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, 2012

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 or organization)	(I.R.S. Employer Identification No.)
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 to submit and post such files).

Yes x 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

The number of outstanding shares of common stock, $5.00 par value per share, as of November 6, 2012 was 7,937,347 shares.

BAYLAKE CORP.

INDEX

		PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1 -	FINANCIAL STATEMENTS	3
ITEM 2 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
ITEM 4 -	CONTROLS AND PROCEDURES	51
PART II - OTHER INFORMATION
ITEM 1 -	LEGAL PROCEEDINGS	51
ITEM 1A -	RISK FACTORS	51
ITEM 2 -	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM 3 -	DEFAULTS UPON SENIOR SECURITIES	52
ITEM 4 -	MINE SAFETY DISCLOSURES	52
ITEM 5 -	OTHER INFORMATION	52
ITEM 6 -	EXHIBITS	52

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 2012 (Unaudited) and December 31, 2011
(Dollar amounts in thousands)

	September 30, 2012			December 31, 2011
ASSETS
Cash and due from financial institutions	$	60,049		$	86,980
Federal funds sold		—			513
Securities available for sale		247,198			284,331
Loans held for sale		2,912			1,869
Loans, net of allowance of $10,658 and $10,638 at September 30, 2012 and December 31, 2011, respectively		589,940			620,377
Cash surrender value of life insurance		22,977			23,064
Premises and equipment, net		21,065			22,953
Premises and equipment held for sale		1,068			1,224
Federal Home Loan Bank stock		3,598			6,792
Foreclosed properties, net		10,451			12,119
Goodwill		6,641			6,641
Deferred income taxes, net		5,487			7,145
Accrued interest receivable		3,243			3,381
Other assets		9,971			9,540
Total Assets	$	984,600		$	1,086,929
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	124,832		$	104,446
Interest-bearing		673,942			760,741
Total Deposits		798,774			865,187
Federal Home Loan Bank advances		40,000			55,000
Repurchase agreements		20,904			47,566
Subordinated debentures		16,100			16,100
Convertible promissory notes		9,450			9,450
Accrued expenses and other liabilities		8,320			9,225
Total Liabilities		893,548			1,002,528
Commitments and Contingencies – Note 16
Common stock, $5 par value, authorized 50,000,000 shares; Issued- 8,148,360 shares at September 30, 2012 and 8,132,552 at December 31, 2011; Outstanding- 7,927,347 shares at September 30, 2012 and 7,911,539 at December 31, 2011		40,741			40,662
Additional paid-in capital		12,136			12,066
Retained earnings		35,835			31,441
Treasury stock (221,013 shares at September 30, 2012 and December 31, 2011)		(3,549	)		(3,549	)
Accumulated other comprehensive income		5,889			3,781
Total Stockholders’ Equity		91,052			84,401
Total Liabilities and Stockholders’ Equity	$	984,600		$	1,086,929

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and nine months ended September 30, 2012 and 2011
(Dollar amounts in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	7,812		$	8,278		$	23,698		$	24,998
Taxable securities		1,493			1,747			5,111			5,376
Tax exempt securities		373			375			1,118			1,129
Federal funds sold		44			51			97			90
Total Interest and Dividend Income		9,722			10,451			30,024			31,593
INTEREST EXPENSE
Deposits		1,029			1,749			3,618			5,577
Repurchase agreements		13			23			49			65
Federal Home Loan Bank advances and other debt		230			261			746			833
Subordinated debentures		75			66			228			200
Convertible promissory notes		245			245			735			735
Total Interest Expense		1,592			2,344			5,376			7,410
Net interest income		8,130			8,107			24,648			24,183
Provision for loan losses		1,100			1,200			5,125			4,450
Net interest income after provision for loan losses		7,030			6,907			19,523			19,733
NONINTEREST INCOME
Fees from fiduciary activities		242			217			765			720
Fees from loan servicing		151			139			450			552
Fees for other services to customers		1,167			1,260			3,555			3,726
Net gain on sale of loans		651			208			1,523			805
Net loss in mortgage servicing rights		(90	)		(111	)		(159	)		(225	)
Net gain on sale of securities		—			267			1,585			392
Net gain/(loss) on sale of premises and equipment		(39	)		(1	)		137			7
Net gain (loss) on sale of premises and equipment held for sale		—			—			445			(10	)
Net gain on sale of branches		826			—			826			—
Increase in cash surrender value of life insurance		81			102			282			353
Income in equity of UFS subsidiary		173			199			509			631
Other income		88			(174	)		718			190
Total Noninterest Income		3,250			2,106			10,636			7,141
NONINTEREST EXPENSE
Salaries and employee benefits		4,196			4,067			12,851			12,681
Occupancy expense		587			551			1,764			1,731
Equipment expense		281			304			838			891
Data processing and courier		238			210			688			621
FDIC insurance expense		351			571			1,082			1,861
Operation of other real estate		306			108			2,718			1,875
Provision for impairment of standby letters of credit		—			117			—			131
Loan and collection expense		106			139			463			470
Other outside services		214			166			594			488
Other operating expenses		976			975			2,966			3,028
Total Noninterest Expense		7,255			7,208			23,964			23,777
Income before provision for income taxes		3,025			1,805			6,195			3,097
Provision for income taxes		940			508			1,484			374
Net Income	$	2,085		$	1,297		$	4,711		$	2,723
Basic earnings per share	$	0.26		$	0.16		$	0.59		$	0.34
Diluted earnings per share	$	0.23		$	0.16		$	0.52		$	0.34

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Three and nine months ended September 30, 2012
(Dollar amounts in thousands)

	Three months ended September 30, 2012					Nine months ended September 30, 2012
Net Income				$	2,085				$	4,711
Other comprehensive income, net of tax
Unrealized gains on securities:
Net unrealized holding gains arising during period	$	1,460				$	5,069
Less: reclassification adjustment for gains included in net income		—					(1,585	)
Tax effect		(577	)				(1,376	)
Other comprehensive income, net of tax					883					2,108
Comprehensive income				$	2,968				$	6,819

See accompanying Notes to Unaudited Consolidated Financial Statements.

5

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)
Nine months ended September 30, 2012
(Dollar amounts in thousands, except share data)

														Accumulated Other Comprehensive Income
					Additional Paid-in Capital
	Common Stock							Retained Earnings			Treasury Stock						Stockholders’ Equity
	Shares		Amount
Balance, January 1, 2012		7,911,539	$	40,662	$	12,066		$	31,441		$	(3,549	)	$	3,781		$	84,401
Net income for the period		—		—		—			4,711			—			—			4,711
Net changes in unrealized gain on securities available for sale		—		—		—			—			—			5,069			5,069
Reclassification adjustment for net gains realized in income		—		—		—			—			—			(1,585	)		(1,585	)
Tax effect		—		—		—			—			—			(1,376	)		(1,376	)
Total comprehensive income		—		—		—			—			—			—			6,819
Stock-based compensation expense		—		—		(4	)		—			—			—			(4	)
Vesting of Restricted Stock Units (“RSUs”)		14,919		75		(75	)		—			—			—			—
Tax benefit from vesting of RSUs		—		—		13			—			—			—			13
Exercise of stock options		889		4		(1	)		—			—			—			3
Expiration/forfeiture of unexercised stock options/RSUs		—		—		137			—			—			—			137
Cash dividends ($0.04 per share)		—		—		—			(317	)		—			—			(317	)
Balance, September 30, 2012		7,927,347	$	40,741	$	12,136		$	35,835		$	(3,549	)	$	5,889		$	91,052

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 2012 and 2011
(Dollar amounts in thousands)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income to net cash provided by operating activities:
Net Income	$	4,711		$	2,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		962			986
Amortization of debt issuance costs		27			26
Provision for losses on loans		5,125			4,450
Provision for impairment of letters of credit		—			131
Net amortization of premium/discount on securities		2,041			1,754
Increase in cash surrender value of life insurance		(282	)		(353	)
Net gain on life insurance death benefit		(501	)		(297	)
Net realized gain on sale of securities		(1,585	)		(392	)
Net gain on sale of loans		(1,523	)		(805	)
Net gain on sale of branches		(826	)		—
Proceeds from sale of loans held for sale		78,428			52,313
Origination of loans held for sale		(78,178	)		(47,367	)
Net change in valuation of mortgage servicing rights		158			225
Provision for valuation allowance on foreclosed properties		2,525			1,517
Net gain on sale of premises and equipment		(137	)		(7	)
Net (gain) loss on sale of land held for sale		(445	)		10
Net gain on disposals of foreclosed properties		(183	)		(198	)
Expense (benefit) for deferred income tax expense		282			(313	)
Stock-based compensation expense		137			59
Tax benefit from exercise/forfeiture of options		(1	)		—
Income in equity of UFS subsidiary		(509	)		(631	)
Changes in assets and liabilities:
Accrued interest receivable and other assets		(669	)		5,802
Payment to reduce LOC valuation allowance		—			(232	)
Accrued expenses and other liabilities		(966	)		1,109
Net cash flows provided by operating activities		8,591			20,510
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		45,822			25,696
Principal payments on securities available for sale		53,644			46,284
Purchase of securities available for sale		(59,306	)		(40,141	)
FHLB stock redemption		3,194			—
Proceeds from sale of foreclosed properties		7,519			6,798

7

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 2012 and 2011
(Dollar amounts in thousands)

	2012			2011
CASH FLOWS FROM INVESTING ACTIVITIES (continued)
Proceeds from sale of premises and equipment	$	254		$	11
Proceeds from sale of land held for sale		601			308
Loan originations and payments, net		(19,633	)		(12,825	)
Additions to premises and equipment		(1,192	)		(474	)
Proceeds from life insurance surrender		—			1,698
Proceeds from life insurance death benefit		870			457
Rabbi Trust initial funding		—			(1,626	)
Net change in federal funds sold		513			1
Dividend from UFS Subsidiary		763			319
Branch sale – Premier, net cash and cash equivalents		(26,675	)		—
Net cash provided by investing activities		6,374			26,506
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(1,081	)		5,778
Net change in federal funds purchased and repurchase agreements		(25,511	)		1,227
Repayments on Federal Home Loan Bank advances		(15,000	)		(15,000	)
Tax benefit from vesting of restricted stock units		13			—
Cash dividends paid		(317	)		—
Net cash used in financing activities		(41,896	)		(7,995	)
Net change in cash		(26,931	)		39,021
Beginning cash		86,980			54,555
Ending cash	$	60,049		$	93,576
Supplemental cash flow information:
Interest paid	$	5,617		$	7,363
Income taxes paid (refunded), net		1,800			(2,526	)
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties	$	8,193		$	2,827
Mortgage servicing rights resulting from sale of loans		230			117

8

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

1.	The consolidated financial statements of Baylake Corp. (the “Company”) include the accounts of the Company, its wholly owned subsidiary Baylake Bank (the “Bank”), and the Bank’s wholly owned subsidiaries: Baylake Investments, Inc., and Baylake Insurance Agency, Inc. During the third quarter of 2012, operations of Baylake Insurance Agency, Inc. were discontinued and the book of business was sold to an unrelated third party. No cash proceeds were received in the transaction; however the Bank will receive future commissions for a three-year period based on insurance policy renewals on the sold book of business. The accompanying interim consolidated financial statements should be read in conjunction with the 2011 Annual Report on Form 10-K of the Company. 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 accounting principles generally accepted in the United States of America (“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 of operations for the three and nine month periods ending September 30, 2012 and 2011. The consolidated results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events through November 7, 2012, the date the interim consolidated financial statements were issued.
2.	Use of Estimates
	To prepare consolidated financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, provision for letter of credit impairment loss, value of foreclosed properties, other than temporary impairment of securities, mortgage servicing rights, income tax expense, and fair values of financial instruments are particularly subject to change.
3.	Earnings Per Share
	Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised, stock awards were fully vested, and promissory notes were converted, resulting in the issuance of common stock that then shared in the Company’s earnings, is computed by dividing net income as adjusted for the income impact of assumed conversions 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 per share:

9

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

EARNINGS PER SHARE
(Dollar amounts in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
(Numerator):
Net income available to common stockholders	$	2,085		$	1,297		$	4,711		$	2,723
Plus: Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		149			—			446			—
Income available to common stockholders plus assumed conversions	$	2,234		$	1,297		$	5,157		$	2,723
(Denominator):
Weighted average number of common shares outstanding-basic		7,927,347			7,911,539			7,922,756			7,911,539
Plus: Incremental shares of assumed conversions:
Dilutive effect of stock options		7,964	(1)		—	(1)		1,922	(2)		—	(2)
Dilutive effect of restricted stock units		27,529			5,215			20,110			3,500
Dilutive effect of convertible promissory notes(3)		1,890,000			—			1,890,000			—
Dilutive potential common shares		1,925,493			5,215			1,912,032			3,500
Adjusted weighted-average shares		9,852,840			7,916,754			9,834,788			7,915,039
Basic Earnings Per Share	$	0.26		$	0.16		$	0.59		$	0.34
Diluted Earnings Per Share	$	0.23		$	0.16		$	0.52		$	0.34

	(1)	At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.
	(2)	At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.
	(3)	At September 30, 2012 and 2011, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”). The Convertible Notes are convertible into shares of common stock of the Company 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. On October 1, 2014, one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not occurred. At September 30, 2012, the entire 1,890,000 common shares are included since the average market price per share for the three months and nine months ended September 30, 2012 exceeded the conversion price of $5.00 per share. For the three months and nine months ended September 30, 2011, the common shares are not included due to their anti-dilutive effect.
4.	Recent Accounting Pronouncements
	In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU was effective for the first interim or annual period beginning on or after December 15, 2011. The provisions of this guidance had no impact on the consolidated financial condition, results of operation or liquidity of the Company.

10

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

	In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The provisions of this guidance did not have a significant impact on the consolidated financial condition, results of operations or liquidity of the Company.
	In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The provisions of this guidance will not have a significant impact on the consolidated financial condition, results of operation or liquidity of the Company.
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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The methods and assumptions used to estimate fair value are described below.

Securities available for sale - 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). For other securities not able to be priced on matrix pricing, outside third parties are relied upon (Level 3 inputs). None of the Company’s securities available for sale at September 30, 2012 or December 31, 2011 were measured using Level 1 inputs.

Mortgage servicing rights - 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. The Company compares the valuation model inputs and results to published industry data for reasonableness (Level 2 inputs).

11

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

Foreclosed properties - 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. Foreclosed properties are adjusted to fair value less estimated costs to sell upon transfer to foreclosed properties, establishing a new cost basis when fair value is lower than the carrying cost on date of transfer. Subsequently, foreclosed properties are carried at the lower of cost or fair value less estimated costs to sell (Level 3 inputs).

Impaired loans - the fair value of impaired loans is based on review of comparable collateral in similar marketplaces (Level 3 inputs) 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 less estimated costs to sell. Impaired loans are not carried at fair value if there is sufficient collateral or if expected repayments exceed the recorded investments of such loans.

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

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

	September 30, 2012		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	$	2,024	$	—	$	2,024	$	—
Mortgage-backed securities		172,390		—		168,759		3,631
Asset-backed securities		4,522		—		4,522		—
Obligations of states and political subdivisions		58,816		—		58,816		—
Private placement and corporate bonds		7,792		—		7,792		—
Other securities		1,654		—		1,654		—
Total securities available for sale		247,198		—		243,567		3,631
Mortgage servicing rights		706		—		706		—
Total	$	247,904	$	—	$	244,273	$	3,631
	December 31, 2011		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	$	14,138	$	—	$	14,138	$	—
Mortgage-backed securities		193,592		—		177,330		16,262
Asset-backed securities		4,969		—		4,969		—
Obligations of states and political subdivisions		57,766		—		57,766		—
Private placement and corporate bonds		12,212		—		12,212		—
Other securities		1,654		—		1,654		—
Total securities available for sale		284,331		—		268,069		16,262
Mortgage servicing rights		634		—		634		—
Total	$	284,965	$	—	$	268,703	$	16,262

12

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

The following table presents additional information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	For the three month period ended September 30, 2012			For the nine month period ended September 30, 2012
Balance, beginning of period	$	4,543		$	16,262
Transfer into Level 3		—			—
Net unrealized gains		15			561
Transfer out of Level 3		—			(10,593	)
Principal payments		(927	)		(2,599	)
Balance, end of period	$	3,631		$	3,631

The transfers out of Level 3 occurred during the first quarter and were the result of the availability of quoted prices on a portion of the securities that were Level 3 at December 31, 2011.

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

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

	September 30, 2012		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,488	$	—	$	—	$	4,488
Foreclosed properties, net		10,451		—		—		10,451
Total	$	14,939	$	—	$	—	$	14,939
	December 31, 2011		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,685	$	—	$	—	$	4,685
Foreclosed properties, net		12,119		—		—		12,119
Total	$	16,804	$	—	$	—	$	16,804

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 Company’s fair value.

13

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

The following table presents the carrying amount and estimated fair value of certain financial instruments:

	(Dollar amounts in thousands)
	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	60,049	$	60,049	$	86,980	$	86,980
Federal funds sold		—		—		513		513
Securities available for sale		247,198		247,198		284,331		284,331
Loans held for sale		2,912		2,957		1,869		1,898
Loans, net		589,940		590,873		620,377		622,967
Federal Home Loan Bank stock		3,598		3,598		6,792		6,792
Mortgage servicing rights		706		706		634		634
Foreclosed properties, net		10,451		10,451		12,119		12,119
Accrued interest receivable		3,243		3,243		3,381		3,381
FINANCIAL LIABILITIES
Deposits	$	798,774	$	799,892	$	865,187	$	851,054
Repurchase agreements		20,904		20,904		47,566		47,566
Federal Home Loan Bank advances		40,000		40,504		55,000		56,968
Subordinated debentures		16,100		16,100		16,100		16,100
Convertible promissory notes		9,450		9,630		9,450		9,387
Accrued interest payable		656		656		898		898
Off-balance sheet credit related items:
Letters of credit	$	—	$	—	$	1,995	$	1,995

The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring and non-recurring basis have been previously disclosed. The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

(a) Cash

The carrying amount of cash approximates fair value.

(b) Federal Funds Sold

The carrying amount of federal funds sold approximates fair value.

(c) Loans Held for Sale

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

(d) Cash Value of Life Insurance

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

14

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

(e) 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.

(f) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value.

(g) Deposits

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

(h) Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(i) 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.

(j) Subordinated Debentures

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

(k) Convertible Promissory Notes

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

(l) Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

(m) 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.

15

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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, 2012 and December 31, 2011 are as follows:

	September 30, 2012
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	2,024	$	7	$	—
Obligations of states and political subdivisions		58,816		4,403		(7	)
Mortgage-backed securities		172,390		5,271		(535	)
Asset-backed securities		4,522		123		(241	)
Private placement and corporate bonds		7,792		712		—
Other securities		1,654		—		—
Totals	$	247,198	$	10,516	$	(783	)

	December 31, 2011
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	14,138	$	49	$	—
Obligations of states and political subdivisions		57,766		4,128		—
Mortgage-backed securities		193,592		4,233		(1,984	)
Asset-backed securities		4,969		132		(451	)
Private placement and corporate bonds		12,212		159		(17	)
Other securities		1,654		—		—
Totals	$	284,331	$	8,701	$	(2,452	)

At September 30, 2012 and December 31, 2011, the mortgage-backed securities portfolio was $172.4 million, (69.7%) and $193.6 million, (68.1%), respectively, of the investment portfolios. Approximately 12.1%, or $20.9 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued and guaranteed by the Government National Mortgage Association (“GNMA”), the Small Business Administration (“SBA”) or the United States Department of Veterans Affairs (“VA”); agencies of the United States government. An additional 65.0%, or $112.1 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued by either the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”); United States government-sponsored agencies. Non-agency mortgage-backed securities present a level of credit risk that does not exist currently with United States government agency-backed securities, but only comprised approximately 22.8%, or $39.4 million, of the outstanding mortgage-backed securities at September 30, 2012. Management evaluates these non-agency mortgage-backed securities at least quarterly and more frequently when economic or market concerns warrant such evaluation.

16

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

Securities with unrealized losses at September 30, 2012 and December 31, 2011, 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):

	September 30, 2012
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	601	$	(7	)	$	—	$	—		$	601	$	(7	)
Mortgage-backed securities		21,598		(134	)		6,770		(401	)		28,368		(535	)
Asset-backed securities		—		—			3,364		(241	)		3,364		(241	)
Total securities temporarily impaired	$	22,199	$	(141	)	$	10,134	$	(642	)	$	32,333	$	(783	)

	December 31, 2011
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Mortgage-backed securities	$	46,955	$	(964	)	$	9,363	$	(1,020	)	$	56,318	$	(1,984	)
Asset-backed securities		—		—			3,645		(451	)		3,645		(451	)
Private placement and corporate bonds		3,504		(17	)		—		—			3,504		(17	)
Total securities temporarily impaired	$	50,459	$	(981	)	$	13,008	$	(1,471	)	$	63,467	$	(2,452	)

At September 30, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises two securities. The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

At December 31, 2011, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises three securities. The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

Management 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 is 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 consolidated statement of operations. Unrealized losses other than credit losses will continue to be recognized in other comprehensive income, net of tax. Unrealized losses reflected in the preceding tables have not been included in the results of operations because the unrealized losses were not deemed other-than-temporary. Management does not have the intent to sell the securities and has determined that it is not more likely than not that the Company will 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.

17

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

7.	Loans
	Loans held for investment are summarized as follows (dollar amounts in thousands):

	September 30, 2012			December 31, 2011
Construction	$	50,148		$	53,606
Real estate-mortgage		132,550			143,456
Real estate-commercial		294,946			317,198
Commercial		98,820			91,750
Consumer		8,172			8,809
Municipal		16,356			16,577
Gross loans		600,992			631,396
Less: Deferred origination fees, net of costs		(394	)		(381	)
Less: Allowance for loan losses		(10,658	)		(10,638	)
Loans, net	$	589,940		$	620,377

Loans having a carrying value of $100.4 million and $105.1 million are pledged as collateral for borrowings from the FHLB at September 30, 2012 and December 31, 2011, respectively.

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2012 is as follows (dollar amounts in thousands):

	Construction			Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer			Municipal		Not Specifically Allocated			Total
Allowance for Loan Losses:
Beginning balance	$	1,231		$	1,995		$	5,467		$	770		$	161		$	—	$	1,014		$	10,638
Charge-offs		(637	)		(828	)		(3,940	)		(259	)		(90	)		—		—			(5,754	)
Recoveries		18			38			491			76			26			—		—			649
Provision		418			998			4,253			133			36			—		(713	)		5,125
Ending balance	$	1,030		$	2,203		$	6,271		$	720		$	133		$	—	$	301		$	10,658
Loans:
Ending balance	$	50,148		$	132,550		$	294,552		$	98,820		$	8,172		$	16,356	$	—		$	600,598
ALL		(1,030	)		(2,203	)		(6,271	)		(720	)		(133	)		—		(301	)		(10,658	)
Recorded investment	$	49,118		$	130,347		$	288,281		$	98,100		$	8,039		$	16,356	$	(301	)	$	589,940
Ending balance:
Individually evaluated	$	1,027		$	2,865		$	12,488		$	35		$	24		$	—	$	—		$	16,439
Collectively evaluated		49,121			129,685			282,064			98,785			8,148			16,356		—			584,159
Total	$	50,148		$	132,550		$	294,552		$	98,820		$	8,172		$	16,356	$	—		$	600,598

18

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2011 is as follows (dollar amounts in thousands):

	Construction			Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer			Municipal		Not Specifically Allocated			Total
Allowance for Loan Losses:
Beginning balance	$	1,424		$	2,103		$	6,355		$	1,189		$	391		$	—	$	40		$	11,502
Charge-offs		(373	)		(1,407	)		(856	)		(476	)		(213	)		—		—			(3,325	)
Recoveries		59			9			78			38			46			—		—			230
Provision		457			1,888			1,213			363			146			—		383			4,450
Ending balance	$	1,567		$	2,593		$	6,790		$	1,114		$	370		$	—	$	423		$	12,857
Loans:
Ending balance	$	54,999		$	137,085		$	328,868		$	91,064		$	8,869		$	15,909	$	—		$	636,794
ALL		(1,567	)		(2,593	)		(6,790	)		(1,114	)		(370	)		—		(423	)		(12,857	)
Recorded investment	$	53,432		$	134,492		$	322,078		$	89,950		$	8,499		$	15,909	$	(423	)	$	623,937
Ending balance:
Individually evaluated	$	2,853		$	2,603		$	10,853		$	404		$	164		$	—	$	—		$	16,877
Collectively evaluated		52,146			134,482			318,015			90,660			8,705			15,909		—			619,917
Total	$	54,999		$	137,085		$	328,868		$	91,064		$	8,869		$	15,909	$	—		$	636,794

A summary of past due loans at September 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

	September 30, 2012
	30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	1,656	$	1,027	$	2,684
Real estate – mortgage		1,519		2,479		3,997
Real estate – commercial		2,374		8,450		10,823
Commercial		—		35		35
Consumer		38		24		63
Municipal		—		—		—
Total	$	5,587	$	12,015	$	17,602

19

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

	December 31, 2011
	30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	435	$	4,945	$	5,380
Real estate – mortgage		845		2,676		3,521
Real estate – commercial		2,072		11,660		13,732
Commercial		41		259		300
Consumer		59		43		102
Municipal		—		—		—
Total	$	3,452	$	19,583	$	23,035

Credit Quality: Management utilizes a risk grading matrix on each of the Company’s commercial loans. Loans are graded on a scale of 1 to 7. A description of the loan grades is as follows:

0001 - Excellent risk. Borrowers of highest quality and character. Almost no risk possibility. Balance sheets are very strong with superior liquidity, excellent debt capacity and low leverage. Cash flow trends are positive and stable. Excellent ratios.

0002 - Very good risk. Good ratios in all areas. High quality borrower. Normally quite liquid. Differs slightly from a 0001 customer.

0003 - Strong in most categories. Possible higher levels of debt or shorter track record. Minimal attention required. Good management.

0004 - Better than average risk. Adequate ratios, fair liquidity, desirable customer. Proactive management. Performance trends are positive. Any deviations are limited and temporary.

0005 - Satisfactory risk. Some ratios slightly weak. Overall ability to repay is adequate. Capable and generally proactive management in all critical positions. Margins and cash flow may lack stability but trends are stable to positive. Company normally profitable year to year but may experience an occasional loss.

0006 A - Weakness detected in either management, capacity to repay or balance sheet. Erratic profitability and financial performance. Loan demands more attention. Includes loans deemed to have weaknesses and less than 90 days past due.

0006 B - Have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s collateral position at some future date. Loans rated 0006B are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Includes loans deemed to have weaknesses and less than 90 days past due.

0007 - Well defined weaknesses and trends that jeopardize the repayment of loans. Ranging from workout to legal. Includes loans that are nonaccrual and/or 90 days and over past due.

In addition to the risk grading on commercial loans, management utilizes a risk grading process on its real estate mortgage, consumer, and municipal loans when the loan becomes past due 90 days or more or is moved to nonaccrual status.

20

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

Below is a breakdown of loans by risk grading as of September 30, 2012 (dollar amounts in thousands):

	0001-0005		0006A		0006B		0007(1)		Total
Commercial	$	92,062	$	1,752	$	4,110	$	896	$	98,820
Real estate – commercial		233,372		25,913		15,604		20,057		294,946
Construction		40,955		6,031		1,905		1,257		50,148
		366,389		33,696		21,619		22,210		443,914
Real estate - mortgage		127,330		1,144		665		3,411		132,550
Consumer		8,171		—		—		1		8,172
Municipal		16,356		—		—		—		16,356
Total	$	518,246	$	34,840	$	22,284	$	25,622		600,992
Deferred origination fees, net of costs										(394	)
Total loans									$	600,598
Percent of Total Loans		86.3%		5.8%		3.7%		4.2%		100.0%

⁽¹⁾ Included in the 0007 rated loans are $9.2 million of loans that are not impaired because fair value exceeds carrying cost.

Below is a breakdown of loss by risk grading as of December 31, 2011 (dollar amounts in thousands):

	0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	84,652	$	4,618	$	1,051	$	1,429	$	91,750
Real estate – commercial		227,815		43,690		11,592		34,101		317,198
Construction		37,636		6,218		3,323		6,429		53,606
		350,103		54,526		15,966		41,959		462,554
Real estate - mortgage		137,379		391		885		4,801		143,456
Consumer		8,791		—		—		18		8,809
Municipal		16,577		—		—		—		16,577
Total	$	512,850	$	54,917	$	16,851	$	46,778		631,396
Deferred origination fees, net of costs										(381	)
Total loans									$	631,015
Percent of Total Loans		81.3%		8.7%		2.6%		7.4%		100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired.

21

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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 the consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
	The ALL consists of specific reserves on certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses 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 the Bank’s 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, nonaccrual 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 the 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.

22

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

September 30, 2012	Construction		Real Estate- Mortgage		Real Estate- Commercial		Commercial		Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$	105	$	1,958	$	2,425	$	—	$	—	$	—	$	—	$	4,488
Unpaid principal balance		194		2,332		3,636		32		—		—		—		6,194
Related allowance		89		374		1,211		32		—		—		—		1,706
With no related allowance recorded:
Recorded investment	$	833	$	533	$	8,853	$	3	$	24	$	—	$	—	$	10,246
Unpaid principal balance		833		533		8,853		3		24		—		—		10,246
Related allowance		—		—		—		—		—		—		—		—
Total:
Recorded investment	$	938	$	2,491	$	11,278	$	3	$	24	$	—	$	—	$	14,734
Unpaid principal balance		1,027		2,865		12,489		35		24		—		—		16,440
Related allowance		89		374		1,211		32		—		—		—		1,706
Average recorded investment during quarter	$	1,158	$	3,101	$	13,276	$	45	$	23	$	—	$	—	$	17,603
Interest income recognized while impaired	$	2	$	72	$	185	$	6	$	—	$	—	$	—	$	265
December 31, 2011	Construction		Real Estate- Mortgage		Real Estate- Commercial		Commercial		Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$	2,667	$	904	$	1,103	$	—	$	11	$	—	$	—	$	4,685
Unpaid principal balance		2,852		1,096		1,702		54		16		—		—		5,720
Related allowance		185		192		599		54		5		—		—		1,035
With no related allowance recorded:
Recorded investment	$	2,093	$	3,011	$	30,156	$	612	$	—	$	—	$	—	$	35,872
Unpaid principal balance		2,093		3,011		30,156		612		—		—		—		35,872
Related allowance		—		—		—		—		—		—		—		—
Total:
Recorded investment	$	4,760	$	3,915	$	31,259	$	612	$	11	$	—	$	—	$	40,557
Unpaid principal balance		4,945		4,107		31,858		666		16		—		—		41,592
Related allowance		185		192		599		54		5		—		—		1,035
Average recorded investment during quarter	$	4,942	$	4,327	$	30,080	$	529	$	15	$	—	$	—	$	39,893
Interest income recognized while impaired	$	277	$	311	$	1,512	$	66	$	21	$	—	$	—	$	2,187

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

23

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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

NONPERFORMING LOANS

	September 30, 2012		June 30, 2012		March 31, 2012		December 31, 2011		September 30, 2011
Nonaccrual loans	$	8,203	$	11,513	$	14,301	$	15,242	$	19,026
Loans restructured in a troubled debt restructuring, nonaccrual		3,812		8,159		8,158		4,341		5,287
Total nonperforming loans (“NPLs”)	$	12,015	$	19,672	$	22,459	$	19,583	$	24,313
Restructured loans, accruing	$	4,425	$	4,715	$	6,469	$	22,009	$	20,461

During the quarter ended September 30, 2012, $4.8 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $2.9 million were received. The remaining balance of $1.9 million was charged off.

9.	Foreclosed Properties, Net
	Foreclosed properties are summarized as follows (dollar amounts in thousands):

	For the nine months ended September 30,
	2012			2011
Beginning balance	$	14,913		$	19,934
Transfer of net realizable value to foreclosed properties		8,193			2,827
Sale proceeds		(7,519	)		(6,798	)
Net gain from disposal of foreclosed properties		183			198
Valuation allowance related to properties disposed		(1,959	)		(2,776	)
Total foreclosed properties		13,811			13,385
Valuation allowance for losses		(3,360	)		(2,723	)
Total foreclosed properties, net	$	10,451		$	10,662

          Changes in the valuation allowance for losses on foreclosed properties were as follows (dollar amounts in thousands):

	For the nine months ended September 30,
	2012			2011
Beginning balance	$	2,794		$	3,982
Provision charged to operations		2,525			1,517
Amounts related to properties disposed		(1,959	)		(2,776	)
Balance at end of period	$	3,360		$	2,723

24

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

10.	Income Taxes
	In accordance with the accounting guidance for income taxes, deferred income 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 income 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 income 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.
	Management regularly reviews the carrying amount of the Company’s deferred income 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 deferred income tax assets will not be realized in future periods, a deferred income tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred income 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 evaluation is based on current tax laws as well as management’s expectations of future performance. At September 30, 2012 and December 31, 2011, the Company determined that no valuation allowance was required to be taken against the deferred income tax asset other than a valuation allowance to reduce its state net operating loss carry forwards to an amount which the Company believes the benefit will more likely than not be realized. The Company continues to assess the amount of tax benefits it may realize.
	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. Accounting guidance related to uncertainty in income taxes 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, the Company 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.
	As of September 30, 2012, the gross unrecognized tax benefits represent estimated tax and interest costs related to a pending IRS audit for the 2009 tax year. In January 2012, the Company and the IRS reached a tentative settlement agreement to finalize the audit. The Company paid interest related to the timing of deductions taken for income tax purposes. The liability amount recorded by the Company is considered adequate to cover the proposed settlement amount.

25

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollar amounts in thousands):

	For the three months ended September 30, 2012		For the nine months ended September 30, 2012
Balance at beginning of period	$	140	$	174
Additions for tax positions of prior years		—		—
Settlements		—		(34	)
Balance, September 30, 2012	$	140	$	140

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

          Deferred income taxes – Available for sale securities

	For the nine months ended September 30,
	2012			2011
Balances at beginning of period	$	(2,468	)	$	(659	)
Net change during period		(1,376	)		(2,419	)
Balances at end of period	$	(3,844	)	$	(3,078	)

          Deferred income taxes – Other than available for sale securities

	For the nine months ended September 30,
	2012			2011
Balances at beginning of period	$	9,613		$	9,861
Net change during period		(282	)		313
Balances at end of period	$	9,331		$	10,174

11.	Equity Investment
	The Bank owns a 49.8% interest (500 shares) in United Financial Services, Inc. (“UFS”), a data processing service. In addition to the ownership interest, the Bank and UFS have a common member on each of their respective Boards of Directors. The investment in this entity is carried under the equity method of accounting and the pro rata share of its net income is included in noninterest income in the consolidated statement of operations. The carrying value of the investment in UFS was $4.1 million at September 30, 2012 and $4.3 million at December 31, 2011. The current book value of UFS is approximately $8,150 per share.
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 with servicing retained. Mortgage servicing rights (“MSRs”) are recorded at fair value when loans are sold in the secondary market with servicing retained. On a quarterly basis, MSRs are valued based on available market information.

26

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

          Changes in the carrying value of MSRs are as follows (dollar amounts in thousands):

MORTGAGE SERVICING RIGHTS

	For the three months ended September 30,						For the nine months ended September 30,
	2012			2011			2012			2011
Balance at beginning of period	$	693		$	722		$	634		$	746
Additions from loans sold with servicing retained		103			28			230			117
Changes in valuation		(25	)		(74	)		1			(73	)
Loan payments and payoffs		(65	)		(38	)		(159	)		(152	)
Fair value of MSRs at the end of period	$	706		$	638		$	706		$	638

	Unpaid principal balance of loans serviced for others was $99.9 million and $81.8 million at September 30, 2012 and September 30, 2011, respectively.
13.	Promissory Notes
	During 2009 and 2010, the Company issued 10% Convertible Notes due June 30, 2017 totaling $9.45 million. 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 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 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 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.

27

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

14.	Troubled Debt Restructuring
	A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that would not otherwise be considered except for the borrower’s financial difficulties. A TDR may be either accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months.
	(Dollar amounts in thousands)

	Construction		Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer		Municipal		Total
Accruing
December 31, 2011	$	—	$	1,432		$	20,203		$	374		$	—	$	—	$	22,009
Principal payments		—		(697	)		(332	)		(374	)		—		—		(1,403	)
Charge-offs		—		(195	)		—			—			—		—		(195	)
Advances		—		—			45			—			—		—		45
New restructured		—		387			1,017			—			—		—		1,404
Transferred out of TDRs		—		(40	)		(7,592	)		—			—		—		(7,632	)
Transfers to nonaccrual		—		(500	)		(9,303	)		—			—		—		(9,803	)
September 30, 2012	$	—	$	387		$	4,038		$	—		$	—	$	—	$	4,425
Nonaccrual
December 31, 2011	$	—	$	—		$	4,325		$	16		$	—	$	—	$	4,341
Principal payments		—		—			(3,889	)		(1	)		—		—		(3,890	)
Charge-offs		—		—			(2,871	)		—			—		—		(2,871	)
Advances		—		—			189			—			—		—		189
New restructured		—		—			—			—			—		—		—
Transfers to foreclosed properties		—		—			(3,760	)		—			—		—		(3,760	)
Transfers from accruing		—		500			9,303			—			—		—		9,803
September 30, 2012	$	—	$	500		$	3,297		$	15		$	—	$	—	$	3,812
Totals
December 31, 2011	$	—	$	1,432		$	24,528		$	390		$	—	$	—	$	26,350
Principal payments		—		(697	)		(4,221	)		(375	)		—		—		(5,293	)
Charge-offs		—		(195	)		(2,871	)		—			—		—		(3,066	)
Advances		—		—			234			—			—		—		234
New restructured		—		387			1,017			—			—		—		1,404
Transfers out of TDRs		—		(40	)		(7,592	)		—			—		—		(7,632	)
Transfers to foreclosed properties		—		—			(3,760	)		—			—		—		(3,760	)
September 30, 2012	$	—	$	887		$	7,335		$	15		$	—	$	—	$	8,237

28

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

During the quarter ended September 30, 2012, $1.1 million of loans were transferred to restructured status. All of these loans were restructured due to payment schedule changes. Also during the quarter, $4.8 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $2.9 million were received. The remaining balance of $1.9 million was charged off.

A summary of troubled debt restructurings as of September 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

	September 30, 2012				December 31, 2011
	Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		—	$	—		—	$	—
Real estate – mortgage		5		887		3		1,432
Real estate – commercial		13		7,335		24		24,528
Commercial		1		15		2		390
Consumer		—		—		—		—
Municipal		—		—		—		—
Total		19	$	8,237		29	$	26,350

A summary of troubled debt restructurings as of September 30, 2012 by restructure type is as follows (dollar amounts in thousands):

	Accruing		Nonaccruing		Total
A/B split	$	78	$	3,798	$	3,876
Payment schedule changes		2,204		14		2,218
Interest rate reduction		2,143		—		2,143
Total	$	4,425	$	3,812	$	8,237

15.

Supervisory Agreement

Effective December 29, 2010, the Company and the Bank entered into a Written Agreement (the “Written Agreement”) with the Federal Reserve Bank and the Wisconsin Department of Financial Institutions (“WDFI”). On June 12, 2012, the Company and Bank announced the termination of the Written Agreement. In place of the Written Agreement, on June 19, 2012 the Company and the Bank entered into an informal arrangement with the Federal Reserve and WDFI, which requires the Company and the Bank to (i) refrain from declaring or paying dividends absent prior regulatory approval, (ii) submit capital plans as evidence of sufficient capital, and (iii) submit annual business plan and budget at least 30 days prior to the beginning of the year. As of September 30, 2012, the arrangement remains in place.

29

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

16. Commitments and Contingencies

The following is a summary of the Company’s off-balance sheet commitments, all of which were lending-related commitments:

LENDING RELATED COMMITMENTS
(Dollar amounts in thousands)

	September 30, 2012		December 31, 2011
Commitments to fund unused home equity line loans	$	64,066	$	56,952
Commitments to fund 1-4 family loans		15,675		3,034
Commitments to fund residential real estate construction loans		1,457		1,114
Commitments unused on commercial lines of credit loans		176,974		150,884
Commitments unused on consumer lines of credit loans		9,579		12,814
Total commitments to extend credit	$	267,751	$	224,798
Financial standby letters of credit	$	10,042	$	12,468

17.

Sale of Branches

On September 7, 2012, the Bank sold four branches located in the central part of Wisconsin to Premier Community Bank (“Premier”). The sale reduced the Bank’s number of branches from 27 to 23. Included in the sale to Premier was $65.2 million of deposit balances, $36.9 million of loan balances, $1.2 million of repurchase agreement balances, and $2.0 million of fixed assets. A net gain of $0.8 million was recognized from the sale.

30

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

General

Baylake Corp. (“we,” “us” or “our”) 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 (the “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. The 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, 2012 and December 31, 2011 and our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011. 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, 2011.

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, 2011, which are incorporated herein by reference, and other risks that may be identified or discussed in this Form 10-Q.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening safety and soundness for the financial services sector. We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Branch Sale

On June 13, 2012, the Bank entered into a branch purchase and sale agreement with Premier Community Bank (“Premier”) whereby Premier agreed to purchase the Bank’s branch operations in Waupaca, King, Manawa and Fremont, Wisconsin. On September 7, 2012, the transaction, which included total deposits of $65.2 million and total loans of $36.9 million, closed and resulted in a gain on sale of $0.8 million. The decision to divest of the four branches is aligned with our strategic initiative to improve operational efficiency and profitability.

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.

31

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 (i) changes in the nature, volume and terms of loans, (ii) changes in lending personnel, (iii) changes in the quality of the loan review function, (iv) changes in nature and volume of past-due, nonaccrual and/or classified loans, (v) changes in concentration of credit risk, (vi) changes in economic and industry conditions, (vii) changes in legal and regulatory requirements, (viii) unemployment and inflation statistics, and (ix) 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 regulatory credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

Provision for Impairment of Standby Letters of Credit: The provision for losses on standby letters of credit represents management’s estimate of probable incurred losses with respect to off-balance sheet standby letters of credit which are used to support our customers’ business arrangements with an unrelated third party. In the event of further impairment, a provision for impairment of standby letters of credit is charged to operations based on management’s periodic evaluation of the factors affecting the standby letters of credit.

Foreclosed Properties: Foreclosed properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of carrying cost or fair value less estimated costs to sell, establishing a new cost basis. Fair value is determined using a variety of market information including, but not limited to, appraisals, professional market assessments and real estate tax assessment information. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed.

Income Tax Accounting: The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of our operations and reported earnings.

Goodwill: Goodwill represents the excess of the cost of businesses acquired over fair value of net identifiable assets at the date of acquisition. Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if deemed appropriate. Goodwill is subject to a periodic assessment by applying a fair value test based upon a two-step method. The first step of the process compares the fair value of the reporting unit with its carrying value, including any goodwill. During 2011, we, with the assistance of a third party valuation firm determined an estimated cash fair value of our common stock. Consideration was given to our nature and history, the competitive and economic outlook for our 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: (i) net asset value – defined as our net worth, (ii) market value – defined as the price at which knowledgeable buyers and sellers would agree to buy and sell our common stock, and (iii) 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 considered to be in excess of the book value. Since the valuation range obtained from that firm exceeded our carrying value including goodwill, we did not fail step one of the impairment test established under accounting principles generally accepted in the United States of America and, therefore, no goodwill impairment was recognized. If the carrying amount would have exceeded fair value, we would have performed the second step to measure the amount of impairment loss. Based on the valuation obtained as of September 30, 2011, our valuation exceeded our carrying value by a range of 23% to 33%. As of September 30, 2012, there are no conditions that would require goodwill impairment to be reevaluated.

32

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, 2012 and 2011.

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

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net income, as reported	$	2,085		$	1,297		$	4,711		$	2,723
Earnings per share-basic, as reported	$	0.26		$	0.16		$	0.59		$	0.34
Earnings per share-diluted, as reported	$	0.23		$	0.16		$	0.52		$	0.34
Cash dividends declared per share	$	0.02		$	—		$	0.04		$	—
Return on average assets		0.79	%		0.49	%		0.60	%		0.35	%
Return on average equity		9.25	%		6.25	%		7.14	%		4.55	%
Efficiency ratio (1)		66.80	%		70.60	%		72.43	%		74.94	%

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

Net income of $2.1 million for the three months ended September 30, 2012 increased from net income of $1.3 million for the comparable period in 2011. Net interest income was $8.1 million for the quarter ended September 30, 2012 and the comparable quarter last year, resulting from a $0.7 million reduction in interest income offset by a $0.7 million reduction in interest expense. A PFLL of $1.1 million was charged to operations for the third quarter of 2012, which is $0.1 million lower than the $1.2 million PFLL taken during the comparable quarter of 2011. Noninterest income increased by $1.1 million in the third quarter of 2012 versus the comparable quarter of 2011, primarily due to an increase of $0.8 million in net gains on the sale of branches and a $0.4 million increase in gain on sale of mortgage loans. Noninterest expense remained stable at $7.2 million for the third quarter of 2012 compared to the similar quarter last year.

Net income of $4.7 million for the nine months ended September 30, 2012 increased from net income of $2.7 million for the comparable period in 2011. Net interest income increased $0.5 million for the nine months ended September 30, 2012 versus the comparable period last year, resulting from a $2.0 million reduction in interest expense partially offset by a $1.5 million reduction in interest income. A PFLL of $5.1 million was charged to operations for the first nine months of 2012, which is $0.6 million higher than the $4.5 million PFLL taken during the comparable period of 2011. Noninterest income increased by $3.5 million in the first nine months of 2012 versus the comparable period of 2011, primarily due to an increase of $1.2 million in net gains on the sale of securities, a $0.6 million increase in gain on sale of fixed assets, including land held for sale, a $0.7 million gain on the sale of loans, a $0.8 million gain on the sale of branches, and a $0.5 million gain on a death benefit from a life insurance policy. Noninterest expense increased $0.2 million between the periods primarily due to an increase of $0.8 million in expenses related to the operation of other real estate and an increase of $0.2 million in salaries and employee benefits expense, partially offset by a $0.8 million decrease in FDIC insurance expense.

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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.

Net interest income on a tax-equivalent basis was $8.4 million for the three months ended September 30, 2012, similar to the same period in 2011. The similar results for the third quarter of 2012 resulted primarily from a $0.7 million decrease in interest expense in funding costs on interest-bearing liabilities, offset by a decrease in interest income on interest-earning assets of $0.7 million. Average noninterest-bearing demand deposits increased from $103.3 million during the third quarter of 2011 to $122.0 million for the comparable period in 2012.

Net interest income on a tax-equivalent basis was $25.4 million for the nine months ended September 30, 2012 compared to $25.0 million for the same period in 2011. The increase resulted primarily from a decrease in funding costs on interest-bearing liabilities, partially offset by a decrease in interest income on interest-earning assets. Average noninterest-bearing demand deposits increased from $92.9 million during the first nine months of 2011 to $108.7 million for the comparable period in 2012.

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 5 bps to 3.41% for the third quarter of 2012 compared to the same period in 2011, resulting primarily from a 32 bps decrease in the cost of interest-bearing liabilities from 1.09% to 0.77%, partially offset by a 27 bps decrease in the yield on earning assets from 4.45% to 4.18%. 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.

Interest rate spread decreased 2 bps to 3.43% for the first nine months of 2012 compared to the same period in 2011, resulting primarily from a 34 bps decrease in the yield on earning assets from 4.61% to 4.27%, partially offset by a 32 bps decrease in the cost of interest-bearing liabilities from 1.16% to 0.84%.

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 2012 was 3.52%, up 4 bps from 3.48% for the comparable period in 2011. For the nine months ended September 30, 2012, the net interest margin was 3.53%, down 2 bps from 3.55% for the comparable period in 2011.

For the three months ended September 30, 2012, average interest-earning assets decreased $4.8 million from the same period in 2011. Decreases in average loans of $0.7 million (0.1%), federal funds sold and interest-bearing due from financial institutions balances of $8.8 million (10.8%), partially offset by increases in taxable and tax exempt securities of $4.7 million (1.9%) accounted for a majority of the net decrease.

For the nine months ended September 30, 2012, average interest-earning assets increased $23.9 million from the same period in 2011. Increases in average loans of $5.8 million (0.9%), federal funds sold and interest-bearing due from financial institutions balances of $4.1 million (8.0%) and in taxable securities of $10.7 million (4.9%) accounted for a majority of the increase.

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

	Three months ended September 30, 2012							Three months ended September 30, 2011
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			AverageBalance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Average Earning Assets:
Loans, net 1,2	$	624,991	$	7,886		5.02	%	$	625,684	$	8,348		5.29	%
Taxable securities		208,467		1,493		2.86	%		205,932		1,747		3.39	%
Tax exempt securities 1		44,932		566		5.04	%		42,765		568		5.31	%
Federal funds sold and interest-bearing due from financial institutions		72,767		44		0.24	%		81,582		51		0.25	%
Total earning assets		951,157		9,989		4.18	%		955,963		10,714		4.45	%
Noninterest earning assets		94,128							93,758
Total assets	$	1,045,285						$	1,049,721
LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Interest-bearing liabilities:
Total interest-bearing deposits	$	727,776		1,029		0.56	%	$	745,786		1,749		0.93	%
Customer repurchase agreements		25,660		13		0.19	%		28,499		23		0.32	%
Federal Home Loan Bank advances		47,011		230		1.95	%		55,000		261		1.88	%
Convertible promissory notes		9,450		245		10.38	%		9,450		245		10.37	%
Subordinated debentures		16,100		75		1.83	%		16,100		66		1.63	%
Total interest-bearing liabilities		825,997		1,592		0.77	%		854,835		2,344		1.09	%
Demand deposits		122,015							103,330
Accrued expenses and other liabilities		7,632							9,158
Stockholders’ equity		89,641							82,398
Total liabilities and stockholders’ equity	$	1,045,285						$	1,049,721
Net interest income			$	8,397						$	8,370
Interest rate spread (3)						3.41	%						3.36	%
Net interest margin (4)						3.52	%						3.48	%

(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 nonaccrual 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.

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

	Nine months endedSeptember 30, 2012							Nine months ended September 30, 2011
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Average Earning Assets:
Loans, net 1,2	$	632,574	$	23,915		5.05	%	$	626,735	$	25,210		5.38	%
Taxable securities		231,379		5,111		2.95	%		220,686		5,376		3.25	%
Tax exempt securities 1		44,559		1,693		5.07	%		41,298		1,710		5.52	%
Federal funds sold and interest-bearing due from financial institutions		54,673		97		0.24	%		50,606		90		0.24	%
Total earning assets		963,185		30,816		4.27	%		939,325		32,386		4.61	%
Noninterest earning assets		92,811							96,793
Total assets	$	1,055,996						$	1,036,118
LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Interest-bearing liabilities:
Total interest-bearing deposits	$	743,938		3,618		0.65	%	$	742,163		5,577		1.00	%
Short-term borrowings		32		—		0.67	%		—		—		—	%
Customer repurchase agreements		29,176		49		0.22	%		27,198		65		0.32	%
Federal Home Loan Bank advances		52,318		746		1.90	%		59,487		833		1.87	%
Convertible promissory notes		9,450		735		10.38	%		9,450		735		10.37	%
Subordinated debentures		16,100		228		1.86	%		16,100		200		1.65	%
Total interest-bearing liabilities		851,014		5,376		0.84	%		854,398		7,410		1.16	%
Demand deposits		108,670							92,890
Accrued expenses and other liabilities		8,235							8,860
Stockholders’ equity		88,077							79,970
Total liabilities and stockholders’ equity	$	1,055,996						$	1,036,118
Net interest income			$	25,440						$	24,976
Interest rate spread (3)						3.43	%						3.45	%
Net interest margin (4)						3.53	%						3.55	%

(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 nonaccrual 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.

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

The following table presents an analysis of changes in net interest income resulting from changes in average volumes in interest-earning assets and interest-bearing liabilities, and average rates earned and paid for the three months ended September 30, 2012 compared to the three months ended September 30, 2011:

	Increase (Decrease) due to (1)
	Volume			Rate			Net
Interest income:
Loans	$	(174	)	$	(288	)	$	(462	)
Taxable securities		(43	)		(211	)		(254	)
Tax exempt securities		112			(114	)		(2	)
Federal funds sold and interest-bearing due from financial institutions		(21	)		14			(7	)
Total interest-earning assets	$	(126	)	$	(599	)	$	(725	)
Interest expense:
Total interest-bearing deposits	$	(661	)	$	(59	)	$	(720	)
Repurchase agreements/short-term borrowings		(8	)		(2	)		(10	)
FHLB advances		(155	)		124			(31	)
Subordinated debentures		—			9			9
Total interest-bearing liabilities	$	(824	)	$	72		$	(752	)
Net interest income	$	698		$	(671	)	$	27

⁽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.

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 91.0% and 91.1% for the three months ended September 30, 2012 and 2011, respectively.

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

The following table presents an analysis of changes in net interest income resulting from changes in average volumes in interest-earning assets and interest-bearing liabilities, and average rates earned and paid for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011:

	Increase (Decrease) due to (1)
	Volume			Rate			Net
Interest income:
Loans	$	172		$	(1,467	)	$	(1,295	)
Taxable securities		146			(411	)		(265	)
Tax exempt securities		129			(146	)		(17	)
Federal funds sold and interest-bearing due from financial institutions		7			—			7
Total interest-earning assets	$	454		$	(2,024	)	$	(1,570	)
Interest expense:
Total interest-bearing deposits	$	(388	)	$	(1,571	)	$	(1,959	)
Repurchase agreements/short-term borrowings		4			(20	)		(16	)
FHLB advances		(102	)		15			(87	)
Subordinated debentures		—			28			28
Total interest-bearing liabilities	$	(486	)	$	(1,548	)	$	(2,034	)
Net interest income	$	940		$	(476	)	$	464

⁽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.

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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 91.2% and 90.7% for the nine months ended September 30, 2012 and 2011, respectively.

Provision for Loan Losses:

The PFLL is the periodic cost of providing an allowance for probable and inherent losses in our loan portfolio. The ALL consists of specific and general components. Our internal risk system is used to identify loans that meet the criteria for being “impaired” as defined in the accounting guidance. The specific component relates to loans that are individually classified as impaired and where expected cash flows are less than carrying value. The general component covers 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, nonaccrual 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 PFLL for the quarter ended September 30, 2012 was $1.1 million compared to $1.2 million for the third quarter of 2011. New impairments of $0.1 million on loans not previously identified with associated loan balances of $0.2 million were recorded during the third quarter of 2012. The PFLL for the nine months ended September 30, 2012 was $5.1 million compared to $4.5 million for the nine months ended September 30, 2011.

Net loan charge-offs for the nine months ended September 30, 2012 and 2011 were $5.8 million and $3.1 million, respectively. During the third quarter of 2012, a $2.0 million charge off was taken related to a sale of a commercial customer’s business. This sale also reduced nonperforming loans and nonperforming assets by $4.8 million. Net annualized charge-offs to average loans were 1.56% for the nine months ended September 30, 2012 compared to 0.66% for the same period in 2011. For the nine months ended September 30, 2012, nonperforming loans decreased by $7.6 million (38.7%) to $12.0 million from $19.6 million at December 31, 2011. Refer to the “Financial Condition - Risk Management and the Allowance for Loan Losses” and “Financial Condition - Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to nonperforming loans. Our management believes that the ALL at September 30, 2012 and the related PFLL charged to earnings for the quarter and nine months ended September 30, 2012 are appropriate in light of the present condition of the loan portfolio and the amount and quality of the collateral supporting nonperforming loans. We continue to monitor nonperforming loan relationships and will make additional PFLLs, 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.

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Noninterest Income:

The following table reflects the various components of noninterest income for the three and nine month periods ended September 30, 2012 and 2011, respectively.

NONINTEREST INCOME
(Dollar amounts in thousands)

	Three months ended									Nine months ended
	September 30, 2012			September 30, 2011			% Change			September 30, 2012			September 30, 2011			% Change
Fees from fiduciary services	$	242		$	217			11.5	%	$	765		$	720			6.3	%
Fees from loan servicing		151			139			8.6	%		450			552			(18.5	)%
Service charges on deposit accounts		785			906			(13.4	)%		2,367			2,549			(7.1	)%
Other fee income		158			178			(11.2	)%		524			511			2.5	%
Financial services income		224			176			27.3	%		664			666			(0.3	)%
Net gains from sales of loans		651			208			213.0	%		1,523			805			89.2	%
Net gains from sale of branches		826			—			100.0	%		826			—			100.0	%
Net loss in valuation of mortgage servicing rights		(90	)		(111	)		(18.9	)%		(159	)		(225	)		(29.3	)%
Net gains from sale of securities		—			267			(100.0	)%		1,585			392			304.3	%
Gains (losses) from sale of fixed assets		(39	)		(1	)		3,800.0	%		582			(3	)		(19,500.0	)%
Increase in cash surrender value of life insurance		81			102			(20.6	)%		282			353			(20.1	)%
Equity in income of UFS subsidiary		173			199			(13.1	)%		509			631			(19.3	)%
Other income		88			(174	)		(150.6	)%		718			190			277.9	%
Total Noninterest Income	$	3,250		$	2,106			54.3	%	$	10,636		$	7,141			48.9	%

Noninterest income increased $1.1 million (54.3%) for the three months ended September 30, 2012 versus the comparable period in 2011. A gain on the sale of four branches of $0.8 million was recognized during the quarter. Other items of income during the quarter included a $0.4 million increase in gain on sale of mortgage loans due to increased mortgage activity. Gains from the sale of securities were down $0.3 million from a year ago.

Noninterest income increased $3.5 million (48.9%) for the nine months ended September 30, 2012 versus the comparable period in 2011. Gains from securities sold in the amount of $1.6 million were recorded compared to $0.4 million in the similar period in 2011. These gains were taken to provide additional cash for potential business opportunities, restructure the security portfolio, and to liquidate securities with high prepayment risks. Also impacting 2012 results were the $0.7 million gain on the sale of land, a $0.5 million life insurance death benefit included in Other Income, and a $0.8 million gain from the sale of four Bank branches.

Included in fees for other services to customers in the Noninterest Income section of the consolidated statement of operations are service charges on deposit accounts, other fee income and financial services income.

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Noninterest Expense:

The following table reflects the various components of noninterest expense for the three and nine months ended September 30, 2012 and 2011, respectively.

NONINTEREST EXPENSE
(Dollar amounts in thousands)

	Three months ended							Nine months ended
	September 30, 2012		September 30, 2011		% Change			September 30, 2012		September 30, 2011		% Change
Salaries and employee benefits	$	4,196	$	4,067		3.2	%	$	12,851	$	12,681		1.3	%
Occupancy		587		551		6.5	%		1,764		1,731		1.9	%
Equipment		281		304		(7.6	)%		838		891		(5.9	)%
Data processing and courier		238		210		13.3	%		688		621		10.8	%
Operation of foreclosed properties		306		108		183.3	%		2,718		1,875		45.0	%
Business development and advertising		135		113		19.5	%		484		420		15.2	%
Charitable contributions		10		4		150.0	%		45		40		12.5	%
Stationery and supplies		122		112		8.9	%		399		374		6.7	%
Director fees		100		89		12.4	%		306		287		6.6	%
FDIC insurance expense		351		571		(38.5	)%		1,082		1,861		(41.9	)%
Legal and professional		179		219		(18.3	)%		440		602		(26.9	)%
Loan and collection		106		139		(23.7	)%		463		470		(1.5	)%
Other outside services		214		166		28.9	%		594		488		21.7	%
Provision for impairment of letter of credit		—		117		(100.0	)%		—		131		(100.0	)%
Other operating		430		438		(1.8	)%		1,292		1,305		(1.0	)%
Total Noninterest Expense	$	7,255	$	7,208		0.7	%	$	23,964	$	23,777		0.8	%

Total noninterest expense increased $0.1 million (0.1%) for the three months ended September 30, 2012 compared to the same period in 2011. The noninterest expense to average assets ratio was 2.8% for the three months ended September 30, 2012 compared to 2.7% for the same period in 2011. The increase in expense was primarily attributable to a $0.2 million increase in expenses related to foreclosed properties. Valuation write-downs on foreclosed properties were down $0.1 million, more than offset by a $0.3 million net increase in operating expenses. The increase was offset by a $0.2 million decrease in FDIC insurance expense.

Total noninterest expense increased $0.2 million (0.8%) for the nine months ended September 30, 2012 compared to the same period in 2011. The noninterest expense to average assets ratio was 3.03% for the nine months ended September 30, 2012 compared to 2.8% for the same period in 2011. The increase in expense was primarily attributable to a $0.8 million increase in expenses related to foreclosed properties and a $0.2 million increase in expense relating to salaries and employee benefits, offset by a $0.8 million decrease in FDIC insurance expense.

Net overhead expense is total noninterest expense less total noninterest income. The net overhead expense to average assets ratio was at 1.5% for the three months ended September 30, 2012 compared to 1.9% for the three months ended September 30, 2011. 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, premises and equipment, branch sales, and land held for sale). A lower efficiency ratio indicates a more efficient operation. The efficiency ratio decreased to 66.8% for the three months ended September 30, 2012 from 70.6% for the comparable period last year. This is primarily due to the $1.1 million increase in noninterest income discussed above.

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Expenses related to the operation of foreclosed properties held for sale by the Bank increased $0.8 million to $2.7 million for the nine month period ended September 30, 2012 compared to $1.9 million for the same period in 2011. The increase consists of a $1.0 million increase in write-downs due to the revaluation of properties held, partially offset by a $0.2 million decrease in net operating expenses. 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. A majority of the properties have updated valuations within the last twelve months.

Salaries and employee benefits were $12.9 million for the nine months ended September 30, 2012, compared to $12.7 million for the nine months ended September 30, 2011. The number of full-time equivalent employees decreased from 305 at September 30, 2011 to 293 at September 30, 2012. Commission expense for commissioned salespersons, including financial advisors and mortgage originators, may impact future salary expense based on the levels of production attained. Included in 2012 salary expense is $0.1 million of expense related to our long-term equity incentive plan.

Included in noninterest expense are FDIC insurance premiums of $1.1 million for the nine months ended September 30, 2012 compared to $1.9 million for the same period a year ago, a decrease of $0.8 million (41.9%). On February 7, 2011, the FDIC finalized a rule to change the assessment base upon which it calculates its premiums from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Act. The new base began in the second quarter of 2011, with the premium payable in September 2011. The result of the change has been a reduction in FDIC assessments for the Bank.

Income Taxes:

We recorded an income tax expense of $0.9 million for the three months ended September 30, 2012 versus an expense of $0.5 million for the same period in 2011. The increase in tax expense is primarily attributable to a $1.2 million year-over-year increase in pre-tax taxable income.

We maintain net deferred income tax assets for deductible temporary tax differences, such as allowance for loan losses, nonaccrual loan interest, and foreclosed property valuations as well as net operating loss carry forwards. Our determination of the amount of our deferred income tax assets 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, 2012, we determined that no valuation allowance was required to be taken against our deferred income tax assets 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.

During the third quarter of 2011, the IRS began an audit of our 2009 federal income tax return primarily in response to our net operating loss carry back claim. In January 2012, we reached a tentative settlement agreement with the IRS. We expect the audit to be finalized sometime during 2012.

Financial Condition

Loans:

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

LOAN PORTFOLIO ANALYSIS

	September 30, 2012			December 31, 2011			Percent Change
Amount of Loans by Type:
Real estate-mortgage:
Commercial	$	294,945		$	317,198			(7.0	)%
1-4 Family residential
First liens		85,917			90,369			(4.9	)%
Junior liens		6,718			8,878			(24.3	)%
Home equity		39,916			44,209			(9.7	)%
Commercial, financial and agricultural		98,820			91,750			7.7	%
Real estate-construction		50,148			53,606			(6.5	)%
Installment
Credit cards and related plans		1,453			1,675			(13.3	)%
Other		6,719			7,134			(5.8	)%
Obligations of states and political subdivisions		16,356			16,577			(1.3	)%
Less: Deferred origination fees, net of costs		(394	)		(381	)		3.4	%
Less: Allowance for loan losses		(10,658	)		(10,638	)		0.2	%
Total	$	589,940		$	620,377			(4.9	)%

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Net loans at September 30, 2012 decreased $30.5 million (4.9%) from $620.4 million at December 31, 2011 to $589.9 million at September 30, 2012. The decrease is primarily due to the sale of $36.9 million of loans as the result of our sale of four branches in September, 2012. Of the $36.9 million in loans sold, $14.5 million were 1-4 family residential, $8.8 million were commercial real estate and $9.6 million were commercial, financial and agricultural in nature. Without the sale, net loans would have increased $6.4 million.

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 the “Provision for Loan Losses” section discussed earlier. 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, 2012 was $10.7 million, compared to $10.6 million at December 31, 2011. 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 classes; 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 for 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 the loan review function downgrades a 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 management familiar with the credits.

We have two other major components of the ALL that do not pertain to specific loans: “General Reserves – Historical” and “General Reserves – Other.” We determine General Reserves – Historical based on our historical recorded charge-offs of loans in particular classes, analyzed as a group. We determine General Reserves – Other by taking into account such qualitative factors 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, nonaccrual 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.

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties:

Management encourages early identification of nonaccrual and problem loans in order to minimize the risk of loss. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, and nonaccrual 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 nonaccrual 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 nonaccrual 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.

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NONPERFORMING ASSETS
(Dollars amounts in thousands)

	September 30,2012			June 30,2012			March 31,2012			December 31, 2011			September 30, 2011
Nonperforming Assets:
Nonaccrual loans	$	8,203		$	11,513		$	14,301		$	15,242		$	19,027
Nonaccrual loans, restructured		3,812			8,159			8,158			4,341			5,287
Accruing loans past due 90 days or more		—			—			—			—			—
Total nonperforming loans (“NPLs”)	$	12,015		$	19,672		$	22,459		$	19,583		$	24,314
Foreclosed properties, net		10,451			10,357			14,766			12,119			10,662
Total nonperforming assets (“NPAs”)	$	22,466		$	30,029		$	37,225		$	31,702		$	34,976
Restructured loans, accruing(1)	$	4,425		$	4,715		$	6,469		$	22,009		$	20,461
Ratios:
ALL to Net Charge-offs (“NCOs”) (annualized)		1.56	x		3.28	x		2.46	x		1.80	x		3.11	x
NCOs to average loans (annualized)		1.08	%		0.61	%		0.72	%		0.94	%		0.66	%
ALL to total loans		1.77	%		2.00	%		1.76	%		1.68	%		2.01	%
NPLs to total loans		1.99	%		3.10	%		3.52	%		3.10	%		3.81	%
NPAs to total assets		2.28	%		2.89	%		3.49	%		2.92	%		3.33	%
ALL to NPLs		88.71	%		64.73	%		50.09	%		54.32	%		52.88	%

⁽¹⁾ Restructured loans on nonaccrual status are returned to accruing when a sufficient period of performance in accordance with the restructured terms, generally six months, has passed.

During the quarter ended September 30, 2012, NPAs were reduced by $4.8 million when a large commercial customer whose loans were classified as nonperforming sold their business. A $2.0 million charge off was required to be taken in the third quarter of 2012 in conjunction with the sale. However, impairment charges totaling $1.8 million were allocated to the allowance for loan losses in the first and second quarter of 2012 and, as a result, the sale transaction reduced earnings by $0.2 million in the third quarter. In addition to this, additional charge-offs of $1.4 million were taken and nonaccrual payments of $1.9 million were recorded from the sale of assets securing nonaccrual loans. These reductions to NPA were partially offset by $0.5 million net nonaccrual additions during the quarter.

Restructured loans accruing at December 31, 2011 were $22.0 million. $1.3 million of accruing restructured loans were transferred to nonaccrual during the second quarter of 2012 when satisfactory repayment plans could not be reached with the borrowers. During the first quarter of 2012, $8.0 million of accruing restructured loans were transferred to nonaccrual. In addition, $7.6 million of restructured loans were in compliance with their modified terms for a period deemed sufficient and were therefore transferred out of the restructured loan category.

Nonperforming loans decreased $7.6 million from December 31, 2011 to September 30, 2012.

Loan balances with a risk grading of 0006B or 0007 have decreased by $9.1 million since December 31, 2011. The decrease consisted of $5.5 million of loan balances transferred to foreclosed properties, $1.4 million of charge-offs, and $2.2 million due to net payments and loan rating changes. Loans in these categories are existing or potential problem loans that require management’s close attention. The decline in these troubled assets continues to be an indication of improvement in the quality of the loan portfolio as management actively works to prudently resolve problem credits. As additional evidence of the continued improvement in the overall quality of the loan portfolio, loan balances with a risk grading of 0005 or better have risen to $530.0 million as of September 30, 2012, representing 88.3% of the total loan portfolio from $512.9 million as of December 31, 2011, representing 81.3% of the total loan portfolio.

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The following table presents an analysis of our past due loans excluding nonaccrual loans:

PAST DUE LOANS (EXCLUDING NONACCRUALS)

30-89 DAYS PAST DUE

(Dollar amounts in thousands)

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011
Secured by real estate	$	5,549		$	2,831		$	4,530		$	3,352		$	2,555
Commercial and industrial loans		—			182			1,173			39			91
Loans to individuals		38			51			51			59			141
All other loans		—			—			—			—			—
Total	$	5,587		$	3,064		$	5,754		$	3,450		$	2,787
Percentage of total loans		0.93	%		0.48	%		0.90	%		0.55	%		0.44	%

Loan balances 30 to 89 days past due have increased by $2.5 million at September 30, 2012 compared to June 30, 2012. Included in the $2.5 million increase, are two commercial loans secured by real estate totaling $2.1 million that have been brought current as of November 1, 2012.

As indicated above, loan balances 30 to 89 days past due have increased by $2.1 million since December 31, 2011. Compared to September 30, 2011, loan balances 30 to 89 days past due have increased $2.8 million.

Information regarding foreclosed properties is as follows:

FORECLOSED PROPERTIES

	Nine months ended September 30, 2012			Twelve months ended December 31, 2011			Nine months ended September 30, 2011
Beginning balance	$	12,119		$	15,952		$	15,952
Transfer of loans to foreclosed properties		8,193			5,127			2,827
Sales proceeds, net		(7,519	)		(7,419	)		(6,798	)
Net gain from sale of foreclosed properties		183			205			198
Provision for foreclosed properties		(2,525	)		(1,746	)		(1,517	)
Total foreclosed properties, net	$	10,451		$	12,119		$	10,662

VALUATION ALLOWANCE ON FORECLOSED PROPERTIES

	Nine months ended September 30, 2012			Twelve months ended December 31, 2011			Nine months ended September 30, 2011
Beginning balance	$	2,794		$	3,982		$	3,982
Provision charged to operations		2,525			1,746			1,517
Allowance recovered on properties disposed		(1,959	)		(2,934	)		(2,776	)
Ending balance	$	3,360		$	2,794		$	2,723

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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, 2012, the investment portfolio (comprising investment securities available for sale) decreased $37.1 million (13.1%) to $247.2 million compared to $284.3 million at December 31, 2011. The gain resulted when securities were sold primarily to provide additional cash for potential business opportunities being considered and secondarily, to take advantage of opportunities to restructure a portion of the investment portfolio. At September 30, 2012, the investment portfolio represented 25.1% of total assets compared to 26.2% at December 31, 2011. For the nine months ended September 30, 2012, principal payments of $53.6 million and $45.8 million were received on maturing investments and the sale of investments, respectively. A gain of $1.6 million was recognized for the nine months ended September 30, 2012. The gain resulted when securities were sold primarily to provide additional cash for potential business opportunities being considered and secondarily, to take advantage of opportunities to restructure a portion of the investment portfolio. For the nine months ended, September 30, 2012, the Company purchased $59.3 million of securities for a net cash increase of $40.1 million.

We closely monitor securities we hold in our investment portfolio that remain in an unrealized loss position for greater than twelve months. Total gross unrealized losses on these securities are $0.6 million at September 30, 2012, representing 82.0% of total gross unrealized securities losses and 0.3% of the total investment portfolio. Based on an in-depth analysis of the specific instruments, which may include ratings from external rating agencies and/or brokers, as well as the creditworthiness of the related issuers, including their ability to continue payments under the terms of the security agreements, no unrealized losses were deemed to be other-than-temporary. Additionally, we do not have the intent to sell the 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 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, 2012 and December 31, 2011, we did not hold securities of any one issuer, other than the Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), or United States Department of Veterans Affairs (“VA”), each an agency or corporation of the United States government, in an amount greater than 10% of stockholders’ equity. As of September 30, 2012, the highest concentration of loans underlying mortgage-backed securities issued in any state was issued in California, representing approximately 23.9% of the total amount invested in residential mortgage-backed securities.

Deposits:

Total deposits at September 30, 2012 decreased $66.4 million (7.7%) to $798.8 million from $865.2 million at December 31, 2011. Deposits declined $65.2 million in September of 2012 due to the sale of four branches. Exclusive of the decline attributable to the branch sales, deposits would have increased by $1.2 million. The decrease for the year was a result of a $62.2 million (20.5%) decrease in time deposits from $303.5 million at December 31, 2011 to $241.3 million at September 30, 2012, a decrease of $12.9 million (4.2%) in our savings deposits from $310.5 million at December 31, 2011 to $297.6 million at September 30, 2012, partially offset by an $8.7 million (3.5%) increase in our non-interest bearing and interest bearing demand deposits from $251.2 million at December 31, 2011 to $259.9 million at September 30, 2012. Total interest-bearing deposits decreased $86.8 million (11.4%) while non-interest-bearing deposits increased $20.4 million (19.5%) from December 31, 2011 to September 30, 2012. During September 2012, a $7.0 million brokered certificate of deposit matured and was not renewed.

The decrease in total deposits from December 31, 2011 to September 30, 2012 is primarily due to the sale of the four branches. We continue to focus on expanding customer deposit relationships and attracting core deposit accounts by emphasizing customer service while maintaining competitive pricing. 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 and through the discount window at the Federal Reserve.

Other Funding Sources:

Securities sold under agreements to repurchase decreased $27.7 million (56.1%) from $47.6 million at December 31, 2011 to $20.9 million at September 30, 2012. Repurchase agreements in the amount of $1.2 million were included in the sale of the four branches. We did not have any federal funds purchased at either September 30, 2012 or December 31, 2011.

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FHLB advances were $40.0 million at September 30, 2012 compared to $55.0 million at December 31, 2011. During August 2012, a $15.0 million FHLB advance matured and was paid off. 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 (“TruPS”) 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 and mature on June 30, 2036. At September 30, 2012, the interest rate on these securities was 1.71%. 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 TruPS 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. After discussion with our regulators during the first quarter of 2011, we exercised our right to defer payment of interest on the Debentures beginning with the March 30, 2011 interest payment, even though we had sufficient cash to make the interest payment. Our payments due June 29, 2011 and September 29, 2011 were also deferred. The expense related to the interest payment was recorded with a corresponding liability for the interest payment amount. In December of 2011, we made all payments due under the agreement, including the deferred payments. At September 30, 2012, we are current on all interest payments.

During 2009 and 2010, we completed several 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 September 30, 2012 and December 31, 2011 was $9.45 million.

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. Subsequent to September 30, 2012 one of the Convertible Notes in the amount of $0.05 million was converted.

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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, 2011 for quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Contractual obligations disclosed in the 2011 Annual Report on Form 10-K have not materially changed since that report was filed.

The following table summarizes our significant contractual obligations and commitments at September 30, 2012:

CONTRACTUAL OBLIGATIONS

	Within 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
Certificates of deposit and other time deposit obligations	$	148,216	$	143,922	$	10,990	$	—	$	303,128
Repurchase agreements		20,904		—		—		—		20,904
Federal Home Loan Bank advances		15,000		25,000		—		—		40,000
Subordinated debentures		—		—		—		16,100		16,100
Convertible promissory notes (1)		—		9,450		—		—		9,450
Total	$	184,120	$	178,372	$	10,990	$	16,100	$	389,582

⁽¹⁾ One-half of the Convertible Notes are mandatorily converted to shares of our 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

	September 30, 2012		December 31, 2011
Commitments to fund unused home equity line loans	$	64,066	$	56,952
Commitments to fund 1-4 family loans		15,675		3,034
Commitments to fund residential real estate construction loans		1,457		1,114
Commitments unused on commercial lines of credit loans		176,974		150,884
Commitments unused on consumer lines of credit loans		9,579		12,814
Total commitments to extend credit	$	267,751	$	224,798
Financial standby letters of credit	$	10,042	$	12,468

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. We and the Bank have different liquidity considerations.

Our primary sources of funds are dividends from the Bank and net proceeds from borrowings and the offerings of subordinated debentures and convertible promissory notes. We may also undertake offerings of debt and issue our common stock if and when we deem it prudent to do so, subject to regulatory approval. 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 (“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 January 2012 and April 2012, we requested advance approval to declare a $0.01 per share dividend. We received the approval and the dividends were paid in February 2012 and June 2012. In July 2012 we requested advance approval to declare a $0.02 per share dividend for the third quarter of 2012. We received the approval and the dividend was paid in September 2012.

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The 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.

Maturing investments have historically been a primary source of liquidity. For the nine months ended September 30, 2012, principal payments totaling $53.6 million were received on maturing investments. In addition, we received proceeds of $45.8 million from the sale of investments and we purchased $59.3 million in investments in the same period. Approximately 12.1%, or $20.9 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued and guaranteed by GNMA, the SBA or the VA, agencies of the United States government. An additional 65.0%, or $112.1 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued by either FNMA or FHLMC, United States government-sponsored agencies. Non-agency mortgage-backed securities present a level of credit risk that does not exist currently with United States government agency-backed securities, but only comprised approximately 22.8%, or $39.3 million, of the outstanding mortgage-backed securities at September 30, 2012. Management evaluates these non-agency mortgage-backed securities at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. These securities tend to be highly marketable.

During February 2012, proceeds of $2.1 million were received from the FHLB under their excess FHLB stock repurchase program that was implemented in 2011. Additional proceeds of $0.6 million and $0.5 million were received in May 2012 and August 2012, respectively, from the stock repurchase program.

Deposit decreases, reflected as a financing activity in the September 30, 2012 unaudited consolidated statements of cash flows, resulted in $1.1 million of cash outflow during the first nine months of 2012, excluding the $65.2 million of deposits sold related to the branch sale. Deposit growth is normally 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 decreased $7.7 million from $46.7 million at December 31, 2011 to $38.9 million at September 30, 2012, primarily from the $7.0 million brokered certificate of deposit that matured in September 2012 and was not renewed. 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 $193.8 million, or 32.1% of total loans, maturing within one year of September 30, 2012. 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, 2012, securities sold under agreements to repurchase totaled $20.9 million compared to $47.6 million at the end of 2011. 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 $40.0 million at September 30, 2012 and $55.0 million at December 31, 2011.

We continue to focus on expanding customer deposit relationships and attracting core deposit accounts by emphasizing customer service while maintaining competitive pricing. In the event that core deposit growth goals are not accomplished, we will continue to look at other wholesale sources of funds. 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.

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Capital Resources:

Stockholders’ equity at September 30, 2012 and December 31, 2011 was $91.1 million and $84.4 million, respectively, reflecting an increase of $6.7 million (7.9%) during the first nine months of 2012. The increase in stockholders’ equity was primarily related to our net income of $4.7 million and an increase in comprehensive income of $2.1 million (as a result of an increase in unrealized gains on available for sale securities). The ratio of stockholders’ equity to assets was 9.3% and 7.8% at September 30, 2012 and December 31, 2011, respectively.

No cash dividends were declared during 2011. In January 2012 and April 2012, we declared a $0.01 per share dividend. In July, 2012, we declared a $0.02 per share dividend. 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 is required. There is no assurance that we will continue to receive such approval if sought.

We regularly review the adequacy of our capital to ensure that sufficient capital is available for our current and future needs and it 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 that 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 their 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, 2012, we maintained capital in excess of the minimum ratios required to be categorized as “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%.

The total capital ratios for the previous four quarters are as follows:

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011
Company		15.28	%		14.24	%		13.76	%		13.54	%
Bank		15.22	%		14.15	%		13.63	%		13.38	%

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.

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The following tables present our and the Bank’s capital ratios as of September 30, 2012 and December 31, 2011:

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, 2012
Total Capital (to Risk-Weighted Assets)
Company	$	105,620		15.28	%	$	55,285		8.00	%	$	N/A		N/A
Bank		105,137		15.22	%		55,266		8.00	%		69,083		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Company	$	87,507		12.66	%	$	27,642		4.00	%	$	N/A		N/A
Bank		96,477		13.97	%		27,633		4.00	%		41,450		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	87,507		8.48	%	$	41,261		4.00	%	$	N/A		N/A
Bank		96,477		9.34	%		41,303		4.00	%		51,629		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, 2011
Total Capital (to Risk-Weighted Assets)
Company	$	101,446		13.54	%	$	59,928		8.00	%	$	N/A		N/A
Bank		100,268		13.38	%		59,961		8.00	%		74,952		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Company	$	82,617		11.03	%	$	29,964		4.00	%	$	N/A		N/A
Bank		90,883		12.13	%		29,981		4.00	%		44,971		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	82,617		7.93	%	$	41,648		4.00	%	$	N/A		N/A
Bank		90,883		8.72	%		41,711		4.00	%		52,139		5.00	%

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, 2012, 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, 2011, as described in our 2011 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 and 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, 2012.

50

INTEREST SENSITIVITY
(Dollar amounts in thousands)

	Change in Net Interest Income Over One Year Horizon
	At September 30, 2012						At December 31, 2011
	Dollar change			Percentage change			Dollar change			Percentage change
Change in levels of interest rates
+200 bp	$	(200	)		(0.7	)%	$	105			0.3	%
+100 bp		(431	)		(1.4	)%		(122	)		(0.4	)%
Base		—			—			—			—
-100 bp		(1,079	)		(3.6	)%		(1,436	)		(4.5	)%
-200 bp		(1,689	)		(5.6	)%		(2,125	)		(6.6	)%

As shown above, at September 30, 2012, the effect of an immediate 200 bp increase in interest rates would have decreased our net interest income by $0.2 million or 0.7%. The effect of an immediate 200 bp reduction in rates would have decreased our net interest income by $1.7 million or 5.6%. 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.

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

Item 4. Controls and Procedures

Disclosures Controls and Procedures: Our management, with the participation of our Chief Executive Officer and 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, 2012. 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 are 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, 2011. There have been no material changes to the risk factors since then.

51

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

During the quarter ended September 30, 2012, we did not sell any equity securities which were not registered under the Securities Act of 1933, as amended, or repurchase any of our equity securities.

We have several limitations on our ability to pay dividends. The Federal Reserve has adopted regulations that deal with the measure of capitalization for bank holding companies. The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies, wherein the Federal Reserve has stated that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.

Our ability to pay dividends on our common stock is largely dependent upon the Bank’s ability to pay dividends on its stock held by us. The Bank’s ability to pay dividends is restricted by both state and federal laws and regulations. The Bank is subject to policies and regulations issued by the Federal Reserve, as the Bank’s primary federal regulator, and the Division of Banking of the WDFI, which, in part, establish minimum acceptable capital requirements for banks, thereby limiting the ability of such banks to pay dividends. In addition, Wisconsin law provides that state chartered banks may declare and pay dividends out of undivided profits but only after provision has been made for all expenses, losses, required reserves, taxes and interest accrued or due from the bank.

Our and the Bank’s payment of dividends in some circumstances may require the written consent of the Federal Reserve or the WDFI. We are currently restricted from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank and, as to the Bank, the WDFI. For the immediate future, we anticipate that this prior approval requirement will remain in place.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.

52

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 7, 2012	/s/ Robert J. Cera
		Robert J. Cera
		President and Chief Executive Officer
Date:	November 7, 2012	/s/ Kevin L. LaLuzerne
		Kevin L. LaLuzerne
		Treasurer and Chief Financial Officer

53

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, President and Chief Executive Officer of Baylake Corp., 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 the 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 7, 2012
/s/ Robert J. Cera
Robert J. Cera
President and Chief Executive Officer

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, Chief Financial Officer of Baylake Corp., 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 the 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 7, 2012
/s/ Kevin L. LaLuzerne
Kevin L. LaLuzerne
Treasurer and Chief Financial Officer

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.

Date:	November 7, 2012
/s/ Robert J. Cera
Robert J. Cera
President and Chief Executive Officer

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

EX-32.2

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.

Date:	November 7, 2012
/s/ Kevin L. LaLuzerne
Kevin L. LaLuzerne
Treasurer and Chief Financial Officer

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.

XML

Fair Value (Assets Measured At Fair Value On A Recurring Basis Using Significant Unobservable Inputs) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012
Fair Value [Abstract]
Balance, beginning of period	$ 4,543	$ 16,262
Transfer into Level 3
Net unrealized gains	15	561
Transfer out of Level 3		(10,593)
Principal payments	(927)	(2,599)
Balance, end of period	$ 3,631	$ 3,631

XML

Income Taxes (Summary Of Changes In Deferred Income Tax Balances) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Available-for-sale Securities [Member]
Deferred Income Taxes [Line Items]
Balances at beginning of period	$ (2,468)	$ (659)
Net change during period	(1,376)	(2,419)
Balances at end of period	(3,844)	(3,078)
Other Than Available For Sale Securities [Member]
Deferred Income Taxes [Line Items]
Balances at beginning of period	9,613	9,861
Net change during period	(282)	313
Balances at end of period	$ 9,331	$ 10,174

XML

Loans (Breakdown Of Loans By Risk Grading) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012		Dec. 31, 2011		Sep. 30, 2011
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	$ 443,914		$ 462,554
Gross loans	600,992		631,396
Deferred Origination Fees, net of costs	(394)		(381)
Loans: Ending Balance	600,598		631,015		636,794
Percent of Total Loans	100.00%		100.00%
0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	366,389		350,103
Gross loans	518,246		512,850
Percent of Total Loans	86.30%		81.30%
0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	33,696		54,526
Gross loans	34,840		54,917
Percent of Total Loans	5.80%		8.70%
0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	21,619		15,966
Gross loans	22,284		16,851
Percent of Total Loans	3.70%		2.60%
0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	22,210	[1]	41,959	[2]
Gross loans	25,622	[1]	46,778	[2]
Percent of Total Loans	4.20%	[1]	7.40%	[2]
0007 Rated Loans Not Impaired [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	9,200		5,200
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	98,820		91,750
Gross loans	98,820		91,750
Loans: Ending Balance	98,820				91,064
Commercial [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	92,062		84,652
Commercial [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,752		4,618
Commercial [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	4,110		1,051
Commercial [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	896	[1]	1,429	[2]
Real Estate - Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	294,946		317,198
Gross loans	294,946		317,198
Loans: Ending Balance	294,552				328,868
Real Estate - Commercial [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	233,372		227,815
Real Estate - Commercial [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	25,913		43,690
Real Estate - Commercial [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	15,604		11,592
Real Estate - Commercial [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	20,057	[1]	34,101	[2]
Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	50,148		53,606
Gross loans	50,148		53,606
Loans: Ending Balance	50,148				54,999
Construction [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	40,955		37,636
Construction [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	6,031		6,218
Construction [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,905		3,323
Construction [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,257	[1]	6,429	[2]
Real Estate - Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	132,550		143,456
Gross loans	132,550		143,456
Loans: Ending Balance	132,550				137,085
Real Estate - Mortgage [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	127,330		137,379
Real Estate - Mortgage [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	1,144		391
Real Estate - Mortgage [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	665		885
Real Estate - Mortgage [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	3,411	[1]	4,801	[2]
Consumer [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	8,172		8,809
Gross loans	8,172		8,809
Loans: Ending Balance	8,172				8,869
Consumer [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	8,171		8,791
Consumer [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	1	[1]	18	[2]
Municipal Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	16,356		16,577
Gross loans	16,356		16,577
Loans: Ending Balance	16,356				15,909
Municipal Loans [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	$ 16,356		$ 16,577

[1] Included in the 0007 rated loans are $9.2 million of loans that are not impaired because fair value exceeds carrying cost.

[2] Included in the 0007 rated loans are $5.2 million of loans that are not impaired.

XML

Equity Investment (Details) (USD $) In Millions, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Equity Investment [Abstract]
Percentage of ownership interest in UFS	49.80%
Number of ownership shares held in UFS	500
Carrying value of investment in UFS	$ 4.1	$ 4.3
Current book value per share of common stock in UFS	$ 8,150

XML

Loans (Allowance For Loan Losses And Recorded Investment In Loans) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			$ 10,638	$ 11,502
Charge-offs			(5,754)	(3,325)
Recoveries			649	230
Provision	1,100	1,200	5,125	4,450
Allowance for Loan Losses: Ending Balance	10,658	12,857	10,658	12,857
Loans: Ending Balance	600,598	636,794	600,598	636,794	631,015
ALL	(10,658)	(12,857)	(10,658)	(12,857)
Loans, net	589,940	623,937	589,940	623,937	620,377
Ending balance: Individually evaluated	16,439	16,877	16,439	16,877
Ending balance: Collectively evaluated	584,159	619,917	584,159	619,917
Construction [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			1,231	1,424
Charge-offs			(637)	(373)
Recoveries			18	59
Provision			418	457
Allowance for Loan Losses: Ending Balance	1,030	1,567	1,030	1,567
Loans: Ending Balance	50,148	54,999	50,148	54,999
ALL	(1,030)	(1,567)	(1,030)	(1,567)
Loans, net	49,118	53,432	49,118	53,432
Ending balance: Individually evaluated	1,027	2,853	1,027	2,853
Ending balance: Collectively evaluated	49,121	52,146	49,121	52,146
Real Estate - Mortgage [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			1,995	2,103
Charge-offs			(828)	(1,407)
Recoveries			38	9
Provision			998	1,888
Allowance for Loan Losses: Ending Balance	2,203	2,593	2,203	2,593
Loans: Ending Balance	132,550	137,085	132,550	137,085
ALL	(2,203)	(2,593)	(2,203)	(2,593)
Loans, net	130,347	134,492	130,347	134,492
Ending balance: Individually evaluated	2,865	2,603	2,865	2,603
Ending balance: Collectively evaluated	129,685	134,482	129,685	134,482
Real Estate - Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			5,467	6,355
Charge-offs			(3,940)	(856)
Recoveries			491	78
Provision			4,253	1,213
Allowance for Loan Losses: Ending Balance	6,271	6,790	6,271	6,790
Loans: Ending Balance	294,552	328,868	294,552	328,868
ALL	(6,271)	(6,790)	(6,271)	(6,790)
Loans, net	288,281	322,078	288,281	322,078
Ending balance: Individually evaluated	12,488	10,853	12,488	10,853
Ending balance: Collectively evaluated	282,064	318,015	282,064	318,015
Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			770	1,189
Charge-offs			(259)	(476)
Recoveries			76	38
Provision			133	363
Allowance for Loan Losses: Ending Balance	720	1,114	720	1,114
Loans: Ending Balance	98,820	91,064	98,820	91,064
ALL	(720)	(1,114)	(720)	(1,114)
Loans, net	98,100	89,950	98,100	89,950
Ending balance: Individually evaluated	35	404	35	404
Ending balance: Collectively evaluated	98,785	90,660	98,785	90,660
Consumer [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			161	391
Charge-offs			(90)	(213)
Recoveries			26	46
Provision			36	146
Allowance for Loan Losses: Ending Balance	133	370	133	370
Loans: Ending Balance	8,172	8,869	8,172	8,869
ALL	(133)	(370)	(133)	(370)
Loans, net	8,039	8,499	8,039	8,499
Ending balance: Individually evaluated	24	164	24	164
Ending balance: Collectively evaluated	8,148	8,705	8,148	8,705
Municipal Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans: Ending Balance	16,356	15,909	16,356	15,909
Loans, net	16,356	15,909	16,356	15,909
Ending balance: Collectively evaluated	16,356	15,909	16,356	15,909
Not Specifically Allocated [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance			1,014	40
Provision			(713)	383
Allowance for Loan Losses: Ending Balance	301	423	301	423
ALL	(301)	(423)	(301)	(423)
Loans, net	$ (301)	$ (423)	$ (301)	$ (423)

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Mortgage Servicing Rights (Tables)

9 Months Ended

Sep. 30, 2012

Mortgage Servicing Rights [Abstract]

Summary Of Changes In the Carrying Value Of MSRs

MORTGAGE SERVICING RIGHTS

		For the three months                                 For the nine months ended September 30,                                ended September 30,
		2012		2011		2012		2011
Balance at beginning of period	$	693	$	722	$	634	$	746
Additions from loans sold with servicing retained		103		28		230		117
Changes in valuation		(25)		(74)		1		(73)
Loan payments and payoffs		(65)		(38)		(159)		(152)
Fair value of MSRs at the end of period	$	706	$	638	$	706	$	638

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Promissory Notes (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Promissory Notes [Abstract]
Stated percentage of interest rate on Convertible Notes	10.00%
Convertible Notes, due date	Jun. 30, 2017
Total Convertible Notes issued	$ 9,450	$ 9,450
Conversion ratio of principal to shares	20.00%
Conversion price per share	$ 5.00
Percentage of original principal amount convertible prior to conversion date, maximum	100.00%
Conversion date of convertible notes	Oct. 01, 2014
Percentage of original principal amount	50.00%

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Sale Of Branches

9 Months Ended

Sep. 30, 2012

Sale Of Branches [Abstract]

Sale Of Branches

17.Sale of Branches

On September 7, 2012, the Bank sold four branches located in the central part of Wisconsin to Premier Community Bank (“Premier”). The sale reduced the Bank’s number of branches from 27 to 23. Included in the sale to Premier was $65.2 million of deposit balances, $36.9 million of loan balances, $1.2 million of repurchase agreement balances, and $2.0 million of fixed assets. A net gain of $0.8 million was recognized from the sale.

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Allowance For Loan Losses ("ALL") (Schedule Of Nonperforming Loans) (Details) (USD $)	9 Months Ended					3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2012 Nonaccrual [Member]	Jun. 30, 2012 Nonaccrual [Member]	Mar. 31, 2012 Nonaccrual [Member]	Dec. 31, 2011 Nonaccrual [Member]	Sep. 30, 2011 Nonaccrual [Member]	Sep. 30, 2012 Accruing [Member]	Jun. 30, 2012 Accruing [Member]	Mar. 31, 2012 Accruing [Member]	Dec. 31, 2011 Accruing [Member]	Sep. 30, 2011 Accruing [Member]
Nonaccrual loans	$ 8,203,000	$ 19,026,000	$ 11,513,000	$ 14,301,000	$ 15,242,000
Restructured loans	8,237,000				26,350,000	3,812,000	8,159,000	8,158,000	4,341,000	5,287,000	4,425,000	4,715,000	6,469,000	22,009,000	20,461,000
Total nonperforming loans ("NPLs")	12,015,000	24,313,000	19,672,000	22,459,000	19,583,000
Restructured loans reduced when collateral securing the loans was sold within the period						4,800,000
Principal payments received						2,900,000
Remaining balance charged off	$ 5,754,000	$ 3,325,000				$ 1,900,000

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Investments (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 247,198	$ 284,331
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	172,390	193,592
Percentage of investment portfolio	69.70%	68.10%
Number of securities	2	3
Issued And Guaranteed By GMNA Or VA [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	20,900
Percentage of investment portfolio	12.10%
Issued By FNMA or FHLMC [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	112,100
Percentage of investment portfolio	65.00%
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of securities	2	2
Non-agency [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 39,400
Percentage of investment portfolio	22.80%

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Recent Accounting Pronouncements (Details)	9 Months Ended
	Sep. 30, 2012
Recent Accounting Pronouncements [Abstract]
Goodwill impairment test, more-likely-than-not threshold, minimum percentage	50.00%

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Foreclosed Properties, Net (Changes In The Valuation Allowance For Losses On Foreclosed Properties) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Foreclosed Properties, Net [Abstract]
Beginning balance	$ 2,794	$ 3,982
Provision charged to operations	2,525	1,517
Amounts related to properties disposed	(1,959)	(2,776)
Balance at end of period	$ 3,360	$ 2,723

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Commitments And Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	$ 267,751	$ 224,798
Unused Home Equity Line Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	64,066	56,952
One To Four Family Residential Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	15,675	3,034
Residential Real Estate Construction Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	1,457	1,114
Commitments Unused On Commercial Lines Of Credit Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	176,974	150,884
Commitments Unused On Consumer Lines Of Credit Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	9,579	12,814
Financial Standby Letters of Credit [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	$ 10,042	$ 12,468

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Loans (Schedule Of Past Due Loans) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	$ 5,587	$ 3,452
90 Days & Over or on Non-accrual	12,015	19,583
Total	17,602	23,035
Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	1,656	435
90 Days & Over or on Non-accrual	1,027	4,945
Total	2,684	5,380
Real Estate - Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	1,519	845
90 Days & Over or on Non-accrual	2,479	2,676
Total	3,997	3,521
Real Estate - Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	2,374	2,072
90 Days & Over or on Non-accrual	8,450	11,660
Total	10,823	13,732
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)		41
90 Days & Over or on Non-accrual	35	259
Total	35	300
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	38	59
90 Days & Over or on Non-accrual	24	43
Total	63	102
Municipal Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)
90 Days & Over or on Non-accrual
Total

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Basis Of Presentation

9 Months Ended

Sep. 30, 2012

Basis Of Presentation [Abstract]

Basis Of Presentation

1.The consolidated financial statements of Baylake Corp. (the “Company”) include the accounts of the Company, its wholly owned subsidiary Baylake Bank (the “Bank”), and the Bank’s wholly owned subsidiaries:  Baylake Investments, Inc., and Baylake Insurance Agency, Inc. During the third quarter of 2012, operations of Baylake Insurance Agency, Inc. were discontinued and the book of business was sold to an unrelated third party. No cash proceeds were received in the transaction; however the Bank will receive future commissions for a three-year period based on insurance policy renewals on the sold book of business. The accompanying interim consolidated financial statements should be read in conjunction with the 2011 Annual Report on Form 10-K of the Company. 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 accounting principles generally accepted in the United States of America (“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 of operations for the three and nine month periods ending September 30, 2012 and 2011. The consolidated results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events through November 7, 2012, the date the interim consolidated financial statements were issued.

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Sale Of Branches (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended
	Sep. 07, 2012	Sep. 08, 2012
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Number of branches	27	23
Net gain recognized from sale	$ 0.8
Sold To Premier Community Bank [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Number of branches	4
Deposits [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Liabilities included in sale	65.2
Loans [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Assets included in sale	36.9
Repurchase Agreements [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Assets included in sale	1.2
Fixed Assets [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Assets included in sale	$ 2.0

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Investments (Fair Value Of Securities Available For Sale And Related Unrealized Gains And Losses) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 247,198	$ 284,331
Gross Unrealized Gains	10,516	8,701
Gross Unrealized Losses	(783)	(2,452)
U.S. Government-Sponsored Agency Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	2,024	14,138
Gross Unrealized Gains	7	49
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	58,816	57,766
Gross Unrealized Gains	4,403	4,128
Gross Unrealized Losses	(7)
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	172,390	193,592
Gross Unrealized Gains	5,271	4,233
Gross Unrealized Losses	(535)	(1,984)
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	4,522	4,969
Gross Unrealized Gains	123	132
Gross Unrealized Losses	(241)	(451)
Private Placement And Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	7,792	12,212
Gross Unrealized Gains	712	159
Gross Unrealized Losses		(17)
Other Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 1,654	$ 1,654

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Loans (Tables)

9 Months Ended

Sep. 30, 2012

Loans [Abstract]

Schedule Of Loans Held For Investment

	September 30, 2012			December 31, 2011
Construction	$	50,148	$		53,606
Real estate-mortgage		132,550			143,456
Real estate-commercial		294,946			317,198
Commercial		98,820			91,750
Consumer		8,172			8,809
Municipal		16,356			16,577
Gross loans		600,992			631,396
Less: Deferred origination fees, net of costs		(394)			(381)
Less: Allowance for loan losses		(10,658)			(10,638)
Loans, net	$	589,940	$		620,377

Allowance For Loan Losses And Recorded Investment In Loans

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2012 is as follows (dollar amounts in thousands):

			Construction			Real Estate-Mortgage				Real Estate-Commercial			Commercial					Consumer					Municipal						Not Specifically Allocated					Total
Allowance for Loan Losses:
Beginning balance	$			1,231	$		1,995	$	5,467		$		770			$			161		$			-		$		1,014			$	10,638
Charge-offs				(637)			(828)		(3,940)				(259)						(90)					-				-				(5,754)
Recoveries				18			38		491				76						26					-				-				649
Provision				418			998		4,253				133						36					-				(713)				5,125
Ending balance	$			1,030	$		2,203	$	6,271		$		720			$			133		$			-		$		301			$	10,658
Loans:
Ending balance		$		50,148	$		132,550	$		294,552		$		98,820	$		8,172			$		16,356			$		-			$			600,598
ALL				(1,030)			(2,203)			(6,271)				(720)			(133)					-					(301)						(10,658)
Recorded investment		$		49,118	$		130,347	$		288,281		$		98,100	$		8,039			$		16,356			$		(301)			$			589,940
Ending balance:
Individually evaluated			$	1,027	$		2,865	$		12,488		$		35	$		24			$		-			$		-			$			16,439
Collectively evaluated				49,121			129,685			282,064				98,785			8,148					16,356					-						584,159
Total			$	50,148	$		132,550	$		294,552		$		98,820	$		8,172			$		16,356			$		-			$			600,598

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2011 is as follows (dollar amounts in thousands):

			Construction		Real Estate-Mortgage		Real Estate-Commercial		Commercial		Consumer			Municipal		Not Specifically Allocated			Total
Allowance for Loan Losses:
Beginning balance	$	1,424		$	2,103	$	6,355	$	1,189	$	391	$		-	$		40	$		11,502
Charge-offs		(373)			(1,407)		(856)		(476)		(213)			-			-			(3,325)
Recoveries		59			9		78		38		46			-			-			230
Provision		457			1,888		1,213		363		146			-			383			4,450
Ending balance	$	1,567		$	2,593	$	6,790	$	1,114	$	370	$		-	$		423	$		12,857
Loans:
Ending balance	$	54,999		$	137,085	$	328,868	$	91,064	$	8,869		$	15,909	$		-	$		636,794
ALL		(1,567)			(2,593)		(6,790)		(1,114)		(370)			-			(423)			(12,857)
Recorded investment	$	53,432		$	134,492	$	322,078	$	89,950	$	8,499		$	15,909	$		(423)	$		623,937
Ending balance:
Individually evaluated	$	2,853		$	2,603	$	10,853	$	404	$	164		$	-	$		-	$		16,877
Collectively evaluated		52,146			134,482		318,015		90,660		8,705			15,909			-			619,917
Total	$	54,999		$	137,085	$	328,868	$	91,064	$	8,869		$	15,909	$		-	$		636,794

Schedule Of Past Due Loans

	September 30, 2012
		30-89 Days Past Due (accruing)		90 Days & Over or            on Non-accrual		Total
Construction	$	1,656	$	1,027	$	2,684
Real estate – mortgage		1,519		2,479		3,997
Real estate – commercial		2,374		8,450		10,823
Commercial		-		35		35
Consumer		38		24		63
Municipal		-		-		-
Total	$	5,587	$	12,015	$	17,602

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

	December 31, 2011
		30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	435	$	4,945	$	5,380
Real estate – mortgage		845		2,676		3,521
Real estate – commercial		2,072		11,660		13,732
Commercial		41		259		300
Consumer		59		43		102
Municipal		-		-		-
Total	$	3,452	$	19,583	$	23,035

Breakdown Of Loans By Risk Grading

Below is a breakdown of loans by risk grading as of September 30, 2012 (dollar amounts in thousands):

		0001-0005		0006A					0006B					0007(1)					Total
Commercial	$	92,062	$			1,752		$		4,110	$		896		$		98,820
Real estate – commercial		233,372				25,913				15,604			20,057				294,946
Construction		40,955				6,031				1,905			1,257				50,148
		366,389				33,696				21,619			22,210				443,914
Real estate - mortgage		127,330				1,144				665			3,411				132,550
Consumer		8,171			-					-		1						8,172
Municipal		16,356			-					-		-						16,356
Total	$	518,246	$		34,840		$			22,284	$	25,622						600,992
Deferred origination fees, net of costs																		(394)
Total loans																$		600,598

Percent of Total Loans86.3%5.8%3.7%4.2%100.0%

⁽¹⁾ Included in the 0007 rated loans are $9.2 million of loans that are not impaired because fair value exceeds carrying cost.

Below is a breakdown of loss by risk grading as of December 31, 2011 (dollar amounts in thousands):

		0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	84,652	$	4,618	$	1,051	$	1,429	$	91,750
Real estate – commercial		227,815		43,690		11,592		34,101		317,198
Construction		37,636		6,218		3,323		6,429		53,606
		350,103		54,526		15,966		41,959		462,554
Real estate - mortgage		137,379		391		885		4,801		143,456
Consumer		8,791		-		-		18		8,809
Municipal		16,577		-		-		-		16,577
Total	$	512,850	$	54,917	$	16,851	$	46,778		631,396
Deferred origination fees, net of costs										(381)
Total loans									$	631,015

Percent of Total Loans81.3%8.7%2.6%7.4%100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired.

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Investments (Tables)

9 Months Ended

Sep. 30, 2012

Investments [Abstract]

Fair Value Of Securities Available For Sale And Related Unrealized Gains And Losses

		September 30, 2012
			Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$		2,024	$	7	$	-
Obligations of states and political subdivisions			58,816		4,403		(7)
Mortgage-backed securities			172,390		5,271		(535)
Asset-backed securities			4,522		123		(241)
Private placement and corporate bonds			7,792		712		-
Other securities			1,654		-		-
Totals	$		247,198	$	10,516	$	(783)

		December 31, 2011
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	14,138	$	49	$	-
Obligations of states and political subdivisions		57,766		4,128		-
Mortgage-backed securities		193,592		4,233		(1,984)
Asset-backed securities		4,969		132		(451)
Private placement and corporate bonds		12,212		159		(17)
Other securities		1,654		-		-
Totals	$	284,331	$	8,701	$	(2,452)

Securities In Unrealized Loss Positions Aggregated By Investment Category And Length Of Time In Loss Position

	September 30, 2012
	Less than 12 Months						12 Months or More				Total
Description of Securities		Fair Value		Unrealized Loss		Fair Value			Unrealized Loss			Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	601	$	(7)	$	-		$	-	$		601	$	(7)
Mortgage-backed securities		21,598		(134)		6,770			(401)			28,368		(535)
Asset-backed securities		-		-		3,364			(241)			3,364		(241)
Total securities temporarily impaired	$	22,199	$	(141)	$	10,134		$	(642)	$		32,333	$	(783)

	December 31, 2011
	Less than 12 Months					12 Months or More				Total
Description of Securities		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Mortgage-backed securities	$	46,955	$	(964)	$	9,363	$	(1,020)	$	56,318	$	(1,984)
Asset-backed securities		-		-		3,645		(451)		3,645		(451)
Private placement and corporate bonds		3,504		(17)		-		-		3,504		(17)
Total securities temporarily impaired	$	50,459	$	(981)	$	13,008	$	(1,471)	$	63,467	$	(2,452)

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Mortgage Servicing Rights (Summary Of Changes In The Carrying Value Of MSRs) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Mortgage Servicing Rights [Abstract]
Balance at beginning of period	$ 693,000	$ 722,000	$ 634,000	$ 746,000
Additions from loans sold with servicing retained	103,000	28,000	230,000	117,000
Changes in valuation	(25,000)	(74,000)	1,000	(73,000)
Loan payments and payoffs	(65,000)	(38,000)	(159,000)	(152,000)
Fair value of MSRs at the end of period	706,000	638,000	706,000	638,000
Unpaid principal balance of loans serviced for others	$ 99,900,000	$ 81,800,000	$ 99,900,000	$ 81,800,000

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Investments (Securities In Unrealized Loss Positions Aggregated By Investment Category And Length Of Time In Loss Position) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	$ 22,199	$ 50,459
Less than 12 Months, Unrealized Loss	(141)	(981)
12 Months or More, Fair Value	10,134	13,008
12 Months or More, Unrealized Loss	(642)	(1,471)
Total Fair Value	32,333	63,467
Total Unrealized Loss	(783)	(2,452)
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	601
Less than 12 Months, Unrealized Loss	(7)
Total Fair Value	601
Total Unrealized Loss	(7)
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	21,598	46,955
Less than 12 Months, Unrealized Loss	(134)	(964)
12 Months or More, Fair Value	6,770	9,363
12 Months or More, Unrealized Loss	(401)	(1,020)
Total Fair Value	28,368	56,318
Total Unrealized Loss	(535)	(1,984)
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
12 Months or More, Fair Value	3,364	3,645
12 Months or More, Unrealized Loss	(241)	(451)
Total Fair Value	3,364	3,645
Total Unrealized Loss	(241)	(451)
Private Placement And Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value		3,504
Less than 12 Months, Unrealized Loss		(17)
Total Fair Value		3,504
Total Unrealized Loss		$ (17)

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Allowance For Loan Losses ("ALL") (Tables)

9 Months Ended

Sep. 30, 2012

Allowance For Loan Losses ("ALL") [Abstract]

Schedule Of Information Regarding Impaired Loans

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

September 30, 2012			Construction							Real Estate- Mortgage						Real Estate- Commercial					Commercial				Consumer					Municipal					Not Specifically Allocated					Totals
With an allowance recorded:
Recorded investment	$			105		$			1,958			$			2,425		$		-			$		-		$		-			$			-			$		4,488
Unpaid principal balance				194					2,332						3,636				32					-				-						-					6,194
Related allowance				89					374						1,211				32					-				-						-					1,706
With no related allowance recorded:
Recorded investment	$			833			$		533				$		8,853		$		3			$		24		$		-				$		-			$		10,246
Unpaid principal balance				833					533						8,853				3					24				-						-					10,246
Related allowance				-					-						-				-					-				-						-					-
Total:
Recorded investment		$		938	$			2,491			$			11,278				$		3			$	24			$		-				$			-		$			14,734
Unpaid principal balance				1,027				2,865						12,489						35				24					-							-					16,440
Related allowance				89				374						1,211						32				-					-							-					1,706
Average recorded investment during quarter		$		1,158	$			3,101			$			13,276				$		45			$	23			$		-				$			-		$			17,603
Interest income recognized while impaired		$		2	$			72			$			185				$		6			$	-			$		-				$			-		$			265

December 31, 2011		Construction				Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer			Municipal			Not Specifically Allocated			Totals
With an allowance recorded:
Recorded investment	$		2,667	$	904		$	1,103		$	-		$	11		$	-		$	-		$	4,685
Unpaid principal balance			2,852		1,096			1,702			54			16			-			-			5,720
Related allowance			185		192			599			54			5			-			-			1,035
With no related allowance recorded:
Recorded investment	$		2,093	$	3,011		$	30,156		$	612		$	-		$	-		$	-		$	35,872
Unpaid principal balance			2,093		3,011			30,156			612			-			-			-			35,872
Related allowance			-		-			-			-			-			-			-			-
Total:
Recorded investment	$		4,760	$	3,915		$	31,259		$	612		$	11		$	-		$	-		$	40,557
Unpaid principal balance			4,945		4,107			31,858			666			16			-			-			41,592
Related allowance			185		192			599			54			5			-			-			1,035
Average recorded investment during quarter	$		4,942	$	4,327		$	30,080		$	529		$	15		$	-		$	-		$	39,893
Interest income recognized while impaired	$		277	$	311		$	1,512		$	66		$	21		$	-		$	-		$	2,187

Schedule Of Nonperforming Loans

NONPERFORMING LOANS

		September 30, 2012		June 30, 2012		March 31, 2012		December 31, 2011		September 30, 2011
Nonaccrual loans	$	8,203	$	11,513	$	14,301	$	15,242	$	19,026
Loans restructured in a troubled debt restructuring, nonaccrual		3,812		8,159		8,158		4,341		5,287
Total nonperforming loans (“NPLs”)	$	12,015	$	19,672	$	22,459	$	19,583	$	24,313

Restructured loans, accruing $ 4,425  $ 4,715  $ 6,469  $ 22,009  $ 20,461 

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Foreclosed Properties, Net (Tables)

9 Months Ended

Sep. 30, 2012

Foreclosed Properties, Net [Abstract]

Summary Of Foreclosed Properties

		For the nine months ended September 30,
		2012			2011
Beginning balance	$	14,913	$	19,934
Transfer of net realizable value to foreclosed properties		8,193		2,827
Sale proceeds		(7,519)		(6,798)
Net gain from disposal of foreclosed properties		183		198
Valuation allowance related to properties disposed		(1,959)		(2,776)
Total foreclosed properties		13,811		13,385
Valuation allowance for losses		(3,360)		(2,723)
Total foreclosed properties, net	$	10,451	$	10,662

Changes In The Valuation Allowance For Losses On Foreclosed Properties

		For the nine months ended September 30,
		2012		2011
Beginning balance	$	2,794	$	3,982
Provision charged to operations		2,525		1,517
Amounts related to properties disposed		(1,959)		(2,776)
Balance at end of period	$	3,360	$	2,723

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Reconciliation of net income to net cash provided by operating activities:
Net Income	$ 4,711	$ 2,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	962	986
Amortization of debt issuance costs	27	26
Provision for losses on loans	5,125	4,450
Provision for impairment of letters of credit		131
Net amortization of premium/discount on securities	2,041	1,754
Increase in cash surrender value of life insurance	(282)	(353)
Net gain on life insurance death benefit	(501)	(297)
Net realized gain on sale of securities	(1,585)	(392)
Net gain on sale of loans	(1,523)	(805)
Net gain on sale of branches	(826)
Proceeds from sale of loans held for sale	78,428	52,313
Origination of loans held for sale	(78,178)	(47,367)
Net change in valuation of mortgage servicing rights	158	225
Provision for valuation allowance on foreclosed properties	2,525	1,517
Net gain on sale of premises and equipment	(137)	(7)
Net gain (loss) on sale of land held for sale	(445)	10
Net gain on disposals of foreclosed properties	(183)	(198)
Expense (benefit) for deferred tax expense	282	(313)
Stock-based compensation expense	137	59
Tax benefit from exercise/forfeiture of options	(1)
Income in equity of UFS subsidiary	(509)	(631)
Changes in assets and liabilities:
Accrued interest receivable and other assets	(669)	5,802
Payment to reduce LOC valuation allowance		(232)
Accrued expenses and other liabilities	(966)	1,109
Net cash flows provided by operating activities	8,591	20,510
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale	45,822	25,696
Principal payments on securities available for sale	53,644	46,284
Purchase of securities available for sale	(59,306)	(40,141)
FHLB stock redemption	3,194
Proceeds from sale of foreclosed properties	7,519	6,798
Proceeds from sale of premises and equipment	254	11
Proceeds from sale of land held for sale	601	308
Loan originations and payments, net	(19,633)	(12,825)
Additions to premises and equipment	(1,192)	(474)
Proceeds from life insurance surrender		1,698
Proceeds from life insurance death benefit	870	457
Rabbi Trust initial funding		(1,626)
Net change in federal funds sold	513	1
Dividend from UFS Subsidiary	763	319
Branch sale - Premier, net cash and cash equivalents	(26,675)
Net cash provided by investing activities	6,374	26,506
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	(1,081)	5,778
Net change in federal funds purchased and repurchase agreements	(25,511)	1,227
Repayments on Federal Home Loan Bank advances	(15,000)	(15,000)
Tax benefit from vesting of restricted stock units	13
Cash dividends paid	(317)
Net cash used in financing activities	(41,896)	(7,995)
Net change in cash	(26,931)	39,021
Beginning cash	86,980	54,555
Ending cash	60,049	93,576
Supplemental cash flow information:
Interest paid	5,617	7,363
Income taxes paid (refunded), net	1,800	(2,526)
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties	8,193	2,827
Mortgage servicing rights resulting from sale of loans	$ 230	$ 117

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2012

Deferred Income Taxes [Line Items]

Reconciliation Of Beginning And Ending Amounts Of Unrecognized Tax Benefits

	For the three months ended September 30, 2012			For the nine months ended September 30, 2012
Balance at beginning of period	$	140	$	174
Additions for tax positions of prior years		-		-
Settlements		-		(34)
Balance, September 30, 2012	$	140	$	140

Available-for-sale Securities [Member]

Deferred Income Taxes [Line Items]

Summary Of Changes In Deferred Income Tax Balances

		For the nine months ended September 30,
		2012		2011
Balances at beginning of period	$	(2,468)	$	(659)
Net change during period		(1,376)		(2,419)
Balances at end of period	$	(3,844)	$	(3,078)

Other Than Available For Sale Securities [Member]

Deferred Income Taxes [Line Items]

Summary Of Changes In Deferred Income Tax Balances

		For the nine months ended September 30,
		2012		2011
Balances at beginning of period	$	9,613	$	9,861
Net change during period		(282)		313
Balances at end of period	$	9,331	$	10,174

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Fair Value (Assets Measured At Fair Value On A Non-Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	$ 14,939	$ 16,804
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	14,939	16,804
Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	4,488	4,685
Impaired Loans [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Impaired Loans [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Impaired Loans [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	4,488	4,685
Foreclosed Properties, Net [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	10,451	12,119
Foreclosed Properties, Net [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Foreclosed Properties, Net [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total
Foreclosed Properties, Net [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	$ 10,451	$ 12,119

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Income Taxes (Reconciliation Of Beginning And Ending Amounts Of Unrecognized Tax Benefits) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012
Income Taxes [Abstract]
Tax benefit recognition threshold, likelihood of being realized		50.00%
Balance, at beginning of period	$ 140	$ 174
Additions for tax positions of prior years
Settlements		(34)
Balance, September 30, 2012	$ 140	$ 140

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash and due from financial institutions	$ 60,049	$ 86,980
Federal funds sold		513
Securities available for sale	247,198	284,331
Loans held for sale	2,912	1,869
Loans, net of allowance of $10,658 and $10,638 at September 30, 2012 and December 31, 2011, respectively	589,940	620,377
Cash surrender value of life insurance	22,977	23,064
Premises and equipment, net	21,065	22,953
Premises and equipment held for sale	1,068	1,224
Federal Home Loan Bank stock	3,598	6,792
Foreclosed properties, net	10,451	12,119
Goodwill	6,641	6,641
Deferred income taxes	5,487	7,145
Accrued interest receivable	3,243	3,381
Other assets	9,971	9,540
Total Assets	984,600	1,086,929
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing	124,832	104,446
Interest-bearing	673,942	760,741
Total Deposits	798,774	865,187
Federal Home Loan Bank advances	40,000	55,000
Repurchase agreements	20,904	47,566
Subordinated debentures	16,100	16,100
Convertible promissory notes	9,450	9,450
Accrued expenses and other liabilities	8,320	9,225
Total Liabilities	893,548	1,002,528
Common stock, $5 par value, authorized 50,000,000 shares; Issued-8,148,360 shares at September 30, 2012 and 8,132,552 at December 31, 2011; Outstanding-7,927,347 shares at September 30, 2012 and 7,911,539 at December 31, 2011	40,741	40,662
Additional paid-in capital	12,136	12,066
Retained earnings	35,835	31,441
Treasury stock (221,013 shares at September 30, 2012 and December 31, 2011)	(3,549)	(3,549)
Accumulated other comprehensive income	5,889	3,781
Total Stockholders' Equity	91,052	84,401
Total Liabilities and Stockholders' Equity	$ 984,600	$ 1,086,929

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Loans (Schedule Of Loans Held For Investment) (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	$ 600,992,000	$ 631,396,000
Less: Deferred Origination Fees, net of costs	(394,000)	(381,000)
Less: Allowance for Loan Losses	(10,658,000)	(10,638,000)	(12,857,000)	(11,502,000)
Loans, net	589,940,000	620,377,000	623,937,000
Loans carrying value	100,400,000	105,100,000
Construction [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	50,148,000	53,606,000
Less: Allowance for Loan Losses	(1,030,000)	(1,231,000)	(1,567,000)	(1,424,000)
Loans, net	49,118,000		53,432,000
Real Estate - Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	132,550,000	143,456,000
Less: Allowance for Loan Losses	(2,203,000)	(1,995,000)	(2,593,000)	(2,103,000)
Loans, net	130,347,000		134,492,000
Real Estate - Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	294,946,000	317,198,000
Less: Allowance for Loan Losses	(6,271,000)	(5,467,000)	(6,790,000)	(6,355,000)
Loans, net	288,281,000		322,078,000
Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	98,820,000	91,750,000
Less: Allowance for Loan Losses	(720,000)	(770,000)	(1,114,000)	(1,189,000)
Loans, net	98,100,000		89,950,000
Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	8,172,000	8,809,000
Less: Allowance for Loan Losses	(133,000)	(161,000)	(370,000)	(391,000)
Loans, net	8,039,000		8,499,000
Municipal Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	16,356,000	16,577,000
Loans, net	$ 16,356,000		$ 15,909,000

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Consolidated Statement Of Changes In Stockholders' Equity And Comprehensive Income (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Treasury Stock [Member]	Accumulated Other Comprehensive Income [Member]	Total
Balance at Dec. 31, 2011	$ 40,662	$ 12,066	$ 31,441	$ (3,549)	$ 3,781	$ 84,401
Balance, Shares at Dec. 31, 2011	7,911,539
Net income for the period			4,711			4,711
Net changes in unrealized gain on securities available for sale					5,069	5,069
Reclassification adjustment for net gains realized in income					(1,585)	(1,585)
Tax effect					(1,376)	(1,376)
Total comprehensive income						6,819
Stock-based compensation expense		(4)				(4)
Vesting of Restricted Stock Units ("RSUs"), Amount	75	(75)
Vesting of Restricted Stock Units ("RSUs"), Shares	14,919
Tax benefit from vesting of RSUs		13				13
Exercise of stock options, Amount	4	(1)				3
Excercise of stock options, Shares	889
Expiration/forfeiture of unexercised stock options/RSUs		137				137
Cash dividends ($0.04 per share)			(317)			(317)
Balance at Sep. 30, 2012	$ 40,741	$ 12,136	$ 35,835	$ (3,549)	$ 5,889	$ 91,052
Balance, Shares at Sep. 30, 2012	7,927,347

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Troubled Debt Restructuring (Summary Of Troubled Debt Restructurings) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Modifications [Line Items]
Number of Modifications	19	29
Recorded Investment	$ 8,237	$ 26,350
Construction [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications
Recorded Investment
Real Estate - Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	5	3
Recorded Investment	887	1,432
Real Estate - Commercial [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	13	24
Recorded Investment	7,335	24,528
Commercial [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	1	2
Recorded Investment	15	390
Consumer [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications
Recorded Investment
Municipal Loans [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications
Recorded Investment

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Commitments And Contingencies (Tables)

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Lending Related Commitments

LENDING RELATED COMMITMENTS

(Dollar amounts in thousands)

		September 30,  2012		December 31, 2011
Commitments to fund unused home equity line loans	$	64,066	$	56,952
Commitments to fund 1-4 family loans		15,675		3,034
Commitments to fund residential real estate construction loans		1,457		1,114
Commitments unused on commercial lines of credit loans		176,974		150,884
Commitments unused on consumer lines of credit loans		9,579		12,814
Total commitments to extend credit	$	267,751	$	224,798
Financial standby letters of credit	$	10,042	$	12,468

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Troubled Debt Restructuring

9 Months Ended

Sep. 30, 2012

Troubled Debt Restructuring [Abstract]

Troubled Debt Restructuring

14.Troubled Debt Restructuring

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that would not otherwise be considered except for the borrower’s financial difficulties.  A TDR may be either accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability.  If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months.

(Dollar amounts in thousands)

			Construction				Real Estate-Mortgage					Real Estate-Commercial					Commercial					Consumer					Municipal				Total
Accruing
December 31, 2011	$	-			$			1,432		$			20,203		$			374			$			-		$			-	$	22,009
Principal payments		-						(697)					(332)					(374)						-					-		(1,403)
Charge-offs		-						(195)					-					-						-					-		(195)
Advances		-						-					45					-						-					-		45
New restructured		-						387					1,017					-						-					-		1,404
Transferred out of TDRs		-						(40)					(7,592)					-						-					-		(7,632)
Transfers to nonaccrual		-						(500)					(9,303)					-						-					-		(9,803)
September 30, 2012	$	-			$			387		$			4,038		$			-			$			-		$			-	$	4,425
Nonaccrual
December 31, 2011	$			-		$			-		$			4,325		$			16	$			-		$			-		$	4,341
Principal payments				-					-					(3,889)					(1)				-					-			(3,890)
Charge-offs				-					-					(2,871)					-				-					-			(2,871)
Advances				-					-					189					-				-					-			189
New restructured				-					-					-					-				-					-			-
Transfers to foreclosed properties				-					-					(3,760)					-				-					-			(3,760)
Transfers from accruing				-					500					9,303					-				-					-			9,803
September 30, 2012	$			-		$			500		$			3,297		$			15	$			-		$			-		$	3,812

Totals
December 31, 2011	$	-	$	1,432	$	24,528	$	390	$	-	$	-	$	26,350
Principal payments		-		(697)		(4,221)		(375)		-		-		(5,293)
Charge-offs		-		(195)		(2,871)		-		-		-		(3,066)
Advances		-		-		234		-		-		-		234
New restructured		-		387		1,017		-		-		-		1,404
Transfers out of TDRs		-		(40)		(7,592)		-		-		-		(7,632)
Transfers to foreclosed properties		-		-		(3,760)		-		-		-		(3,760)
September 30, 2012	$	-	$	887	$	7,335	$	15	$	-	$	-	$	8,237

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

During the quarter ended September 30, 2012, $1.1 million of loans were transferred to restructured status. All of these loans were restructured due to payment schedule changes. Also during the quarter, $4.8 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $2.9 million were received. The remaining balance of $1.9 million was charged off.

A summary of troubled debt restructurings as of September 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

	September 30, 2012				December 31, 2011
		Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		-	$	-		-	$	-
Real estate – mortgage		5		887		3		1,432
Real estate – commercial		13		7,335		24		24,528
Commercial		1		15		2		390
Consumer		-		-		-		-
Municipal		-		-		-		-
Total		19	$	8,237		29	$	26,350

A summary of troubled debt restructurings as of September 30, 2012 by restructure type is as follows (dollar amounts in thousands):

		Accruing		Nonaccruing		Total
A/B split	$	78	$	3,798	$	3,876
Payment schedule changes		2,204		14		2,218
Interest rate reduction		2,143		-		2,143
Total	$	4,425	$	3,812	$	8,237

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011		Dec. 31, 2011
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Net income available to common shareholders	$ 2,085		$ 1,297		$ 4,711		$ 2,723
Plus: Income impact of assumed conversions: Interest on 10% convertible debentures, net of income tax	149				446
Income available to common stockholders plus assumed conversions	2,234		1,297		5,157		2,723
Weighted average number of common shares outstanding-basic	7,927,347		7,911,539		7,922,756		7,911,539
Dilutive effect of stock options	7,964	[1]		[1]	1,922	[1]		[1]
Dilutive effect of restricted stock units	27,529		5,215		20,110		3,500
Dilutive effect of convertible promissory notes	1,890,000	[2]		[1],[2]	1,890,000	[2]		[1],[2]
Dilutive potential common shares	1,925,493		5,215		1,912,032		3,500
Adjusted weighted-average shares	9,852,840		7,916,754		9,834,788		7,915,039
Basic Earnings Per Share	$ 0.26		$ 0.16		$ 0.59		$ 0.34
Diluted Earnings Per Share	$ 0.23		$ 0.16		$ 0.52		$ 0.34
Interest rate on convertible debentures	10.00%		10.00%		10.00%		10.00%
Convertible promissory notes	$ 9,450				$ 9,450				$ 9,450
Conversion ratio of principal to shares					20.00%
Conversion date of convertible notes					Oct. 01, 2014
Percentage of original principal amount	50.00%				50.00%
Conversion price per share	$ 5.00				$ 5.00
Convertible Notes [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive effect of convertible promissory notes					1,890,000
Stock Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities excluded from computation of earnings per share	93,152		112,400		93,152		112,400

[1] At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

[2] At September 30, 2012 and 2011, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”). The Convertible Notes are convertible into shares of common stock of the Company 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. On October 1, 2014, one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not occurred. At September 30, 2012, the entire 1,890,000 common shares are included since the average market price per share for the three months and nine months ended September 30, 2012 exceeded the conversion price of $5.00 per share. For the three months and nine months ended September 30, 2011, the common shares are not included due to their anti-dilutive effect.

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Commitments And Contingencies

16.Commitments and Contingencies

The following is a summary of the Company’s off-balance sheet commitments, all of which were lending-related commitments:

LENDING RELATED COMMITMENTS

(Dollar amounts in thousands)

		September 30,  2012		December 31, 2011
Commitments to fund unused home equity line loans	$	64,066	$	56,952
Commitments to fund 1-4 family loans		15,675		3,034
Commitments to fund residential real estate construction loans		1,457		1,114
Commitments unused on commercial lines of credit loans		176,974		150,884
Commitments unused on consumer lines of credit loans		9,579		12,814
Total commitments to extend credit	$	267,751	$	224,798
Financial standby letters of credit	$	10,042	$	12,468

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Consolidated Statement Of Changes In Stockholders' Equity And Comprehensive Income (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2012
Consolidated Statement Of Changes In Stockholders' Equity And Comprehensive Income [Abstract]
Cash dividends, per share	$ 0.04

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Loans, allowance	$ 10,658	$ 10,638
Common stock, par value	$ 5	$ 5
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	8,148,360	8,132,552
Common stock, shares outstanding	7,937,347	7,911,539
Treasury stock, shares	221,013	221,013

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Foreclosed Properties, Net

9 Months Ended

Sep. 30, 2012

Foreclosed Properties, Net [Abstract]

Foreclosed Properties, Net

9.Foreclosed Properties, Net

Foreclosed properties are summarized as follows (dollar amounts in thousands):

		For the nine months ended September 30,
		2012			2011
Beginning balance	$	14,913	$	19,934
Transfer of net realizable value to foreclosed properties		8,193		2,827
Sale proceeds		(7,519)		(6,798)
Net gain from disposal of foreclosed properties		183		198
Valuation allowance related to properties disposed		(1,959)		(2,776)
Total foreclosed properties		13,811		13,385
Valuation allowance for losses		(3,360)		(2,723)
Total foreclosed properties, net	$	10,451	$	10,662

Changes in the valuation allowance for losses on foreclosed properties were as follows (dollar amounts in thousands):

		For the nine months ended September 30,
		2012		2011
Beginning balance	$	2,794	$	3,982
Provision charged to operations		2,525		1,517
Amounts related to properties disposed		(1,959)		(2,776)
Balance at end of period	$	3,360	$	2,723

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Document And Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 06, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012
Entity Registrant Name	BAYLAKE CORP
Entity Central Index Key	0000275119
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		7,937,347

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

Income Taxes

10.Income Taxes

In accordance with the accounting guidance for income taxes, deferred income 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 income 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 income 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.

Management regularly reviews the carrying amount of the Company’s deferred income 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 deferred income tax assets will not be realized in future periods, a deferred income tax valuation allowance would be established.  Consideration is given to various positive and negative factors that could affect the realization of the deferred income 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 evaluation is based on current tax laws as well as management’s expectations of future performance.  At September 30, 2012 and December 31, 2011, the Company determined that no valuation allowance was required to be taken against the deferred income tax asset other than a valuation allowance to reduce its state net operating loss carry forwards to an amount which the Company believes the benefit will more likely than not be realized.  The Company continues to assess the amount of tax benefits it may realize.

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.   Accounting guidance related to uncertainty in income taxes 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, the Company 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.

As of September 30, 2012, the gross unrecognized tax benefits represent estimated tax and interest costs related to a pending IRS audit for the 2009 tax year.   In January 2012, the Company and the IRS reached a tentative settlement agreement to finalize the audit.  The Company paid interest related to the timing of deductions taken for income tax purposes.  The liability amount recorded by the Company is considered adequate to cover the proposed settlement amount.

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollar amounts in thousands):

	For the three months ended September 30, 2012			For the nine months ended September 30, 2012
Balance at beginning of period	$	140	$	174
Additions for tax positions of prior years		-		-
Settlements		-		(34)
Balance, September 30, 2012	$	140	$	140

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

Deferred income taxes – Available for sale securities

		For the nine months ended September 30,
		2012		2011
Balances at beginning of period	$	(2,468)	$	(659)
Net change during period		(1,376)		(2,419)
Balances at end of period	$	(3,844)	$	(3,078)

Deferred income taxes – Other than available for sale securities

		For the nine months ended September 30,
		2012		2011
Balances at beginning of period	$	9,613	$	9,861
Net change during period		(282)		313
Balances at end of period	$	9,331	$	10,174

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Consolidated Statements Of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
INTEREST AND DIVIDEND INCOME
Loans, including fees	$ 7,812	$ 8,278	$ 23,698	$ 24,998
Taxable securities	1,493	1,747	5,111	5,376
Tax exempt securities	373	375	1,118	1,129
Federal funds sold	44	51	97	90
Total Interest and Dividend Income	9,722	10,451	30,024	31,593
INTEREST EXPENSE
Deposits	1,029	1,749	3,618	5,577
Repurchase agreements	13	23	49	65
Federal Home Loan Bank advances and other debt	230	261	746	833
Subordinated debentures	75	66	228	200
Convertible promissory notes	245	245	735	735
Total Interest Expense	1,592	2,344	5,376	7,410
Net interest income	8,130	8,107	24,648	24,183
Provision for loan losses	1,100	1,200	5,125	4,450
Net interest income after provision for loan losses	7,030	6,907	19,523	19,733
NONINTEREST INCOME
Fees from fiduciary activities	242	217	765	720
Fees from loan servicing	151	139	450	552
Fees for other services to customers	1,167	1,260	3,555	3,726
Net gain on sale of loans	651	208	1,523	805
Net loss in mortgage servicing rights	(90)	(111)	(159)	(225)
Net gain on sale of securities		267	1,585	392
Net gain/(loss) on sale of premises and equipment	(39)	(1)	137	7
Net gain (loss) on sale of premises and equipment held for sale			445	(10)
Net gain on sale of branches	826		826
Increase in cash surrender value of life insurance	81	102	282	353
Income in equity of UFS subsidiary	173	199	509	631
Other income	88	(174)	718	190
Total Noninterest Income	3,250	2,106	10,636	7,141
NONINTEREST EXPENSE
Salaries and employee benefits	4,196	4,067	12,851	12,681
Occupancy expense	587	551	1,764	1,731
Equipment expense	281	304	838	891
Data processing and courier	238	210	688	621
FDIC insurance expense	351	571	1,082	1,861
Operation of other real estate	306	108	2,718	1,875
Provision for impairment of standby letters of credit		117		131
Loan and collection expense	106	139	463	470
Other outside services	214	166	594	488
Other operating expenses	976	975	2,966	3,028
Total Noninterest Expense	7,255	7,208	23,964	23,777
Income before provision for income taxes	3,025	1,805	6,195	3,097
Provision for income taxes	940	508	1,484	374
Net Income	$ 2,085	$ 1,297	$ 4,711	$ 2,723
Basic earnings per share	$ 0.26	$ 0.16	$ 0.59	$ 0.34
Diluted earnings per share	$ 0.23	$ 0.16	$ 0.52	$ 0.34

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

4.Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860):Reconsideration of Effective Control for Repurchase Agreements.  The ASU is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  The amendments to the codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets.  The guidance in the ASU was effective for the first interim or annual period beginning on or after December 15, 2011.  The provisions of this guidance had no impact on the consolidated financial condition, results of operation or liquidity of the Company.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350):  Testing Goodwill for Impairment.  ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment.  ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other.  The more-likely-than-not threshold is defined as having a likelihood of more than 50%.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The provisions of this guidance did not have a significant impact on the consolidated financial condition, results of operations or liquidity of the Company.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The provisions of this guidance will not have a significant impact on the consolidated financial condition, results of operation or liquidity of the Company.

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Earnings Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Earnings Per Share

3.Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised, stock awards were fully vested, and promissory notes were converted, resulting in the issuance of common stock that then shared in the Company’s earnings, is computed by dividing net income as adjusted for the income impact of assumed conversions 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 per share:

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended September 30,				Nine months ended September 30,
		2012		2011		2012			2011
(Numerator):
Net income available to common stockholders	$	2,085	$	1,297	$	4,711		$	2,723
Plus:  Income impact of assumed conversions
Interest on 10% convertible debentures, net of
income tax		149		-		446			-
Income available to common stockholders plus  assumed conversions	$	2,234	$	1,297	$	5,157		$	2,723
(Denominator):
Weighted average number of common shares
outstanding-basic		7,927,347		7,911,539		7,922,756			7,911,539
Plus:  Incremental shares of assumed conversions:
Dilutive effect of stock options		7,964	(1)	-	(1)	1,922		(2)	-		(2)
Dilutive effect of restricted stock units		27,529		5,215		20,110			3,500
Dilutive effect of convertible promissory notes (3)		1,890,000		-			1,890,000			-
Dilutive potential common shares		1,925,493		5,215		1,912,032			3,500
Adjusted weighted-average shares		9,852,840		7,916,754		9,834,788			7,915,039
Basic Earnings Per Share	$	0.26	$	0.16	$	0.59		$	0.34
Diluted Earnings Per Share	$	0.23	$	0.16	$	0.52		$	0.34

⁽¹⁾At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽²⁾At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽³⁾At September 30, 2012 and 2011, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”).  The Convertible Notes are convertible into shares of common stock of the Company 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.  On October 1, 2014,  one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not occurred.  At September 30, 2012, the entire 1,890,000 common shares are included since the average market price per share for the three months and nine months ended September 30, 2012 exceeded the conversion price of $5.00 per share.  For the three months and nine months ended September 30, 2011, the common shares are not included due to their anti-dilutive effect.

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Supervisory Agreement

9 Months Ended

Sep. 30, 2012

Supervisory Agreement [Abstract]

Supervisory Agreement

15.Supervisory Agreement

Effective December 29, 2010, the Company and the Bank entered into a Written Agreement (the “Written Agreement”) with the Federal Reserve Bank and the Wisconsin Department of Financial Institutions (“WDFI”). On June 12, 2012, the Company and Bank announced the termination of the Written Agreement. In place of the Written Agreement, on June 19, 2012 the Company and the Bank entered into an informal arrangement with the Federal Reserve and WDFI, which requires the Company and the Bank to (i) refrain from declaring or paying dividends absent prior regulatory approval, (ii) submit capital plans as evidence of sufficient capital, and (iii) submit annual business plan and budget at least 30 days prior to the beginning of the year. As of September 30, 2012, the arrangement remains in place.

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Equity Investment

9 Months Ended

Sep. 30, 2012

Equity Investment [Abstract]

Equity Investment

11.Equity Investment

The Bank owns a 49.8% interest (500 shares) in United Financial Services, Inc. (“UFS”), a data processing service. In addition to the ownership interest, the Bank and UFS have a common member on each of their respective Boards of Directors. The investment in this entity is carried under the equity method of accounting and the pro rata share of its net income is included in noninterest income in the consolidated statement of operations.  The carrying value of the investment in UFS was $4.1 million at September 30, 2012 and $4.3 million at December 31, 2011.  The current book value of UFS is approximately $8,150 per share.

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Loans

9 Months Ended

Sep. 30, 2012

Loans [Abstract]

Loans

7.Loans

Loans held for investment are summarized as follows (dollar amounts in thousands):

	September 30, 2012			December 31, 2011
Construction	$	50,148	$		53,606
Real estate-mortgage		132,550			143,456
Real estate-commercial		294,946			317,198
Commercial		98,820			91,750
Consumer		8,172			8,809
Municipal		16,356			16,577
Gross loans		600,992			631,396
Less: Deferred origination fees, net of costs		(394)			(381)
Less: Allowance for loan losses		(10,658)			(10,638)
Loans, net	$	589,940	$		620,377

Loans having a carrying value of $100.4 million and $105.1 million are pledged as collateral for borrowings from the FHLB at September 30, 2012 and December 31, 2011, respectively.

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2012 is as follows (dollar amounts in thousands):

			Construction			Real Estate-Mortgage				Real Estate-Commercial			Commercial					Consumer					Municipal						Not Specifically Allocated					Total
Allowance for Loan Losses:
Beginning balance	$			1,231	$		1,995	$	5,467		$		770			$			161		$			-		$		1,014			$	10,638
Charge-offs				(637)			(828)		(3,940)				(259)						(90)					-				-				(5,754)
Recoveries				18			38		491				76						26					-				-				649
Provision				418			998		4,253				133						36					-				(713)				5,125
Ending balance	$			1,030	$		2,203	$	6,271		$		720			$			133		$			-		$		301			$	10,658
Loans:
Ending balance		$		50,148	$		132,550	$		294,552		$		98,820	$		8,172			$		16,356			$		-			$			600,598
ALL				(1,030)			(2,203)			(6,271)				(720)			(133)					-					(301)						(10,658)
Recorded investment		$		49,118	$		130,347	$		288,281		$		98,100	$		8,039			$		16,356			$		(301)			$			589,940
Ending balance:
Individually evaluated			$	1,027	$		2,865	$		12,488		$		35	$		24			$		-			$		-			$			16,439
Collectively evaluated				49,121			129,685			282,064				98,785			8,148					16,356					-						584,159
Total			$	50,148	$		132,550	$		294,552		$		98,820	$		8,172			$		16,356			$		-			$			600,598

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2011 is as follows (dollar amounts in thousands):

			Construction		Real Estate-Mortgage		Real Estate-Commercial		Commercial		Consumer			Municipal		Not Specifically Allocated			Total
Allowance for Loan Losses:
Beginning balance	$	1,424		$	2,103	$	6,355	$	1,189	$	391	$		-	$		40	$		11,502
Charge-offs		(373)			(1,407)		(856)		(476)		(213)			-			-			(3,325)
Recoveries		59			9		78		38		46			-			-			230
Provision		457			1,888		1,213		363		146			-			383			4,450
Ending balance	$	1,567		$	2,593	$	6,790	$	1,114	$	370	$		-	$		423	$		12,857
Loans:
Ending balance	$	54,999		$	137,085	$	328,868	$	91,064	$	8,869		$	15,909	$		-	$		636,794
ALL		(1,567)			(2,593)		(6,790)		(1,114)		(370)			-			(423)			(12,857)
Recorded investment	$	53,432		$	134,492	$	322,078	$	89,950	$	8,499		$	15,909	$		(423)	$		623,937
Ending balance:
Individually evaluated	$	2,853		$	2,603	$	10,853	$	404	$	164		$	-	$		-	$		16,877
Collectively evaluated		52,146			134,482		318,015		90,660		8,705			15,909			-			619,917
Total	$	54,999		$	137,085	$	328,868	$	91,064	$	8,869		$	15,909	$		-	$		636,794

A summary of past due loans at September 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

	September 30, 2012
		30-89 Days Past Due (accruing)		90 Days & Over or            on Non-accrual		Total
Construction	$	1,656	$	1,027	$	2,684
Real estate – mortgage		1,519		2,479		3,997
Real estate – commercial		2,374		8,450		10,823
Commercial		-		35		35
Consumer		38		24		63
Municipal		-		-		-
Total	$	5,587	$	12,015	$	17,602

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

	December 31, 2011
		30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	435	$	4,945	$	5,380
Real estate – mortgage		845		2,676		3,521
Real estate – commercial		2,072		11,660		13,732
Commercial		41		259		300
Consumer		59		43		102
Municipal		-		-		-
Total	$	3,452	$	19,583	$	23,035

Credit Quality:  Management utilizes a risk grading matrix on each of the Company’s commercial loans.  Loans are graded on a scale of 1 to 7.  A description of the loan grades is as follows:

0001 - Excellent risk.  Borrowers of highest quality and character.  Almost no risk possibility.  Balance sheets are very strong with superior liquidity, excellent debt capacity and low leverage.  Cash flow trends are positive and stable.  Excellent ratios.

0002 - Very good risk.  Good ratios in all areas.  High quality borrower.  Normally quite liquid.  Differs slightly from a 0001 customer.

0003 - Strong in most categories.  Possible higher levels of debt or shorter track record.  Minimal attention required.  Good management.

0004 - Better than average risk.  Adequate ratios, fair liquidity, desirable customer.  Proactive management.  Performance trends are positive.  Any deviations are limited and temporary.

0005 - Satisfactory risk.  Some ratios slightly weak.  Overall ability to repay is adequate.  Capable and generally proactive management in all critical positions.  Margins and cash flow may lack stability but trends are stable to positive.  Company normally profitable year to year but may experience an occasional loss.

0006 A - Weakness detected in either management, capacity to repay or balance sheet.  Erratic profitability and financial performance.  Loan demands more attention.  Includes loans deemed to have weaknesses and less than 90 days past due.

0006 B - Have weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s collateral position at some future date.  Loans rated 0006B are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Includes loans deemed to have weaknesses and less than 90 days past due.

0007 - Well defined weaknesses and trends that jeopardize the repayment of loans.  Ranging from workout to legal.  Includes loans that are nonaccrual and/or 90 days and over past due.

In addition to the risk grading on commercial loans, management utilizes a risk grading process on its real estate mortgage, consumer, and municipal loans when the loan becomes past due 90 days or more or is moved to nonaccrual status.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

Below is a breakdown of loans by risk grading as of September 30, 2012 (dollar amounts in thousands):

		0001-0005		0006A					0006B					0007(1)					Total
Commercial	$	92,062	$			1,752		$		4,110	$		896		$		98,820
Real estate – commercial		233,372				25,913				15,604			20,057				294,946
Construction		40,955				6,031				1,905			1,257				50,148
		366,389				33,696				21,619			22,210				443,914
Real estate - mortgage		127,330				1,144				665			3,411				132,550
Consumer		8,171			-					-		1						8,172
Municipal		16,356			-					-		-						16,356
Total	$	518,246	$		34,840		$			22,284	$	25,622						600,992
Deferred origination fees, net of costs																		(394)
Total loans																$		600,598

Percent of Total Loans86.3%5.8%3.7%4.2%100.0%

⁽¹⁾ Included in the 0007 rated loans are $9.2 million of loans that are not impaired because fair value exceeds carrying cost.

Below is a breakdown of loss by risk grading as of December 31, 2011 (dollar amounts in thousands):

		0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	84,652	$	4,618	$	1,051	$	1,429	$	91,750
Real estate – commercial		227,815		43,690		11,592		34,101		317,198
Construction		37,636		6,218		3,323		6,429		53,606
		350,103		54,526		15,966		41,959		462,554
Real estate - mortgage		137,379		391		885		4,801		143,456
Consumer		8,791		-		-		18		8,809
Municipal		16,577		-		-		-		16,577
Total	$	512,850	$	54,917	$	16,851	$	46,778		631,396
Deferred origination fees, net of costs										(381)
Total loans									$	631,015

Percent of Total Loans81.3%8.7%2.6%7.4%100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

XML

Troubled Debt Restructuring (Summary Of Troubled Debt Restructurings By Restructure Type) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011
Total	$ 8,237			$ 26,350
A/B Note Structure [Member]
Total	3,876
Payment Schedule Changes [Member]
Total	2,218
Interest Rate Reduction [Member]
Total	2,143
Accruing [Member]
Total	4,425	4,715	6,469	22,009	20,461
Accruing [Member] | A/B Note Structure [Member]
Total	78
Accruing [Member] | Payment Schedule Changes [Member]
Total	2,204
Accruing [Member] | Interest Rate Reduction [Member]
Total	2,143
Nonaccrual [Member]
Total	3,812	8,159	8,158	4,341	5,287
Nonaccrual [Member] | A/B Note Structure [Member]
Total	3,798
Nonaccrual [Member] | Payment Schedule Changes [Member]
Total	$ 14

XML

Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Fair Value

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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement. 

The methods and assumptions used to estimate fair value are described below.

Securities available for sale - 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).  For other securities not able to be priced on matrix pricing, outside third parties are relied upon (Level 3 inputs).  None of the Company’s securities available for sale at September 30, 2012 or December 31, 2011 were measured using Level 1 inputs.

Mortgage servicing rights - 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.  The Company compares the valuation model inputs and results to published industry data for reasonableness (Level 2 inputs).

Foreclosed properties - 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.  Foreclosed properties are adjusted to fair value less estimated costs to sell upon transfer to foreclosed properties, establishing a new cost

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

basis when fair value is lower than the carrying cost on date of transfer.  Subsequently, foreclosed properties are carried at the lower of cost or fair value less estimated costs to sell (Level 3 inputs).

Impaired loans - the fair value of impaired loans is based on review of comparable collateral in similar marketplaces (Level 3 inputs) 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 less estimated costs to sell.  Impaired loans are not carried at fair value if there is sufficient collateral or if expected repayments exceed the recorded investments of such loans.

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

(Dollar amounts in thousands)

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

		September 30, 2012		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	$	2,024	$	-	$	2,024	$	-
Mortgage-backed securities		172,390		-		168,759		3,631
Asset-backed securities		4,522		-		4,522		-
Obligations of states and political subdivisions		58,816		-		58,816		-
Private placement and corporate bonds		7,792		-		7,792		-
Other securities		1,654		-		1,654		-
Total securities available for sale		247,198		-		243,567		3,631
Mortgage servicing rights		706		-		706		-
Total	$	247,904	$	-	$	244,273	$	3,631

		December 31, 2011		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	$	14,138	$	-	$	14,138	$	-
Mortgage-backed securities		193,592		-		177,330		16,262
Asset-backed securities		4,969		-		4,969		-
Obligations of states and political subdivisions		57,766		-		57,766		-
Private placement and corporate bonds		12,212		-		12,212		-
Other securities		1,654		-		1,654		-
Total securities available for sale		284,331		-		268,069		16,262
Mortgage servicing rights		634		-		634		-
Total	$	284,965	$	-	$	268,703	$	16,262

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

The following table presents additional information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	For the three month period ended September 30, 2012			For the nine month period ended September 30, 2012
Balance, beginning of period	$	4,543	$	16,262
Transfer into Level 3		-		-
Net unrealized gains		15		561
Transfer out of Level 3		-		(10,593)
Principal payments		(927)		(2,599)
Balance, end of period	$	3,631	$	3,631

The transfers out of Level 3 occurred during the first quarter and were the result of the availability of quoted prices on a portion of the securities that were Level 3 at December 31, 2011.

ASSETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS

(Dollar amounts in thousands)

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

		September 30, 2012		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,488	$	-	$	-	$	4,488
Foreclosed properties, net		10,451		-		-		10,451
Total	$	14,939	$	-	$	-	$	14,939

		December 31, 2011		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,685	$	-	$	-	$	4,685
Foreclosed properties, net		12,119		-		-		12,119
Total	$	16,804	$	-	$	-	$	16,804

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 Company’s fair value.

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

The following table presents the carrying amount and estimated fair value of certain financial instruments:

	(Dollar amounts in thousands)
	September 30, 2012					December 31, 2011
		Carrying Amount		Fair Value			Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	60,049	$	60,049	$		86,980	$	86,980
Federal funds sold		-		-			513		513
Securities available for sale		247,198		247,198			284,331		284,331
Loans held for sale		2,912		2,957			1,869		1,898
Loans, net		589,940		590,873			620,377		622,967
Federal Home Loan Bank stock		3,598		3,598			6,792		6,792
Mortgage servicing rights		706		706			634		634
Foreclosed properties, net		10,451		10,451			12,119		12,119
Accrued interest receivable		3,243		3,243			3,381		3,381
FINANCIAL LIABILITIES
Deposits	$	798,774	$	799,892	$		865,187	$	851,054
Repurchase agreements		20,904		20,904			47,566		47,566
Federal Home Loan Bank advances		40,000		40,504			55,000		56,968
Subordinated debentures		16,100		16,100			16,100		16,100
Convertible promissory notes		9,450		9,630			9,450		9,387
Accrued interest payable		656		656			898		898
Off-balance sheet credit related items:
Letters of credit	$	-	$	-	$		1,995	$	1,995

The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring and non-recurring basis have been previously disclosed.  The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

(a)Cash

The carrying amount of cash approximates fair value.

(b)Federal Funds Sold

The carrying amount of federal funds sold approximates fair value.

(c)Loans Held for Sale

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

(d)Cash Value of Life Insurance

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

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(e)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.

(f)Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value.

(g)Deposits

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

(h)Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(i)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.

(j)Subordinated Debentures

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

(k)Convertible Promissory Notes

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

(l)Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

(m)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.

XML

Investments

9 Months Ended

Sep. 30, 2012

Investments [Abstract]

Investments

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, 2012 and December 31, 2011 are as follows:

		September 30, 2012
			Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$		2,024	$	7	$	-
Obligations of states and political subdivisions			58,816		4,403		(7)
Mortgage-backed securities			172,390		5,271		(535)
Asset-backed securities			4,522		123		(241)
Private placement and corporate bonds			7,792		712		-
Other securities			1,654		-		-
Totals	$		247,198	$	10,516	$	(783)

		December 31, 2011
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	14,138	$	49	$	-
Obligations of states and political subdivisions		57,766		4,128		-
Mortgage-backed securities		193,592		4,233		(1,984)
Asset-backed securities		4,969		132		(451)
Private placement and corporate bonds		12,212		159		(17)
Other securities		1,654		-		-
Totals	$	284,331	$	8,701	$	(2,452)

At September 30, 2012 and December 31, 2011, the mortgage-backed securities portfolio was $172.4 million, (69.7%) and $193.6 million, (68.1%), respectively, of the investment portfolios.  Approximately 12.1%, or $20.9 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued and guaranteed by the Government National Mortgage Association (“GNMA”), the Small Business Administration (“SBA”) or the United States Department of Veterans Affairs (“VA”);  agencies of the United States government.  An additional 65.0%, or $112.1 million, of the mortgage-backed securities outstanding at September 30, 2012 were issued by either the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”); United States government-sponsored agencies.  Non-agency mortgage-backed securities present a level of credit risk that does not exist currently with United States government agency-backed securities, but only comprised approximately 22.8%, or  $39.4 million, of the outstanding mortgage-backed securities at September 30, 2012.  Management evaluates these non-agency mortgage-backed securities at least quarterly and more frequently when economic or market concerns warrant such evaluation.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

Securities with unrealized losses at September 30, 2012 and December 31, 2011, 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):

	September 30, 2012
	Less than 12 Months						12 Months or More				Total
Description of Securities		Fair Value		Unrealized Loss		Fair Value			Unrealized Loss			Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	601	$	(7)	$	-		$	-	$		601	$	(7)
Mortgage-backed securities		21,598		(134)		6,770			(401)			28,368		(535)
Asset-backed securities		-		-		3,364			(241)			3,364		(241)
Total securities temporarily impaired	$	22,199	$	(141)	$	10,134		$	(642)	$		32,333	$	(783)

	December 31, 2011
	Less than 12 Months					12 Months or More				Total
Description of Securities		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Mortgage-backed securities	$	46,955	$	(964)	$	9,363	$	(1,020)	$	56,318	$	(1,984)
Asset-backed securities		-		-		3,645		(451)		3,645		(451)
Private placement and corporate bonds		3,504		(17)		-		-		3,504		(17)
Total securities temporarily impaired	$	50,459	$	(981)	$	13,008	$	(1,471)	$	63,467	$	(2,452)

At September 30, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.  The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

At December 31, 2011, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises three securities.  The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

Management 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 is 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 consolidated statement of operations. Unrealized losses other than credit losses will continue to be recognized in other comprehensive income, net of tax. Unrealized losses reflected in the preceding tables have not been included in the results of operations because the unrealized losses were not deemed other-than-temporary. Management does not have the intent to sell the securities and has determined that it is not more likely than not that the Company will 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.

XML

Allowance For Loan Losses ("ALL")

9 Months Ended

Sep. 30, 2012

Allowance For Loan Losses ("ALL") [Abstract]

Allowance For Loan Losses ("ALL")

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 the consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

The ALL consists of specific reserves on certain impaired loans and general reserves for non-impaired loans.  Specific reserves reflect estimated losses 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 the Bank’s 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, nonaccrual 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 the 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.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

September 30, 2012			Construction							Real Estate- Mortgage						Real Estate- Commercial					Commercial				Consumer					Municipal					Not Specifically Allocated					Totals
With an allowance recorded:
Recorded investment	$			105		$			1,958			$			2,425		$		-			$		-		$		-			$			-			$		4,488
Unpaid principal balance				194					2,332						3,636				32					-				-						-					6,194
Related allowance				89					374						1,211				32					-				-						-					1,706
With no related allowance recorded:
Recorded investment	$			833			$		533				$		8,853		$		3			$		24		$		-				$		-			$		10,246
Unpaid principal balance				833					533						8,853				3					24				-						-					10,246
Related allowance				-					-						-				-					-				-						-					-
Total:
Recorded investment		$		938	$			2,491			$			11,278				$		3			$	24			$		-				$			-		$			14,734
Unpaid principal balance				1,027				2,865						12,489						35				24					-							-					16,440
Related allowance				89				374						1,211						32				-					-							-					1,706
Average recorded investment during quarter		$		1,158	$			3,101			$			13,276				$		45			$	23			$		-				$			-		$			17,603
Interest income recognized while impaired		$		2	$			72			$			185				$		6			$	-			$		-				$			-		$			265

December 31, 2011		Construction				Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer			Municipal			Not Specifically Allocated			Totals
With an allowance recorded:
Recorded investment	$		2,667	$	904		$	1,103		$	-		$	11		$	-		$	-		$	4,685
Unpaid principal balance			2,852		1,096			1,702			54			16			-			-			5,720
Related allowance			185		192			599			54			5			-			-			1,035
With no related allowance recorded:
Recorded investment	$		2,093	$	3,011		$	30,156		$	612		$	-		$	-		$	-		$	35,872
Unpaid principal balance			2,093		3,011			30,156			612			-			-			-			35,872
Related allowance			-		-			-			-			-			-			-			-
Total:
Recorded investment	$		4,760	$	3,915		$	31,259		$	612		$	11		$	-		$	-		$	40,557
Unpaid principal balance			4,945		4,107			31,858			666			16			-			-			41,592
Related allowance			185		192			599			54			5			-			-			1,035
Average recorded investment during quarter	$		4,942	$	4,327		$	30,080		$	529		$	15		$	-		$	-		$	39,893
Interest income recognized while impaired	$		277	$	311		$	1,512		$	66		$	21		$	-		$	-		$	2,187

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

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012

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

NONPERFORMING LOANS

		September 30, 2012		June 30, 2012		March 31, 2012		December 31, 2011		September 30, 2011
Nonaccrual loans	$	8,203	$	11,513	$	14,301	$	15,242	$	19,026
Loans restructured in a troubled debt restructuring, nonaccrual		3,812		8,159		8,158		4,341		5,287
Total nonperforming loans (“NPLs”)	$	12,015	$	19,672	$	22,459	$	19,583	$	24,313

Restructured loans, accruing $ 4,425  $ 4,715  $ 6,469  $ 22,009  $ 20,461 

During the quarter ended September 30, 2012, $4.8 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $2.9 million were received. The remaining balance of $1.9 million was charged off.

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Troubled Debt Restructuring (Tables)

9 Months Ended

Sep. 30, 2012

Troubled Debt Restructuring [Abstract]

Schedule Of Accrual And Nonaccrual Status Of Troubled Debt Restructuring

(Dollar amounts in thousands)

			Construction				Real Estate-Mortgage					Real Estate-Commercial					Commercial					Consumer					Municipal				Total
Accruing
December 31, 2011	$	-			$			1,432		$			20,203		$			374			$			-		$			-	$	22,009
Principal payments		-						(697)					(332)					(374)						-					-		(1,403)
Charge-offs		-						(195)					-					-						-					-		(195)
Advances		-						-					45					-						-					-		45
New restructured		-						387					1,017					-						-					-		1,404
Transferred out of TDRs		-						(40)					(7,592)					-						-					-		(7,632)
Transfers to nonaccrual		-						(500)					(9,303)					-						-					-		(9,803)
September 30, 2012	$	-			$			387		$			4,038		$			-			$			-		$			-	$	4,425
Nonaccrual
December 31, 2011	$			-		$			-		$			4,325		$			16	$			-		$			-		$	4,341
Principal payments				-					-					(3,889)					(1)				-					-			(3,890)
Charge-offs				-					-					(2,871)					-				-					-			(2,871)
Advances				-					-					189					-				-					-			189
New restructured				-					-					-					-				-					-			-
Transfers to foreclosed properties				-					-					(3,760)					-				-					-			(3,760)
Transfers from accruing				-					500					9,303					-				-					-			9,803
September 30, 2012	$			-		$			500		$			3,297		$			15	$			-		$			-		$	3,812

Totals
December 31, 2011	$	-	$	1,432	$	24,528	$	390	$	-	$	-	$	26,350
Principal payments		-		(697)		(4,221)		(375)		-		-		(5,293)
Charge-offs		-		(195)		(2,871)		-		-		-		(3,066)
Advances		-		-		234		-		-		-		234
New restructured		-		387		1,017		-		-		-		1,404
Transfers out of TDRs		-		(40)		(7,592)		-		-		-		(7,632)
Transfers to foreclosed properties		-		-		(3,760)		-		-		-		(3,760)
September 30, 2012	$	-	$	887	$	7,335	$	15	$	-	$	-	$	8,237

Summary Of Troubled Debt Restructurings

	September 30, 2012				December 31, 2011
		Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		-	$	-		-	$	-
Real estate – mortgage		5		887		3		1,432
Real estate – commercial		13		7,335		24		24,528
Commercial		1		15		2		390
Consumer		-		-		-		-
Municipal		-		-		-		-
Total		19	$	8,237		29	$	26,350

Summary Of Troubled Debt Restructurings By Restructure Type)

		Accruing		Nonaccruing		Total
A/B split	$	78	$	3,798	$	3,876
Payment schedule changes		2,204		14		2,218
Interest rate reduction		2,143		-		2,143
Total	$	4,425	$	3,812	$	8,237

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Foreclosed Properties, Net (Summary Of Foreclosed Properties) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Dec. 31, 2010
Foreclosed Properties, Net [Abstract]
Beginning balance	$ 14,913	$ 19,934
Transfer of net realizable value to foreclosed properties	8,193	2,827
Sale proceeds	(7,519)	(6,798)
Net gain from disposal of foreclosed properties	183	198
Valuation allowance related to properties disposed	(1,959)	(2,776)
Total foreclosed properties	13,811	13,385
Valuation allowance for losses	(3,360)	(2,723)	(2,794)	(3,982)
Total foreclosed properties, net	$ 10,451	$ 10,662	$ 12,119

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Promissory Notes

9 Months Ended

Sep. 30, 2012

Promissory Notes [Abstract]

Promissory Notes

13.Promissory Notes

During 2009 and 2010, the Company issued 10% Convertible Notes due June 30, 2017 totaling $9.45 million. 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 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 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 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.

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Schedule Of Earnings Per Share

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended September 30,				Nine months ended September 30,
		2012		2011		2012			2011
(Numerator):
Net income available to common stockholders	$	2,085	$	1,297	$	4,711		$	2,723
Plus:  Income impact of assumed conversions
Interest on 10% convertible debentures, net of
income tax		149		-		446			-
Income available to common stockholders plus  assumed conversions	$	2,234	$	1,297	$	5,157		$	2,723
(Denominator):
Weighted average number of common shares
outstanding-basic		7,927,347		7,911,539		7,922,756			7,911,539
Plus:  Incremental shares of assumed conversions:
Dilutive effect of stock options		7,964	(1)	-	(1)	1,922		(2)	-		(2)
Dilutive effect of restricted stock units		27,529		5,215		20,110			3,500
Dilutive effect of convertible promissory notes (3)		1,890,000		-			1,890,000			-
Dilutive potential common shares		1,925,493		5,215		1,912,032			3,500
Adjusted weighted-average shares		9,852,840		7,916,754		9,834,788			7,915,039
Basic Earnings Per Share	$	0.26	$	0.16	$	0.59		$	0.34
Diluted Earnings Per Share	$	0.23	$	0.16	$	0.52		$	0.34

⁽¹⁾At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽²⁾At September 30, 2012 and 2011, there were 93,152 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽³⁾At September 30, 2012 and 2011, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”).  The Convertible Notes are convertible into shares of common stock of the Company 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.  On October 1, 2014,  one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not occurred.  At September 30, 2012, the entire 1,890,000 common shares are included since the average market price per share for the three months and nine months ended September 30, 2012 exceeded the conversion price of $5.00 per share.  For the three months and nine months ended September 30, 2011, the common shares are not included due to their anti-dilutive effect.

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Allowance For Loan Losses ("ALL") (Schedule Of Information Regarding Impaired Loans) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	$ 4,488	$ 4,685
With an allowance recorded: Unpaid principal balance	6,194	5,720
With an allowance recorded: Related allowance	1,706	1,035
With no related allowance recorded: Recorded Investment	10,246	35,872
With no related allowance recorded: Unpaid principal balance	10,246	35,872
Total: Recorded investment	14,734	40,557
Total: Unpaid principal balance	16,440	41,592
Average recorded investment during quarter	17,603	39,893
Interest income recognized while impaired	265	2,187
Construction [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	105	2,667
With an allowance recorded: Unpaid principal balance	194	2,852
With an allowance recorded: Related allowance	89	185
With no related allowance recorded: Recorded Investment	833	2,093
With no related allowance recorded: Unpaid principal balance	833	2,093
Total: Recorded investment	938	4,760
Total: Unpaid principal balance	1,027	4,945
Average recorded investment during quarter	1,158	4,942
Interest income recognized while impaired	2	277
Real Estate - Mortgage [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	1,958	904
With an allowance recorded: Unpaid principal balance	2,332	1,096
With an allowance recorded: Related allowance	374	192
With no related allowance recorded: Recorded Investment	533	3,011
With no related allowance recorded: Unpaid principal balance	533	3,011
Total: Recorded investment	2,491	3,915
Total: Unpaid principal balance	2,865	4,107
Average recorded investment during quarter	3,101	4,327
Interest income recognized while impaired	72	311
Real Estate - Commercial [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	2,425	1,103
With an allowance recorded: Unpaid principal balance	3,636	1,702
With an allowance recorded: Related allowance	1,211	599
With no related allowance recorded: Recorded Investment	8,853	30,156
With no related allowance recorded: Unpaid principal balance	8,853	30,156
Total: Recorded investment	11,278	31,259
Total: Unpaid principal balance	12,489	31,858
Average recorded investment during quarter	13,276	30,080
Interest income recognized while impaired	185	1,512
Commercial [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Unpaid principal balance	32	54
With an allowance recorded: Related allowance	32	54
With no related allowance recorded: Recorded Investment	3	612
With no related allowance recorded: Unpaid principal balance	3	612
Total: Recorded investment	3	612
Total: Unpaid principal balance	35	666
Average recorded investment during quarter	45	529
Interest income recognized while impaired	6	66
Consumer [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment		11
With an allowance recorded: Unpaid principal balance		16
With an allowance recorded: Related allowance		5
With no related allowance recorded: Recorded Investment	24
With no related allowance recorded: Unpaid principal balance	24
Total: Recorded investment	24	11
Total: Unpaid principal balance	24	16
Average recorded investment during quarter	23	15
Interest income recognized while impaired		21
Municipal Loans [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment
With an allowance recorded: Unpaid principal balance
With an allowance recorded: Related allowance
With no related allowance recorded: Recorded Investment
With no related allowance recorded: Unpaid principal balance
Total: Recorded investment
Total: Unpaid principal balance
Average recorded investment during quarter
Interest income recognized while impaired
Not Specifically Allocated [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment
With an allowance recorded: Unpaid principal balance
With an allowance recorded: Related allowance
With no related allowance recorded: Recorded Investment
With no related allowance recorded: Unpaid principal balance
Total: Recorded investment
Total: Unpaid principal balance
Average recorded investment during quarter
Interest income recognized while impaired

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Fair Value (Required Financial Disclosures About Fair Value Of Financial Instruments) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Dec. 31, 2010
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available for sale	$ 247,198		$ 284,331
Mortgage servicing rights	706	693	634	638	722	746
Foreclosed properties, net	10,451		12,119	10,662
Accrued interest receivable	3,243		3,381
Carrying Amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash	60,049		86,980
Federal funds sold			513
Securities available for sale	247,198		284,331
Loans held for sale	2,912		1,869
Loans, net	589,940		620,377
Federal Home Loan Bank stock	3,598		6,792
Mortgage servicing rights	706		634
Foreclosed properties, net	10,451		12,119
Accrued interest receivable	3,243		3,381
Deposits	798,774		865,187
Repurchase agreements	20,904		47,566
Federal Home Loan Bank advances	40,000		55,000
Subordinated debentures	16,100		16,100
Convertible promissory notes	9,450		9,450
Accrued interest payable	656		898
Letters of credit			1,995
Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash	60,049		86,980
Federal funds sold			513
Securities available for sale	247,198		284,331
Loans held for sale	2,957		1,898
Loans, net	590,873		622,967
Federal Home Loan Bank stock	3,598		6,792
Mortgage servicing rights	706		634
Foreclosed properties, net	10,451		12,119
Accrued interest receivable	3,243		3,381
Deposits	799,892		851,054
Repurchase agreements	20,904		47,566
Federal Home Loan Bank advances	40,504		56,968
Subordinated debentures	16,100		16,100
Convertible promissory notes	9,630		9,387
Accrued interest payable	656		898
Letters of credit			$ 1,995

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Consolidated Statement Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012
Consolidated Statement Of Comprehensive Income [Abstract]
Net Income	$ 2,085	$ 4,711
Other comprehensive income, net of tax
Net unrealized holding gains arising during period	1,460	5,069
Less: reclassification adjustment for gains included in net income		(1,585)
Tax effect	(577)	(1,376)
Other comprehensive income	883	2,108
Total comprehensive income	$ 2,968	$ 6,819

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Use Of Estimates

9 Months Ended

Sep. 30, 2012

Use Of Estimates [Abstract]

Use Of Estimates

2.Use of Estimates

To prepare consolidated financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, provision for letter of credit impairment loss, value of foreclosed properties, other than temporary impairment of securities, mortgage servicing rights, income tax expense, and fair values of financial instruments are particularly subject to change.

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Troubled Debt Restructuring (Schedule Of Accrual And Nonaccrual Status Of Troubled Debt Restructuring) (Details) (USD $)	9 Months Ended																	9 Months Ended						3 Months Ended	9 Months Ended			9 Months Ended						3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 Construction [Member]	Sep. 30, 2011 Construction [Member]	Sep. 30, 2012 Real Estate - Mortgage [Member]	Sep. 30, 2011 Real Estate - Mortgage [Member]	Sep. 30, 2012 Real Estate - Commercial [Member]	Sep. 30, 2011 Real Estate - Commercial [Member]	Sep. 30, 2012 Commercial [Member]	Sep. 30, 2011 Commercial [Member]	Sep. 30, 2012 Consumer [Member]	Sep. 30, 2011 Consumer [Member]	Sep. 30, 2012 Municipal Loans [Member]	Sep. 30, 2012 Accruing [Member]	Jun. 30, 2012 Accruing [Member]	Mar. 31, 2012 Accruing [Member]	Sep. 30, 2011 Accruing [Member]	Sep. 30, 2012 Accruing [Member] Construction [Member]	Sep. 30, 2012 Accruing [Member] Real Estate - Mortgage [Member]	Sep. 30, 2012 Accruing [Member] Real Estate - Commercial [Member]	Sep. 30, 2012 Accruing [Member] Commercial [Member]	Sep. 30, 2012 Accruing [Member] Consumer [Member]	Sep. 30, 2012 Accruing [Member] Municipal Loans [Member]	Sep. 30, 2012 Nonaccrual [Member]	Sep. 30, 2012 Nonaccrual [Member]	Mar. 31, 2012 Nonaccrual [Member]	Sep. 30, 2011 Nonaccrual [Member]	Sep. 30, 2012 Nonaccrual [Member] Construction [Member]	Sep. 30, 2012 Nonaccrual [Member] Real Estate - Mortgage [Member]	Sep. 30, 2012 Nonaccrual [Member] Real Estate - Commercial [Member]	Sep. 30, 2012 Nonaccrual [Member] Commercial [Member]	Sep. 30, 2012 Nonaccrual [Member] Consumer [Member]	Sep. 30, 2012 Nonaccrual [Member] Municipal Loans [Member]	Sep. 30, 2012 Payment Schedule Changes [Member]
Financing Receivable, Modifications [Line Items]
December 31, 2011	$ 26,350,000				$ 1,432,000		$ 24,528,000		$ 390,000					$ 22,009,000	$ 4,715,000	$ 6,469,000	$ 20,461,000		$ 1,432,000	$ 20,203,000	$ 374,000			$ 8,159,000	$ 4,341,000	$ 8,158,000	$ 5,287,000			$ 4,325,000	$ 16,000
Principal payments	(5,293,000)				(697,000)		(4,221,000)		(375,000)					(1,403,000)					(697,000)	(332,000)	(374,000)				(3,890,000)					(3,889,000)	(1,000)
Charge-offs	(3,066,000)				(195,000)		(2,871,000)							(195,000)					(195,000)						(2,871,000)					(2,871,000)
Advances	234,000						234,000							45,000						45,000					189,000					189,000
New restructured	1,404,000				387,000		1,017,000							1,404,000					387,000	1,017,000														1,100,000
Transfers out of TDRs	(7,632,000)				(40,000)		(7,592,000)							(7,632,000)					(40,000)	(7,592,000)
Transfers to nonaccrual														(9,803,000)					(500,000)	(9,303,000)
Transfers to foreclosed properties	(3,760,000)						(3,760,000)																		(3,760,000)					(3,760,000)
Transfers from accruing																									9,803,000				500,000	9,303,000
September 30,2012	8,237,000				887,000		7,335,000		15,000					4,425,000	4,715,000	6,469,000	20,461,000		387,000	4,038,000				3,812,000	3,812,000	8,158,000	5,287,000		500,000	3,297,000	15,000
Restructured loans reduced when collateral securing the loans was sold within the period																								4,800,000
Principal payments received																								2,900,000
Remaining balance charged off	$ 5,754,000	$ 3,325,000	$ 637,000	$ 373,000	$ 828,000	$ 1,407,000	$ 3,940,000	$ 856,000	$ 259,000	$ 476,000	$ 90,000	$ 213,000												$ 1,900,000

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Assets Measured At Fair Value On A Recurring Basis

		September 30, 2012		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	$	2,024	$	-	$	2,024	$	-
Mortgage-backed securities		172,390		-		168,759		3,631
Asset-backed securities		4,522		-		4,522		-
Obligations of states and political subdivisions		58,816		-		58,816		-
Private placement and corporate bonds		7,792		-		7,792		-
Other securities		1,654		-		1,654		-
Total securities available for sale		247,198		-		243,567		3,631
Mortgage servicing rights		706		-		706		-
Total	$	247,904	$	-	$	244,273	$	3,631

		December 31, 2011		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	$	14,138	$	-	$	14,138	$	-
Mortgage-backed securities		193,592		-		177,330		16,262
Asset-backed securities		4,969		-		4,969		-
Obligations of states and political subdivisions		57,766		-		57,766		-
Private placement and corporate bonds		12,212		-		12,212		-
Other securities		1,654		-		1,654		-
Total securities available for sale		284,331		-		268,069		16,262
Mortgage servicing rights		634		-		634		-
Total	$	284,965	$	-	$	268,703	$	16,262

Assets Measured At Fair Value On A Recurring Basis Using Significant Unobservable Inputs

	For the three month period ended September 30, 2012			For the nine month period ended September 30, 2012
Balance, beginning of period	$	4,543	$	16,262
Transfer into Level 3		-		-
Net unrealized gains		15		561
Transfer out of Level 3		-		(10,593)
Principal payments		(927)		(2,599)
Balance, end of period	$	3,631	$	3,631

Assets Measured At Fair Value On A Non-Recurring Basis

ASSETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS

(Dollar amounts in thousands)

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

		September 30, 2012		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,488	$	-	$	-	$	4,488
Foreclosed properties, net		10,451		-		-		10,451
Total	$	14,939	$	-	$	-	$	14,939

		December 31, 2011		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	4,685	$	-	$	-	$	4,685
Foreclosed properties, net		12,119		-		-		12,119
Total	$	16,804	$	-	$	-	$	16,804

Required Financial Disclosures About Fair Value Of Financial Instruments

	(Dollar amounts in thousands)
	September 30, 2012					December 31, 2011
		Carrying Amount		Fair Value			Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	60,049	$	60,049	$		86,980	$	86,980
Federal funds sold		-		-			513		513
Securities available for sale		247,198		247,198			284,331		284,331
Loans held for sale		2,912		2,957			1,869		1,898
Loans, net		589,940		590,873			620,377		622,967
Federal Home Loan Bank stock		3,598		3,598			6,792		6,792
Mortgage servicing rights		706		706			634		634
Foreclosed properties, net		10,451		10,451			12,119		12,119
Accrued interest receivable		3,243		3,243			3,381		3,381
FINANCIAL LIABILITIES
Deposits	$	798,774	$	799,892	$		865,187	$	851,054
Repurchase agreements		20,904		20,904			47,566		47,566
Federal Home Loan Bank advances		40,000		40,504			55,000		56,968
Subordinated debentures		16,100		16,100			16,100		16,100
Convertible promissory notes		9,450		9,630			9,450		9,387
Accrued interest payable		656		656			898		898
Off-balance sheet credit related items:
Letters of credit	$	-	$	-	$		1,995	$	1,995

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Fair Value (Assets Measured At Fair Value On A Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Dec. 31, 2010
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	$ 247,198		$ 284,331
Mortgage servicing rights	706	693	634	638	722	746
Total	247,904		284,965
U.S. Government-Sponsored Agency Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	2,024		14,138
Mortgage-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	172,390		193,592
Asset-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	4,522		4,969
Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	58,816		57,766
Private Placement And Corporate Bonds [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	7,792		12,212
Other Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	1,654		1,654
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Mortgage servicing rights
Total
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | U.S. Government-Sponsored Agency Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | Mortgage-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | Asset-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | Private Placement And Corporate Bonds [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member] | Other Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	243,567		268,069
Mortgage servicing rights	706		634
Total	244,273		268,703
Significant Other Observable Inputs (Level 2) [Member] | U.S. Government-Sponsored Agency Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	2,024		14,138
Significant Other Observable Inputs (Level 2) [Member] | Mortgage-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	168,759		177,330
Significant Other Observable Inputs (Level 2) [Member] | Asset-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	4,522		4,969
Significant Other Observable Inputs (Level 2) [Member] | Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	58,816		57,766
Significant Other Observable Inputs (Level 2) [Member] | Private Placement And Corporate Bonds [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	7,792		12,212
Significant Other Observable Inputs (Level 2) [Member] | Other Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	1,654		1,654
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	3,631		16,262
Total	3,631		16,262
Significant Unobservable Inputs (Level 3) [Member] | Mortgage-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	$ 3,631		$ 16,262

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Mortgage Servicing Rights

9 Months Ended

Sep. 30, 2012

Mortgage Servicing Rights [Abstract]

Mortgage Servicing Rights

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 with servicing retained.  Mortgage servicing rights (“MSRs”) are recorded at fair value when loans are sold in the secondary market with servicing retained. On a quarterly basis, MSRs are valued based on available market information.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Changes in the carrying value of MSRs are as follows (dollar amounts in thousands):

MORTGAGE SERVICING RIGHTS

		For the three months                                 For the nine months ended September 30,                                ended September 30,
		2012		2011		2012		2011
Balance at beginning of period	$	693	$	722	$	634	$	746
Additions from loans sold with servicing retained		103		28		230		117
Changes in valuation		(25)		(74)		1		(73)
Loan payments and payoffs		(65)		(38)		(159)		(152)
Fair value of MSRs at the end of period	$	706	$	638	$	706	$	638

Unpaid principal balance of loans serviced for others was $99.9 million and $81.8 million at September 30, 2012 and September 30, 2011, respectively.