the standby letters of credit. At September 30, 2010, the allowance for impairment of standby letters of credit was $0.1 million.

Income Taxes:

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 our consolidated results of operations and reported earnings. As part of our assessment process, we evaluate our net deferred tax assets to determine if a deferred tax valuation allowance is necessary. To make this determination, we review current year operating results with budgeted amounts, as well as our historic levels of income. In addition, we project future operating results and any expected or anticipated changes in the various deferred tax asset or liability categories. We then determine the likelihood that we will be able to utilize those net deferred tax assets in a reasonable period of time in the future. We believe that the tax assets and liabilities are adequate and properly recorded in the consolidated financial statements at September 30, 2010 and no valuation allowance is considered necessary.

22

Goodwill:

Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if deemed appropriate. For 2009, consideration of impairment was given due to the market value of our stock. However, in October 2009 we hired a firm specialized in rendering valuation opinions for banks and bank holding companies nationwide. In rendering their opinion as to our fair value, they considered our nature and history, the competitive and economic outlook for the trade area and for the banking industry in general, our book value and financial condition, our future earnings and dividend paying capacity, the size of the block valued, and the prevailing market prices of bank stocks. The following valuation methodologies were considered: 1) net asset value – defined as our net worth, 2) market value – defined as the price at which knowledgeable buyers and sellers would agree to buy and sell our common stock, and 3) investment value – defined as an estimate of the present value of the future benefits, usually earnings, cash flow, or dividends, that will accrue to our common stock. When consideration was given to the three valuation methodologies, as well as all other relevant valuation variables and factors, the fully-diluted cash fair value range of our common shares was deemed to be in excess of the book value and therefore, no impairment of goodwill was recognized. As of September 30, 2010, there are no conditions that would require us to recognize goodwill impairment.

Results of Operations

The following table sets forth our results of operations and related summary information for the three and nine month periods ended September 30, 2010 and 2009.

SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Net income(loss), as reported	$	(512	)	$	835		$	1,655		$	3,651
Earnings per share-basic, as reported	$	(0.06	)	$	0.11		$	0.21		$	0.46
Earnings per share-diluted, as reported	$	(0.06	)	$	0.11		$	0.21		$	0.46
Cash dividends declared	$	—		$	—		$	—		$	—
Return on average assets		(0.21	%)		0.31	%		0.21	%		0.01	%
Return on average equity		(2.54	%)		4.61	%		2.85	%		0.14	%
Efficiency ratio (1)		72.99	%		75.53	%		73.43	%		87.84	%

⁽¹⁾ Noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income, excluding net investment securities gains and excluding net gains on the sale of fixed assets. A lower ratio indicates greater efficiency.

Net loss of $0.5 million for the three months ended September 30, 2010 decreased from net income of $0.8 million for the comparable period in 2009. Net interest income increased $0.8 million for the quarter ended September 30, 2010 versus the comparable quarter last year resulting from a $1.4 million reduction in interest expense partially offset by a $0.6 million reduction in interest income. A PFLL of $4.6 million was charged to operations for the third quarter of 2010, which is $3.4 million higher than the $1.2 million PFLL taken during the comparable quarter of 2009. Noninterest expense increased $0.8 million, which was more than offset by a $1.2 million increase in noninterest income in the third quarter of 2010 compared to the similar period in 2009. Refer to the “Net Interest Income,” “Provision for Loan Losses,” “Noninterest Expense” and “Noninterest Income” sections below for additional details.

23

Net Interest Income

Net interest income is the largest component of our operating income and represents the difference between interest earned on loans, investments and other interest-earning assets offset by the interest expense attributable to the deposits and borrowings that fund such assets. Interest rate fluctuations, together with changes in the volume and types of interest-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.

Average interest rates on loans remained stable while average yields on deposits decreased during the third quarter of 2010 compared to the similar period in 2009. Average yields on interest-earning assets decreased to 4.83% during the three-month period ended September 30, 2010 compared to 5.02% during the same period in 2009.

Interest rate spread is the difference between the interest rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities. Interest rate spread increased 38 bps to 3.43% for the third quarter of 2010 compared to the same period in 2009, resulting primarily from a 19 bps decrease in the yield on interest-earning assets from 5.02% to 4.83% and a 57 bps decrease in the cost of interest-bearing liabilities from 1.97% to 1.40%. We continue to be positively impacted by the interest rate floors on a large number of loans on our balance sheet, which has resulted in the recognition of a greater amount of interest income than would have been recognized had the floors not existed.

Net interest income on a tax-equivalent basis was $8.5 million for the three months ended September 30, 2010 compared to $7.7 million for the same period in 2009. The increase for the third quarter of 2010 resulted primarily from a decrease in funding costs on liabilities attributable to both a decline in interest rates and a reduction in average interest-bearing liabilities, partially offset by a decrease in interest income on loans, due to a reduction in average loans. Contributing to the improved net interest income was a $14.8 million increase in average noninterest-bearing demand deposits, from $77.5 million during the third quarter of 2009 to $92.3 million for the similar period in 2010.

Net interest margin represents net interest income expressed as an annualized percentage of average interest-earning assets. Net interest margin exceeds the interest rate spread because of the use of noninterest-bearing sources of funds (demand deposits and equity capital) to fund a portion of earning assets. Net interest margin for the third quarter of 2010 was 3.55%, up 36 bps from 3.19% for the comparable period in 2009.

For the three months ended September 30, 2010, average interest-earning assets decreased $8.4 million (0.9%) from the same period in 2009. Decreases in average loans of $55.8 million (8.1%) and in federal funds sold and interest-bearing due from banks of $27.2 million (41.8%) were partially offset by a $70.6 million (43.2%) increase in taxable securities.

Net interest income on a tax-equivalent basis was $24.9 million for the nine months ended September 30, 2010 compared to $22.5 million for the same period in 2009. The $2.4 million increase reflected a decrease in funding costs of $4.3 million partially offset by a decrease in interest income of $1.9 million, each reflecting the continued decline in prevailing interest rates. Contributing to the improved net interest income was a $10.2 million increase in average non-interest bearing demand deposits from $69.7 million during the nine months ended September 30, 2009 to $79.9 million for the similar period in 2010.

Net interest margin for the nine months ending September 30, 2010 was 3.56%, up 43 bps from 3.13% for the comparable period in 2009.

For the nine months ended September 30, 2010, average interest-earning assets decreased $27.2 million (2.8%) from the same period in 2009. Decreases in average loans of $67.3 million (9.5%) and in average tax-exempt securities of $3.8 million (9.0%) were offset in part by a $3.8 million (8.5%) increase in federal funds sold and interest-bearing due from banks and a $40.1 million (24.6%) increase in taxable securities.

24

NET INTEREST INCOME ANALYSIS ON A TAX–EQUIVALENT BASIS
(Dollar amounts in thousands)

	Three months ended September 30, 2010							Three months ended September 30, 2009
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Average Earning Assets:
Loans, net 1,2	$	636,067	$	8,949		5.58	%	$	691,898	$	9,748		5.59	%
Taxable securities		233,941		1,983		3.39	%		163,370		1,755		4.30	%
Tax exempt securities 1		40,909		579		5.66	%		36,902		557		6.04	%
Federal funds sold and interest bearing due from banks		37,742		28		0.30	%		64,892		37		0.23	%
Total earning assets		948,659		11,539		4.83	%		957,062		12,097		5.02	%
Non-interest earning assets		102,880							94,637
Total assets	$	1,051,539						$	1,051,699
LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Interest-bearing liabilities:
Total interest-bearing deposits	$	744,803		2,248		1.20	%	$	766,010		3,679		1.91	%
Short-term borrowings		—		—		—	%		8		—		0.66	%
Customer repurchase agreements		25,462		16		0.25	%		20,699		28		0.54	%
Federal Home Loan Bank advances		74,565		484		2.57	%		85,000		579		2.70	%
Convertible Promissory Notes		9,450		245		10.29	%		1,591		44		11.09	%
Subordinated debentures		16,100		77		1.90	%		16,100		80		1.97	%
Total interest-bearing liabilities	$	870,380		3,070		1.40	%	$	889,408		4,410		1.97	%
Demand deposits		92,273							77,488
Accrued expenses and other liabilities		8,753							13,055
Stockholders’ equity		80,133							71,748
Total liabilities and stockholders’ equity	$	1,051,539						$	1,051,699
Net Interest Income			$	8,469						$	7,687
Interest rate spread 3						3.43	%						3.06	%
Net interest margin 4						3.55	%						3.19	%

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

25

NET INTEREST INCOME ANALYSIS ON A TAX–EQUIVALENT BASIS
(Dollar Amounts in thousands)

	Nine months ended September 30, 2010							Nine months ended September 30, 2009
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Average Earning assets:
Loans, net 1,2	$	643,197	$	27,105		5.63	%	$	710,461	$	29,619		5.57	%
Taxable securities		202,879		6,007		3.95	%		162,809		5,204		4.26	%
Tax exempt securities1		38,891		1,695		5.81	%		42,728		1,931		6.03	%
Federal funds sold and interest bearing due from banks		48,034		81		0.23	%		44,260		77		0.23	%
Total earning assets	$	933,001		34,888		5.00	%		960,258	$	36,831		5.13	%
Non-interest earning assets		104,213							93,534
Total assets	$	1,037,214						$	1,053,792
LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Interest-bearing liabilities:
Total interest-bearing deposits	$	743,500		7,567		1.36	%		774,603	$	12,121		2.09	%
Short-term borrowings		17		—		0.92	%		409		2		0.69	%
Customer repurchase agreements		25,433		78		0.41	%		23,606		137		0.77	%
Federal Home Loan Bank advances		77,857		1,539		2.64	%		85,039		1,697		2.67	%
Subordinated debentures		16,100		209		1.71	%		16,100		299		2.45	%
Convertible Promissory Notes		7,863		615		10.31	%		536		44		10.94	%
Total interest-bearing liabilities	$	870,770		10,008		1.54	%	$	900,293		14,300		2.13	%
Demand deposits		79,944							69,696
Accrued expenses and other liabilities		8,902							12,725
Stockholders’ equity		77,598							71,078
Total liabilities and stockholders’ equity	$	1,037,214						$	1,053,792
Net Interest Income			$	24,880						$	22,531
Interest rate spread3						3.46	%						3.00	%
Net interest margin4						3.56	%						3.13	%

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

26

RATE/VOLUME ANALYSIS ⁽¹⁾
(Dollar amounts in thousands)

Three months ended September 30, 2010 compared to the three months ended September 30, 2009:

	Increase (Decrease) due to
	Volume			Rate			Net
Interest income:
Loans	$	(3,207	)	$	2,408		$	(799	)
Taxable securities		2,219			(1,990	)		229
Tax exempt securities		232			(211	)		21
Federal funds sold and interest-bearing due from banks		(72	)		63			(9	)
Total interest earning assets		(828	)		270			(558	)
Interest expense:
Total interest-bearing deposits		(1,726	)		294			(1,432	)
Short term borrowings		—			—			—
Repurchase agreements		22			(34	)		(12	)
FHLB advances		(272	)		177			(95	)
Subordinated debentures		—			(3	)		(3	)
Long term debt		809			(608	)		201
Total interest-bearing liabilities		(1,167	)		(174	)		(1,341	)
Net interest income	$	339		$	444		$	783

(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

Our management’s ability to employ overall assets for the production of interest income can be measured by the ratio of average interest-earning assets to average total assets. This ratio was 90.2% and 91.0% for the third quarter of 2010 and 2009, respectively.

RATE/VOLUME ANALYSIS ⁽¹⁾
(Dollar amounts in thousands)

Nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

	Increase (Decrease) due to
	Volume			Rate			Net
Interest income:
Loans	$	(2,801	)	$	286		$	(2,515	)
Taxable securities		954			(150	)		804
Tax exempt securities		(103	)		(133	)		(236	)
Federal funds sold and interest-bearing due from banks		—			4			4
Total interest-earning assets		(1,950	)		7			(1,943	)
Interest expense:
Total interest-bearing deposits		(1,167	)		(3,388	)		(4,555	)
Short term borrowings		(2	)		—			(2	)
Repurchase agreements		12			(71	)		(59	)
FHLB advances		(142	)		(16	)		(158	)
Subordinated debentures		—			(89	)		(89	)
Long term debt		490			80			570
Total interest-bearing liabilities		(809	)		(3,484	)		(4,293	)
Net interest income	$	(1,141	)	$	3,491		$	2,350

(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

27

The ratio of average interest-earning assets to average total assets was 90.0% and 91.1% for the nine months ending September 30, 2010 and 2009, respectively.

Provision for Loan Losses

The ALL consists of specific and general reserves. The PFLL is the cost of providing an allowance for probable and inherent losses in our loan portfolio. Our internal risk system is used to identify loans that meet the criteria for being “impaired” as defined by accounting guidance. Specific reserves are computed on loans that are individually classified as impaired. Loans identified as impaired are evaluated for impairment using either the discounted expected cash flows or collateral value less estimated costs to sell. When the fair value of the collateral is less than amortized cost, a specific reserve is required. The general reserve is computed on non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include: 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, non-accrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The PFLL for the quarter ended September 30, 2010 was $4.6 million compared to $1.2 million for the third quarter of 2009. In discussion with our regulators, an additional $2.3 million provision was taken to increase our general reserve levels due to the continued uncertainty in the local and national economy. Also impacting the additional provision level by $1.9 million were further legal negotiations on a credit relationship initially addressed in our June 30, 2010 Form 10-Q filing. In that filing, we reported a specific impairment of $0.7 million on a credit relationship of $5.4 million. An additional credit of $2.4 million to a related party in the hospitality industry became delinquent during the third quarter of 2010. As a result of receipt of updated valuations of the collateral securing the loan, $2.3 million of the total $7.8 million credit relationship was charged off during the third quarter of 2010.

Also during the third quarter of 2010, an additional provision of $0.9 million was taken on a construction development project based on updated valuations of the collateral securing the credit. This credit relationship had $0.2 million of specific impairment at June 30, 2010. The total impairment of $1.1 million was charged off during the third quarter of 2010. New impairments of $0.7 million on loans not previously identified, with associated loan balances of $3.8 million, were recorded during the third quarter of 2010 (of that total, $2.5 million relates to one credit relationship).

Net loan charge-offs for each of the first nine months of 2010 and 2009 were $3.2 million. Net annualized charge-offs to average loans were 0.67% for the first nine months of 2010 compared to 0.60% for the same period in 2009. For the nine months ended September 30, 2010, non-performing loans decreased by $7.7 million (28.8%) to $18.9 million from $26.6 million at December 31, 2009. Refer to the “Financial Condition - Risk Management and the Allowance for Loan Losses” and “Financial Condition - Non-Performing Loans, Potential Problem Loans and Other Real Estate” sections below for more information related to non-performing loans. Our management believes that the ALL at September 30, 2010 and the related PFLL charged to earnings for the quarter and nine months ended September 30, 2010 are appropriate in light of the present condition of the loan portfolio and the amount and quality of the collateral supporting non-performing loans. We continue to monitor non-performing loan relationships and will make additional provisions, as necessary, if the facts and circumstances change. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market area, or otherwise, could affect the adequacy of the ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate or our estimates are different than our regulators estimates, we will need to make additional PFLLs in the future. See “Financial Condition - Risk Management and the Allowance for Loan Losses” below for more information related to non-performing loans.

28

Noninterest Income

The following table reflects the various components of noninterest income for the three and nine month periods ended September 30, 2010 and 2009, respectively.

NONINTEREST INCOME
(Dollar amounts in thousands)

	Three months ended									Nine months ended
	September 30, 2010			September 30, 2009			% Change			September 30, 2010			September 30, 2009			% Change
Fees from fiduciary services	$	214		$	162			32.3	%	$	714		$	463			54.4	%
Fees from loan servicing		123			161			(23.6	%)		397			538			(26.3	%)
Service charges on deposit accounts		935			1,022			(8.6	%)		2,615			2,895			(9.7	%)
Other fee income		183			171			7.2	%		553			540			2.5	%
Financial services income		202			136			48.8	%		629			431			45.9	%
Net gains from sales of loans		324			105			207.4	%		725			752			(3.8	%)
Net change in valuation of mortgage servicing rights		(12	)		(60	)		79.8	%		26			(247	)		110.5	%
Net gains from sale of securities		973			—			NM	%		1,406			2,943			52.2	%
Losses from sale of fixed assets		(81	)		(3	)		NM	%		(83	)		—			NM	%
Increase in cash surrender value of life insurance		205			242			(15.4	%)		271			493			(45.2	%)
Equity in income of UFS subsidiary		185			142			30.4	%		423			367			15.3	%
Other income		16			12			38.9	%		75			44			78.5	%
Total Noninterest Income	$	3,267		$	2,090			56.3	%	$	7,751		$	9,219			(15.9	%)

Noninterest income increased $1.2 million (56.3%) for the three months ended September 30, 2010 versus the comparable period in 2009. This was primarily due to a $1.0 million increase in net gains from the sale of securities, a $0.2 million increase in net gains from sales of loans due to increased secondary mortgage market originations, and a $0.1 million increase in financial services income due to an increase in trading activity on behalf of our brokerage customers. The increase was partially offset by a $0.1 million decrease in service charges on deposit accounts including overdraft charges and a $0.1 million loss on the sale of fixed assets due to the closure of our Howard financial center in Green Bay, Wisconsin.

Noninterest income decreased $1.5 million (15.9%) for the nine months ended September 30, 2010 versus the comparable period in 2009. This was primarily due to $2.9 million of net securities gains realized for the nine months ended September 30, 2009 versus $1.4 million in securities gains for the first nine months of 2010. These gains were primarily realized to take advantage of a portion of the gains in our investment portfolio due to the favorable interest rate environment that existed at the time of the sale. A secondary reason was to enable us to reposition our investment portfolio. Also impacting the decrease was a $0.1 decline in fees from loan servicing, and a $0.3 million decrease in service charges on deposit accounts. This was partially offset by a $0.3 million increase in fiduciary services income due to increased trust fees and estate business and a $0.3 million increase in mortgage servicing rights valuation primarily due to an increase in mortgage servicing multiples.

29

Noninterest Expense

The following table reflects the various components of noninterest expense for the three and nine months ended September 30, 2010 and 2009, respectively.

NONINTEREST EXPENSE
(Dollar amounts in thousands)

	Three months ended September 30,				% Change			Nine months ended September 30,				% Change
	2010		2009					2010		2009
Salaries and employee benefits	$	4,207	$	4,147		1.4	%	$	12,156	$	12,316		(1.3	%)
Occupancy		584		592		(1.4	%)		1,782		1,846		(3.5	%)
Equipment		287		313		(8.5	%)		961		993		(3.2	%)
Data processing and courier		221		246		(10.3	%)		662		723		(8.6	%)
Operation of foreclosed properties		894		461		94.1	%		1,837		714		157.3	%
Business development & advertising		115		91		26.8	%		446		369		21.1	%
Charitable contributions		6		10		(43.1	%)		52		51		0.9	%
Stationery and supplies		129		124		4.0	%		381		377		0.9	%
Director fees		94		95		(0.8	%)		279		363		(23.2	%)
FDIC		697		482		44.8	%		1,938		1,864		4.0	%
Legal and professional		178		128		38.9	%		523		735		(28.8	%)
Loan and collection		155		151		2.4	%		492		531		(7.3	%)
Other operating		671		589		13.9	%		1,934		1,789		8.1	%
Total Noninterest Expense	$	8,238	$	7,429		10.9	%	$	23,443	$	22,671		3.4	%

Total noninterest expense increased $0.8 million for the three months ended September 30, 2010 compared to the same period in 2009. The noninterest expense to average assets ratio was 3.1% for the three months ended September 30, 2010 compared to 2.9% for the same period in 2009.

Net overhead expense is total noninterest expense less total noninterest income excluding securities gains. The net overhead expense to average assets ratio was at 1.9% for the three months ended September 30, 2010 compared to $2.0 for the same period in 2009. The efficiency ratio represents total noninterest expense as a percentage of the sum of net-interest income on a fully taxable equivalent basis and total noninterest income (excluding net gains on the sale of securities and premises and equipment). A lower efficiency ratio indicates a more efficient operation. The efficiency ratio increased to 76.0% for the three months ended September 30, 2010 from 75.5% for the comparable period last year. This is primarily due to an increase of $0.8 million in tax equivalent net interest income and a $0.2 million increase in noninterest income. Partially offsetting the increase was a $0.8 million increase in noninterest expense.

Expenses related to the operation of foreclosed properties held for sale by the Bank increased $0.4 million to $0.9 million for the three-month period ended September 30, 2010 compared to $0.5 million for the same period in 2009. The increase consists of a $0.5 million increase in write-downs due to the revaluation of properties held, offset by a $0.1 million increase in operating income related to the properties. We intend to continue to evaluate all foreclosed property values and attempt to reduce the holding periods of these properties and, as a result, the related holding costs, to the extent possible. Such expenses include but are not limited to insurance, maintenance, real estate taxes, management fees, utilities and legal fees.

30

Included in noninterest expense are FDIC insurance premiums of $0.7 million for the three months ended September 30, 2010 compared to $0.5 million for the same period a year ago. FDIC insurance premiums consist of two components, deposit insurance premiums and payments for servicing obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations. With the enactment in early 2006 of the Federal Deposit Insurance Reform Act of 2005, major changes were introduced in the calculation of FDIC deposit insurance premiums. Such changes were effective January 1, 2007 and included establishment by the FDIC of a target reserve ratio range for the DIF of between 1.15% and 1.50%, as opposed to the prior fixed reserve ratio of 1.25%. At the same time, the FDIC adopted a new risk-based system for assessment of deposit insurance premiums under which all such institutions are required to pay minimum annual premiums. The system categorizes institutions in one of four risk categories, depending on capitalization and supervisory rating criteria. Baylake Bank’s assessment rate, like that of other financial institutions, is confidential and may not be directly disclosed, except to the extent required by law. Payments for the FICO portion will continue as long as FICO obligations remain outstanding. In February 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009 at between 12 bps and 45 bps. On November 12, 2009, the Board of Directors of the FDIC adopted a rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. In October 2010, the FDIC Board voted to eliminate a uniform 3 bps increase in assessment rates that was to be effective January 1, 2011. We were required to prepay approximately $6.7 million in premiums in December 2009, which premiums will not be taken as a charge against our operations until the period for which they apply.

Legal and professional fees increased $0.1 million (39.1%) to $0.2 million for the three months ended September 30, 2010 compared to $0.1 million for the three months ended September 30, 2009. This is primarily due to increased costs related to loans that are currently in the collection process.

Total noninterest expense increased $0.8 million for the nine months ended September 30, 2010 compared to the same period in 2009. The noninterest expense to average assets ratio was 3.0% for the nine months ended September 30, 2010 compared to 2.9% for the same period in 2009.

The net overhead expense to average assets ratio increased to 1.7% for the nine months ended September 30, 2010 compared to 1.6% for the same period in 2009. The efficiency ratio decreased to 74.9% for the nine months ended September 30, 2010 from 78.8% for the comparable period last year. This is primarily due to a $2.4 million increase in tax equivalent net interest income.

The decrease in salaries and employee benefits of $0.2 million (1.3%) to $12.2 million for the nine month period ended September 30, 2010 compared to the same period in 2009 is primarily due to attrition, partially offset by a $0.1 million increase in employee benefit expense. During the second quarter of 2009, $0.3 million of self funding health insurance expense was reversed because of excess funding related to the 2008 claims year. Also, our discretionary 5% employer match to our 401K plan was eliminated effective April 1, 2009, thus reducing 401K expense by $0.2 million when comparing the nine-month periods.

Expenses related to the operation of foreclosed properties held for sale by the Bank increased $1.1 million to $1.8 million for the nine-month period ended September 30, 2010 compared to $0.7 million for the same period in 2009. The increase consists of a $0.8 million increase in write-downs due to the revaluations of properties held and a $0.3 million increase in operating expenses to maintain the properties. We continue to evaluate all foreclosed property values and attempt to reduce the holding periods of these properties and, as a result, the related holding costs, to the extent possible. Such expenses include but are not limited to insurance, maintenance, real estate taxes, management fees, utilities and legal fees.

Included in noninterest expenses are FDIC insurance premiums of $1.9 million for both the nine months ended September 30, 2010 and the nine months ended September 30, 2009. Included in 2009 is $0.5 million related to a 5 basis point special assessment imposed by the FDIC in the second quarter of 2009 to assist in replenishing the DIF.

Legal and professional fees decreased $0.2 million (28.8%) to $0.5 million for the nine months ended September 30, 2010 compared to $0.7 million for the nine months ended September 30, 2009. This is primarily due to reduced outsourcing of legal services in 2010.

Director fees for the nine months ended September 30, 2010 are $0.1 million lower than for the nine-month period ended September 30, 2009. The decrease is due to the reduction of the fees paid to the chairman of the board, the voluntary election of the directors to reduce their board fees beginning April 1, 2009, and a reduction in the number of regional board meetings.

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Income Taxes

Income tax benefit for the three months ended September 30, 2010 was $0.8 million versus nominal tax expense for the same period in 2009. The decrease in tax expense is attributable to a $2.2 million year-over-year decrease in pre-tax income resulting primarily from an increase in PFLLs.

Income tax benefit for the nine months ended September 30, 2010 was $0.1 million versus tax expense of $0.9 million for the same period in 2009. The decrease in tax expense is attributable largely to a $3.0 million year-to-year decrease in pre-tax income primarily due to a reduction of $1.5 million in gains from sale of securities and $3.3 million increase in the PFLL.

We maintain significant net deferred tax assets for deductible temporary tax differences, such as allowance for loan losses, non-accrual loan interest, and foreclosed property valuations as well as net operating loss carry forwards. Our determination of the amount of our deferred tax asset to be realized is highly subjective and is based on several factors, including projected future income, income tax planning strategies, and federal and state income tax rules and regulations. At September 30, 2010, we determined that no valuation allowance was required to be taken against our deferred tax asset other than a valuation allowance to reduce our state net operating loss carry forwards to an amount which we believe the benefit will more likely than not be realized. We continue to assess the amount of tax benefits we may realize.

Financial Condition

Loans:

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

LOAN PORTFOLIO ANALYSIS
(Dollar amounts in thousands)

	September 30, 2010			December 31, 2009			Percent change
Amount of loans by type
Real estate-mortgage
Commercial	$	345,150		$	353,110			(2.3	%)
1-4 family residential
First liens		76,398			73,262			4.3	%
Junior liens		11,115			13,041			(14.8	%)
Home equity		41,801			38,527			8.5	%
Commercial, financial and agricultural		71,526			83,674			(14.5	%)
Real estate-construction		58,947			62,827			(6.2	%)
Installment
Credit cards and related plans		1,741			1,867			(6.8	%)
Other		8,805			9,937			(11.4	%)
Obligations of states and political subdivisions		18,216			16,009			13.8	%
Less: deferred origination fees, net of costs		(418	)		(360	)		16.0	%
Less: Allowance for loan losses		(13,226	)		(9,600	)		37.7	%
Total	$	620,055		$	642,294			(3.5	%)

Total gross loans at September 30, 2010 decreased $18.6 million (2.9%) from $651.9 million at December 31, 2009 to $633.3 million at September 30, 2010. The decrease is primarily due to reductions in commercial real estate and commercial, financial and agricultural loans. This is the result of the uncertainty in the economy, as we have focused on credit quality in loans we originate.

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Risk Management and the Allowance for Loan Losses

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

The ALL at September 30, 2010 was $13.2 million, compared to $9.6 million at year-end 2009. On a quarterly basis, management reviews the adequacy of the ALL. The analysis of the ALL consists of three components: (i) specific reserves established for expected losses relating to impaired loans for which the recorded investment in the loans exceeds its fair value; (ii) general reserves based on historical loan loss experience for significant loan categories; and (iii) general reserves based on qualitative factors such as concentrations, and changes in portfolio mix and volume. Allocations of the ALL may be made for specific loans but the entire ALL is available of any loan that, in management’s judgment, should be charged off or for which an actual loss is realized.

On a regular basis, loan officers review all commercial credit relationships. The loan officers grade commercial credits and the loan review function validates the grades assigned. In the event that a loan review function downgrades the loan, it is included in the ALL analysis process at the lower grade. This grading system is in compliance with regulatory classifications. At least quarterly, all commercial loans that have been deemed impaired are evaluated. In compliance with accounting guidance for impaired loans, the fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan or, if the loan is collateral dependent, the fair value of the underlying collateral less the estimated costs to sell. This evaluation may include obtaining supplemental market data and/or routine site visits to offer support to the evaluation process. A specific reserve is then allocated to the loans based on this assessment. Specific reserves are reviewed by the Chief Credit Officer (“CCO”) and management familiar with the credits.

During the third quarter of 2010, an additional provision of $1.9 million was taken on a $7.8 million credit relationship. This was first reported in the June 30, 2010 10-Q filing, as a $5.4 million credit relationship in the hospitality industry with a specific impairment of $0.7 million. An additional loan of $2.4 million to a related party in the hospitality industry increased the total amount of this relationship. Active legal negotiations are taking place to resolve this delinquency, and as a result, $2.3 million of the total credit relationship was charged off in the third quarter of 2010.

Also during the third quarter of 2010, an additional provision of $0.9 million was taken on a construction development project based on updated valuations of the collateral securing the loan. This credit relationship had specific impairment of $0.2 million at June 30, 2010. The entire impairment of $1.1 million was charged off during the third quarter of 2010.

The ALL at September 30, 2010 was $13.2 million, compared to $9.6 million at year-end 2009. A PFLL of $6.9 million was charged to earnings for the nine months ended September 30, 2010 compared to a $3.6 million PFLL recorded for the same period ended September 30, 2009.

In addition to the significant impairments on the credit relationships previously mentioned, we took an additional $2.3 million provision based on discussions with our regulators. This additional provision primarily relates to general reserves not specifically allocated to specific credits, and are available for unforeseen or unanticipated events that may occur. We have ordered external third party appraisals that we anticipate receiving in the fourth quarter of 2010. In the event these valuations do not support our current estimates of value, the additional provision in the third quarter is available to offset any specific impairment that may be necessary.

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We have two other major components of the ALL that do not pertain to specific loans: “General Reserves – Historical” and “General Reserves – Other.” We continue to use the same methodology of determining historical loss factors for the portfolio of loans to which there are no specific loss allocations. We determine General Reserves – Historical based on our historical recorded charge-offs of loans in particular categories, analyzed as a group. As it relates to the historical loss component, we reduced the historical loss look back period from 16 quarters to an average of between 8 and 12 quarters during the fourth quarter of 2009. This was primarily done to enable the model to provide a better reflection of the recent economic times. This resulted in increased allocations that we determined were appropriate. We determine General Reserves – Other by taking into account other factors, such as 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, non-accrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values. By nature, our general reserve changes with our fluid lending environment and the overall economic environment in which we lend. As such, we are continually attempting to enhance this portion of the allocation process to reflect anticipated losses in our portfolio driven by these changing factors. During the first quarter of 2009, the general component of the analysis was modified to specifically identify the inherent risks in the loan portfolio. Expanded economic statistics, specifically unemployment and inflation rates for national, state and local markets, were factored into the allocation to address repayment risk. Further identification and management of portfolio concentration risks both by loan category and by specific markets were also enhanced and are reflected in the general allocation component. In the fourth quarter of 2009, the model was further enhanced to include more specific qualitative factors, as mentioned previously, by loan type.

Non-Performing Loans, Potential Problem Loans and Foreclosed Properties

Management encourages early identification of non-accrual and problem loans in order to minimize the risk of loss. Non-performing loans are defined as non-accrual loans, loans 90 days or more past due but still accruing, and loans restructured in a troubled debt restructuring that haven’t shown a sufficient period of performance with the restructured terms. 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 or earlier as deemed appropriate. 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 a loan typically involves the granting of some concession to the borrower involving a loan modification, such as payment schedule or interest rate changes. Restructured loans may 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 pursuant to accounting guidance for troubled debt restructurings.

NON-PERFORMING ASSETS
(Dollar amounts in thousands)

	September 30, 2010			June 30, 2010			December 31, 2009			September 30, 2009
Nonperforming Assets:
Nonaccrual loans	$	18,339		$	23,550		$	23,247		$	40,474
Nonaccrual loans, restructured		586			160			3,343			11
Accruing loans past due 90 days or more		—			—			—			—
Total nonperforming loans (“NPLs”)		18,925			23,710			26,590			40,485
Other real estate owned		15,498			15,962			14,995			10,178
Total nonperforming assets (“NPAs”)		34,423			39,672			41,585			50,663
Restructured loans, accruing(1)		11,416			9,845			2,061			11
Ratios:
ALL to Net Charge-offs (“NCOs”) (annualized)		3.07	x		12.79	x		0.92	x		3.28	x
NCOs to average loans (annualized)		0.67	%		0.14	%		1.50	%		0.60	%
ALL to total loans		2.09	%		1.79	%		1.47	%		2.07	%
NPLs to total loans		2.99	%		3.71	%		4.08	%		5.99	%
NPAs to total assets		3.27	%		3.81	%		3.98	%		4.85	%
ALL to NPLs		69.89	%		48.31	%		36.10	%		34.51	%

(1) Restructured loans on accrual status were previously reported as nonperforming loans at December 31, 2009 and September 30, 2009. Restructured loans on non-accrual status are returned to accruing when a sufficient period of performance in accordance with the restructured terms, generally six months, has passed.

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Restructured nonaccrual loans at December 31, 2009 were $3.3 million. Principal payments of $3.2 million were received on those loans and $0.1 million was charged-off. As of September 30, 2010, none of those principal balances remain.

Restructured loans accruing at December 31, 2009 were $2.1 million. Charge-offs of $0.1 million have been recognized. As of September 30, 2010, $2.0 million of principal balances continue to be reported as restructured loans accruing.

Non-performing loans decreased $7.7 million (28.8%) during the nine months ended September 30, 2010. The non-performing loan relationships are secured primarily by commercial or residential real estate and, secondarily, by personal guarantees from principals of the respective borrowers.

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

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

	09/30/10			06/30/10			03/31/10			12/31/09			09/30/09
Secured by Real Estate	$	6,877		$	5,474		$	6,730		$	8,881		$	5,922
Commercial and industrial loans		140			476			806			255			862
Loans to individuals		80			41			65			370			204
All other loans		1			149			134			1			139
Total	$	7,098		$	6,140		$	7,735		$	9,507		$	7,127
Percentage of total loans		1.12	%		0.96	%		1.20	%		1.46	%		1.06	%

As indicated above, loan balances 30 to 89 days past due have decreased by $2.4 million since December 31, 2009. As the loans continue through the collection process, we anticipate these past due levels will continue to decline.

Information regarding foreclosed properties is as follows:

FORECLOSED PROPERTIES
(Dollar amounts in thousands)

	For the three months ended September 30,						Nine months ended September 30, 2010
	2010			2009			2010			2009
Beginning Balance	$	15,962		$	7,680		$	14,995		$	7,143
Transfer of loans to foreclosed properties		949			3,215			3,398			6,453
Sales proceeds, net		(558	)		(384	)		(1,560	)		(3,131	)
Net gain from sale of foreclosed properties		7			(27	)		39			204
Provision for foreclosed properties		(862	)		(306	)		(1,374	)		(491	)
Total Foreclosed Properties	$	15,498		$	10,178		$	15,498		$	10,178

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Changes in the valuation allowance for losses on foreclosed properties were as follows:

	Nine months ended September 30, 2010			Twelve months ended December 31, 2009			Nine months ended September 30, 2009
Beginning balance	$	2,773		$	3,391		$	3,391
Provision charged to operations		1,374			678			491
Allowance recovered on properties disposed		(566	)		(1,296	)		(1,122	)
Ending Balance	$	3,581		$	2,773		$	2,760

Investment Portfolio

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

At September 30, 2010, the investment portfolio (comprising investment securities available for sale) increased $50.1 million (24.4%) to $254.9 million compared to $204.8 million at December 31, 2009. At September 30, 2010, the investment portfolio represented 24.2% of total assets compared to 19.6% at December 31, 2009.

We continue to closely monitor trust preferred securities we hold in our investment portfolio included in the private placement and corporate bond totals. Total gross unrealized losses on these securities are $0.3 million at September 30, 2010, representing 21.7% of total gross unrealized securities losses. Based on an in-depth analysis, including ratings from external rating agencies and/or brokers, of the specific instruments and the creditworthiness of the related issuers, including their ability to continue payments under the terms of the security agreements, no declines were deemed to be other-than-temporary. Additionally, we do not have the intent to sell the trust preferred securities and it is not more likely than not that we will be required to sell these securities before their anticipated recovery. If at any point in time any losses are considered other than temporary, we would be required to recognize other-than-temporary impairment. This would require us to assess the cash flows expected to be collected from the security. The difference between the present value of the cash flows expected to be collected and the amortized cost basis would result in a credit loss for the amount of the impairment. This amount would reduce our earnings. The remaining portion of the impairment related to factors other than credit loss would be recognized through other comprehensive income/(loss). At September 30, 2010 and December 31, 2009, we did not hold securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Deposits

Total deposits at September 30, 2010 increased $13.7 million (1.7%) to $845.3 million from $831.6 million at December 31, 2009. This increase was a result of a $5.2 million (8.8%) increase in our brokered deposits from $58.9 million at December 31, 2009 to $64.1 million at September 30, 2010, an increase of $5.8 million (2.6%) in our demand deposits from $222.0 million at December 31, 2009 to $227.8 million at September 30, 2010 and a $35.3 million (15.6%) increase in our savings deposits from $226.6 million at December 31, 2009 to $261.9 million at September 30, 2010, partially offset by a decrease in our time deposits (excluding brokered time deposits) of $32.5 million (10.0%) from $324.1 million at December 31, 2009 to $291.6 million at September 30, 2010. Total interest-bearing deposits increased $2.2 million (0.3%) while non-interest bearing deposits increased $11.5 million (14.2%) from December 31, 2009 to September 30, 2010.

During the third quarter of 2010, $13.1 million of new brokered certificates of deposit were originated at terms we considered favorable compared to interest rates in the retail market, further lengthening the maturities of our liabilities in a low interest rate environment.

Emphasis has been, and will continue to be, placed on generating additional core deposits in 2010 through competitive pricing of deposit products and through our existing branch delivery systems. We will also attempt to attract and retain core deposit accounts through new product offerings and quality customer service. We also may increase brokered certificates of deposit during the remainder of 2010 as an additional source of funds to support loan growth or other asset and liability needs in the event that core deposit growth goals are not achieved. Under that scenario, we will continue to look at other wholesale sources of funds if the brokered certificate of deposit market were to become illiquid or more costly. If liquidity concerns arise, we have alternative sources of funds such as lines of credit with correspondent banks and borrowing arrangements with the Federal Home Loan Bank (“FHLB”) and through the discount window at the Federal Reserve.

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Other Funding Sources

Securities under agreements to repurchase at September 30, 2010 increased $1.4 million (6.4%) to $22.5 million from $21.1 million at December 31, 2009. We did not have any federal funds purchased at either September 30, 2010 or December 31, 2009.

FHLB advances were $70.0 million at September 30, 2010, compared to $85.0 million at December 31, 2009. During the third quarter of 2010, a $5.0 million borrowing matured and was paid in full. In addition, we restructured $30.0 million of borrowings during the third quarter of 2010. The restructure resulted in reduced interest expense and extended the maturity by two to three years in a low interest rate environment. We will borrow funds if borrowing is a less costly form of funding loans than acquiring deposits or if deposit growth is not sufficient. The availability of deposits also determines the amount of funds we need to borrow in order to fund loan demand.

Long Term Debt

In March 2006, we issued $16.1 million of variable rate, trust preferred securities and $0.5 million of trust common securities through Baylake Capital Trust II (the “Trust”) that adjust quarterly at a rate equal to 1.35% over the three month LIBOR. At September 30, 2010, the interest rate on these securities was 1.64%. These securities were issued to replace trust-preferred securities issued in 2001 through Baylake Capital Trust I. For bank 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 (“Debentures”) to the Trust. Under the terms of the Debentures, we would be precluded from paying dividends on our common stock if we were in default under the Debentures, if we exercised our right to defer payment of interest on the Debentures or if certain related defaults occurred.

Since the third quarter of 2009 through April 30 2010, we completed seven separate closings of a private placement of Convertible Notes. The Convertible Notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated there under. The total amount of the Convertible Notes outstanding as of the date of this report is $9.45 million. The offering expired on April 30, 2010.

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

Contractual Obligations

We use 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, 2009 for quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Items disclosed in the 2009 Annual Report on Form 10-K have not materially changed since that Report was filed.

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The following table summarizes our significant contractual obligations and commitments at September 30, 2010:

CONTRACTUAL OBLIGATIONS
(Dollar amounts in thousands)

	Within 1 year		1-3 years		3-5 years		After 5 years		Total
Certificates of deposit and other time deposit obligations	$	191,491	$	134,869	$	5,940	$	—	$	332,300
Repurchase agreements		22,471		—		—		—		22,471
Federal Home Loan Bank advances		40,000		30,000		—		—		70,000
Subordinated debentures		—		—		—		16,100		16,100
Convertible promissory notes(1)		—		—		—		9,450		9,450
Total	$	253,962	$	164,869	$	5,940	$	25,550	$	450,321

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

Off-balance Sheet Arrangements

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

LENDING RELATED COMMITMENTS
(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Commitments to fund home equity line loans	$	49,275	$	46,565
Commitments to fund 1-4 family loans		4,651		2,704
Commitments to fund residential real estate construction loans		858		2,259
Commitments unused on various other lines of credit loans		142,025		116,667
Total commitments to extend credit	$	196,809	$	168,195
Financial standby letters of credit	$	10,287	$	14,550

Liquidity

Liquidity management refers to our ability to ensure that cash is available on a timely basis 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. Baylake Corp. and Baylake Bank have different liquidity considerations.

Our primary sources of funds are dividends from Baylake Bank, investment income, and net proceeds from borrowings. We may also undertake offerings of debt and issue our common stock if and when we deem it prudent to do so. We generally manage our liquidity position in order to provide funds necessary to meet interest obligations of our trust preferred securities and convertible notes, pay dividends to our shareholders, subject to regulatory restrictions, and repurchase shares. Such restrictions, which govern all state chartered banks, preclude the payment of dividends without the prior written consent of the Wisconsin Department of Financial Institutions - Division of Banking (“WDFI”) if dividends declared and paid by such bank in either of the two immediately preceding years exceeded that bank’s net income for those years. In consultation with our federal and state regulators, our Board of Directors elected to forego the dividend to our shareholders beginning in the first quarter of 2008. In addition, in order to pay dividends in the future, we will need to seek prior approval from WDFI as well as the Federal Reserve Board. There is no assurance that we would receive such approval if sought.

Baylake Bank 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, payments on and maturities of loans, payments on and maturities of the investment portfolio, access to other funding sources, marketability of certain assets, the ability to use loan and investment portfolios as collateral for secured borrowings and a strong capital position.

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Maturing investments have historically been a primary source of liquidity. For the nine months ended September 30, 2010, principal payments totaling $58.1 million were received on maturing investments. In addition, we received proceeds of $53.8 million from the sale of investments and we purchased $155.7 million in investments in the same period. At September 30, 2010 the investment portfolio contained $142.4 million of mortgage-backed securities issued by U.S. government sponsored agencies, representing 55.9% of the total investment portfolio. These securities tend to be highly marketable.

Deposit increases, reflected as a financing activity in the September 30, 2010 Unaudited Consolidated Statements of Cash Flows, resulted in $13.7 million of cash inflow during the first nine months of 2010. 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 brokered deposits increased $5.2 million to $64.1 million during the nine month period at September 30, 2010, versus $58.9 million at December 31, 2009. During the third quarter of 2010, $8.2 million of brokered CDs matured and $13.1 of new brokered CDs was originated. Interest rates on the CDs were reflective of the low rate environment, and extended our maturities by two to three years. If at any point in the future we fall below the “well capitalized” regulatory capital threshold, it will become more difficult for us to obtain brokered deposits. Also 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 payments and maturities of loans can provide a source of additional liquidity. There are $284.5 million, or 44.9% of total loans, maturing within one year of September 30, 2010. 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 creates a need for liquidity that may cause us to acquire other sources of funding, some of which could be more difficult to find and more costly to secure.

Within the classification of short-term borrowings at September 30, 2010, securities sold under agreements to repurchase totaled $22.5 million compared to $21.1 million at the end of 2009. Securities sold under agreements to repurchase are obtained from a base of business customers. Short-term and long-term borrowings from the FHLB are another source of funds, totaling $70.0 million at September 30, 2010 and $85.0 million at December 31, 2009. During the third quarter of 2010, we reduced our FHLB borrowings by $5.0 million.

We expect that deposit growth will be our primary 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. We expect deposit growth to be a reliable funding source in the future as a result of marketing efforts to attract and retain core deposits. In addition, we may acquire additional brokered deposits as funding for short-term liquidity needs. Short-term liquidity needs will also be addressed by growth in short-term borrowings, maturing federal funds sold and portfolio investments and loan maturities and prepayments.

In assessing liquidity, historical information such as seasonality, local economic cycles and the economy in general are considered along with our current financial position and projections. We believe that in the current economic environment our 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 material increases or decreases in our liquidity.

Capital Resources

Stockholders’ equity at September 30, 2010 and December 31, 2009 was $79.8 million and $74.6 million, respectively, reflecting an increase of $5.2 million (6.9%) during the first nine months of 2010. The increase in stockholders’ equity was primarily related to our net income of $1.7 million and an increase in comprehensive income of $3.5 million (as a result of an increase in unrealized gains on available-for-sale securities). The ratio of stockholders’ equity to assets was 7.6% and 7.1% at September 30, 2010 and December 31, 2009, respectively.

No cash dividends were declared during the first nine months of 2010 or during all of 2009. Beginning in February 2008, our Board of Directors, in consultation with our federal and state bank regulators, elected to forego the payment of cash dividends on our common stock. We continue to monitor the payment of dividends in relationship to our financial position on a quarterly basis and our intention is to reinstate payment of dividends at the earliest appropriate opportunity, however there is no assurance if or when we will be able to do so or if we do, in what amounts. Our ability to pay dividends is subject to various factors including, among other things, sufficient earnings, available capital, board discretion and regulatory compliance. In order to pay dividends, advance approval from the WDFI as well as the Federal Reserve Board will need to be obtained. There is no assurance that we would receive such approval if sought.

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

The Federal Reserve 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 which at least half must comprise core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banks and bank holding companies 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 minimum ratio of 4% or 5%, depending on the rating. 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 our consolidated financial statements.

At September 30, 2010, we were in excess of the minimum capital ratios established for “well capitalized” under the regulatory framework for the prompt corrective action categorization. There are no conditions or events since that date 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%.

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. We believe 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.

          The following tables present our and Baylake Bank’s capital ratios as of September 30, 2010 and December 31, 2009:

CAPITAL RATIOS
(Dollar amounts 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 September 30, 2010
Total Capital (to Risk Weighted Assets)
Company	$	97,323		12.91	%	$	60,301		8.00	%	$	N/A		N/A
Bank		94,497		12.53	%		60,331		8.00	%		75,414		10.00	%
Tier 1 Capital (to Risk Weighted Assets)
Company	$	78,405		10.40	%	$	30,150		4.00	%	$	N/A		N/A
Bank		85,024		11.27	%		30,166		4.00	%		45,249		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	78,405		7.56	%	$	41,491		4.00	%	$	N/A		N/A
Bank		85,024		8.19	%		41,528		4.00	%		51,910		5.00	%

	Actual					Required For Capital Adequacy Purposes					Required To Be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009
Total Capital (to Risk Weighted Assets)
Company	$	92,667		12.18	%	$	60,882		8.00	%		N/A		N/A
Bank		90,321		11.86	%		60,940		8.00	%	$	76,175		10.00	%
Tier 1 Capital (to Risk Weighted Assets)
Company	$	77,804		10.22	%	$	30,441		4.00	%		N/A		N/A
Bank		80,798		10.61	%		30,470		4.00	%	$	45,705		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	77,804		7.60	%	$	40,961		4.00	%		N/A		N/A
Bank		80,798		7.89	%		40,978		4.00	%	$	51,222		5.00	%

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Item 3. Quantitative and Qualitative Disclosures 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. Historically, we have not used 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 subordinated debentures. 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 Federal Reserve. 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 September 30, 2010, 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, 2009, as described in our 2009 Annual Report on Form 10-K.

Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which 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 100 bp to 200 bp 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 September 30, 2010.

INTEREST SENSITIVITY
(Dollar amounts in thousands)

Change in Net Interest Income over One Year Horizon

	At September 30, 2010					At December 31, 2009
Change in levels of interest rates	Dollar change		Percentage change			Dollar change		Percentage change
+200 bp	$	32,407		2.2	%	$	29,388		1.4	%
+100 bp		31,667		(0.2	%)		29,453		1.6	%
Base		31,726					28,990
-100 bp		30,302		(4.5	%)		29,132		0.5	%
-200 bp		29,459		(7.2	%)		28,110		(3.0	%)

As shown above, at September 30, 2010, the effect of an immediate 200 bp increase in interest rates would have increased our net interest income by $0.7 million or 2.2%. The effect of an immediate 200 bp reduction in rates would have decreased our net interest income by $2.3 million or 7.2%. However, a 200 bp reduction in rates is not realistic given the low interest rate environment that currently exists. An interest rate floor of zero is used rather than assuming a negative interest rate.

During the first nine months of 2010, Baylake Bank lengthened slightly the duration of its liabilities by issuing longer term brokered deposits and restructuring our outstanding FHLB debt by extending the maturities This effort has contributed to moderation of the liability sensitivity that was present at December 31, 2009.

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.

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Item 4T. Controls and Procedures

Disclosures Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2010. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

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

Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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

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

Item 1A. Risk Factors

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2009. Other than as set forth below, there have been no material changes to the risk factors since then.

Financial reforms and related regulations may affect our and Baylake Bank’s business activities, financial position and profitability.

The Dodd-Frank Act, signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms and requires significant rulemaking. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. We are currently reviewing the impact the legislation will have on our and Baylake Bank’s business.

The legislation charges the federal banking agencies, including the Federal Reserve and the FDIC with drafting and implementing enhanced supervision, examination and capital standards for depository institutions and their holding companies. The Dodd-Frank Act also authorized various new assessments and fees, expands supervision and oversight authority over nonbank subsidiaries, increases the standards for certain covered transactions with affiliates and requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions. In addition, the Dodd-Frank Act contains several provisions that change the manner in which deposit insurance premiums are assessed and which could increase the FDIC deposit insurance premiums paid by Baylake Bank.

The Dodd-Frank Act establishes a new, independent Consumer Financial Protection Bureau which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. States will be permitted to adopt stricter consumer protection laws and state attorney generals can enforce consumer protection rules issued by the Bureau.

The changes resulting from the Dodd-Frank Act, as well as the regulations promulgated by federal agencies, may impact the profitability of our and Baylake Bank’s business activities, require changes to certain of our business practices or otherwise adversely affect our businesses. These changes may also require us and Baylake Bank to invest significant management attention and resources to evaluate and make necessary changes.

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We may sell a pool of loans in the fourth quarter at a discount from par value.

Our Board of Directors has authorized, and we are currently considering, the sale of a pool of performing and nonperforming loans during the fourth quarter of 2010. Any such sale would likely be for a price that reflects a substantial discount from the par value of the loans, which could have a material adverse effect on our results of operations for the fourth quarter.

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. [Reserved]

Item 5. Other Information

Not applicable

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Item 6. Exhibits

The following exhibits are furnished herewith:

Exhibit
Number	Description
31.1	Certification under Section 302 of Sarbanes-Oxley by Robert J. Cera, Chief Executive Officer, is attached hereto.
31.2	Certification under Section 302 of Sarbanes-Oxley by Kevin L. LaLuzerne, 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.

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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:	November 15, 2010	/s/ Robert J. Cera
		Robert J. Cera
		President and Chief Executive Officer
Date:	November 15, 2010	/s/ Kevin L. LaLuzerne
		Kevin L. LaLuzerne
		Treasurer and Chief Financial Officer

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EX-31.1

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, Robert J. Cera, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Baylake Corp;
2.	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;
3.	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;
4.	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:
	a)	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;
	b)	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;
	c)	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
	d)	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
5.	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):
	a)	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
	b)	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:      November 15, 2010

/s/ Robert J. Cera

Robert J. Cera

President and Chief Executive Officer

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EX-31.2

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:
1.	I have reviewed this quarterly report on Form 10-Q of Baylake Corp;
2.	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;
3.	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;
4.	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:
	a)	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;
	b)	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;
	c)	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
	d)	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
5.	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):
	a)	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
	b)	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:      November 15, 2010

/s/ Kevin L. LaLuzerne

Kevin L. LaLuzerne

Treasurer and Chief Financial Officer

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EX-32.1

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 this Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Robert J. Cera, 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/ Robert J. Cera

Robert J. Cera

President and Chief Executive Officer

November 15, 2010

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.

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EX-32.2

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 this Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Kevin L. LaLuzerne, 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

Treasurer and Chief Financial Officer

November 15, 2010

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.

49