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 March 31, 2013

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	(I.R.S. Employer Identification No.)
incorporation or organization)
217 North Fourth Avenue, Sturgeon Bay, WI	54235
(Address of principal executive offices)	(Zip Code)
(920) 743-5551
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required 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 May 1, 2013 was 7,969,552 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	30
ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46
ITEM 4 -	CONTROLS AND PROCEDURES	47
PART II - OTHER INFORMATION
ITEM 1 -	LEGAL PROCEEDINGS	48
ITEM 1A -	RISK FACTORS	48
ITEM 2 -	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3 -	DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4 -	MINE SAFETY DISCLOSURES	48
ITEM 5 -	OTHER INFORMATION	48
ITEM 6 -	EXHIBITS	49

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2013 (unaudited) and December 31, 2012
(Dollar amounts in thousands)

	March 31, 2013			December 31, 2012
ASSETS
Cash and due from financial institutions	$	40,486		$	109,621
Federal funds sold		105			1,018
Securities available for sale		245,823			242,019
Loans held for sale		4,415			894
Loans, net of allowance of $8,313 and $9,165 at March 31, 2013 and December 31, 2012, respectively		583,089			586,368
Cash surrender value of life insurance		23,139			23,061
Premises and equipment, net		20,850			20,818
Premises and equipment held for sale		1,068			1,068
Federal Home Loan Bank stock		3,598			3,598
Foreclosed properties, net		8,579			10,476
Goodwill		6,641			6,641
Deferred income taxes		6,027			6,358
Accrued interest receivable		3,095			2,752
Other assets		9,015			9,279
Total Assets	$	955,930		$	1,023,971
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	115,974		$	132,477
Interest-bearing		642,988			673,538
Total Deposits		758,962			806,015
Federal Home Loan Bank advances		40,000			40,000
Repurchase agreements		29,110			51,568
Subordinated debentures		16,100			16,100
Convertible promissory notes		9,400			9,400
Accrued expenses and other liabilities		8,094			7,744
Total Liabilities		861,666			930,827
Commitments and Contingencies - Note 15
Common stock, $5 par value, authorized 50,000,000 shares; Issued-8,176,847 shares at March 31, 2013 and 8,158,360 at December 31, 2012; Outstanding-7,955,834 shares at March 31, 2013 and 7,937,347 at December 31, 2012		40,884			40,792
Additional paid-in capital		12,204			12,192
Retained earnings		39,886			38,448
Treasury stock (221,013 shares at March 31, 2013 and December 31, 2012)		(3,549	)		(3,549	)
Accumulated other comprehensive income		4,839			5,261
Total Stockholders’ Equity		94,264			93,144
Total Liabilities and Stockholders’ Equity	$	955,930		$	1,023,971

See accompanying Notes to Unaudited Consolidated Financial Statements

3

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months ended March 31, 2013 and 2012
(Dollar amounts in thousands, except per share data)

	Three months ended March 31,
	2013			2012
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	7,021		$	8,010
Taxable securities		1,223			1,906
Tax exempt securities		374			372
Federal funds sold		35			30
Total Interest and Dividend Income		8,653			10,318
INTEREST EXPENSE
Deposits		763			1,394
Repurchase agreements		20			23
Federal Home Loan Bank advances and other debt		199			258
Subordinated debentures		67			78
Convertible promissory notes		244			245
Total Interest Expense		1,293			1,998
Net interest income		7,360			8,320
Provision for loan losses		600			1,750
Net interest income after provision for loan losses		6,760			6,570
NONINTEREST INCOME
Fees from fiduciary activities		251			240
Fees from loan servicing		150			159
Fees for other services to customers		1,103			1,168
Net gain on sale of loans		594			361
Net (loss) gain in valuation of mortgage servicing rights		(2	)		18
Net (loss) gain on sale of securities		(12	)		678
Net gain on sale of premises and equipment		—			2
Increase in cash surrender value of life insurance		78			93
Income in equity of UFS subsidiary		235			177
Other income		102			149
Total Noninterest Income		2,499			3,045
NONINTEREST EXPENSE
Salaries and employee benefits		4,185			4,427
Occupancy expense		524			624
Equipment expense		295			270
Data processing and courier expense		207			229
FDIC insurance expense		191			362
Operation of other real estate		199			596
Loan and collection expense		95			210
Other outside services		199			183
Other operating expenses		913			932
Total Noninterest Expense		6,808			7,833
Income before provision for income taxes		2,451			1,782
Provision for income taxes		696			450
Net Income	$	1,755		$	1,332
Basic earnings per share	$	0.22		$	0.17
Diluted earnings per share	$	0.19		$	0.15

See accompanying Notes to Unaudited Consolidated Financial Statements

4

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three months ended March 31, 2013 and 2012
(Dollar amounts in thousands)

	2013						2012
Net Income				$	1,755					$	1,332
Other comprehensive income (losses), net of tax
Unrealized gains (losses) on securities
Net unrealized holding gains (losses) arising during the period	$	(747	)				$	1,779
Less: reclassification adjustment for losses (gains) included in net income		12						(678	)
Tax effect		313						(434	)
Other comprehensive income (loss)					(422	)					667
Comprehensive income				$	1,333					$	1,999

See accompanying Notes to Unaudited Consolidated Financial Statements

5

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)
Three months ended March 31, 2013
(Dollar amounts in thousands)

	Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Stockholders’ Equity
	Shares		Amount
Balance, January 1, 2013		7,937,347	$	40,792	$	12,192		$	38,448		$	(3,549	)	$	5,261		$	93,144
Net income for period									1,755									1,755
Net changes in unrealized loss on securities available for sale															(747	)		(747	)
Reclassification adjustment for net losses realized in income															12			12
Tax effect															313			313
Total comprehensive income																		1,333
Stock-based compensation expense recognized, net						58			—			—			—			58
Vesting of Restricted Stock Units (“RSUs”)		14,027		70		(70	)		—			—			—			—
Tax benefit from vesting of RSUs		—		—		29			—			—			—			29
Exercise of stock options		4,460		22		(4	)		—			—			—			18
Tax benefit from exercise of stock options/RSUs				—		4			—			—			—			4
Tax expense from forfeiture of unexercised stock options/RSUs				—		(5	)											(5	)
Cash dividends - ($0.04 per share)									(317	)								(317	)
Balance, March 31, 2013		7,955,834	$	40,884	$	12,204		$	39,886		$	(3,549	)	$	4,839		$	94,264

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2013 and 2012
(Dollar amounts in thousands)

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income to net cash provided by operating activities:
Net Income	$	1,755		$	1,332
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		322			314
Amortization of debt issuance costs		9			9
Provision for losses on loans		600			1,750
Net amortization of premium/discount on securities		745			757
Increase in cash surrender value of life insurance		(78	)		(93	)
Net realized loss (gain) on sale of securities		12			(678	)
Net gain on sale of loans		(594	)		(361	)
Proceeds from sale of loans held for sale		22,851			19,558
Origination of loans held for sale		(25,889	)		(19,222	)
Change in valuation of mortgage servicing rights, net of payments and payoffs		2			(18	)
Provision for valuation allowance on foreclosed properties		169			458
Net gain on sale of premises and equipment		—			(2	)
Net gain on disposals of foreclosed properties		(118	)		(39	)
Provision (benefit) for deferred income tax expense		644			(34	)
Stock-based compensation expense		58			27
Tax benefit from exercise/forfeiture of options		(1	)		—
Income in equity of UFS subsidiary		(235	)		(177	)
Changes in assets and liabilities:
Accrued interest receivable and other assets		572			(811	)
Income tax refund		(316	)		—
Accrued expenses and other liabilities		350			(29	)
Net cash flow from operating activities		858			2,741
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		—			17,121
Principal payments on securities available for sale		15,801			16,096
Purchase of securities available for sale		(21,097	)		(26,937	)
Proceeds from FHLB stock redemption		—			2,082
Proceeds from sale of foreclosed properties		2,049			792
Proceeds from sale of premises and equipment		—			2
Loan originations and payments, net		2,476			(10,916	)
Additions to premises and equipment		(354	)		(260	)
Net change in federal funds sold		913			513
Dividend from UFS subsidiary		—			600
Net cash flow from investing activities		(212	)		(907	)

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2013 and 2012
(Dollar amounts in thousands)

	2013			2012
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	(47,053	)	$	(6,863	)
Net change in federal funds purchased and repurchase agreements		(22,458	)		(14,289	)
Tax benefit from vesting of restricted stock units		29			12
Proceeds from exercise of stock options		18			—
Cash dividends paid		(317	)		(79	)
Net cash flow from financing activities		(69,781	)		(21,219	)
Net change in cash		(69,135	)		(19,385	)
Beginning cash	$	109,621		$	86,980
Ending cash	$	40,486		$	67,595
Supplemental cash flow information:
Interest paid	$	1,292		$	1,728
Income taxes (paid) refunded, net		316			(920	)
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties	$	203		$	3,858
Mortgage servicing rights resulting from sale of loans		111			45

See accompanying Notes to Unaudited Consolidated Financial Statements.

8

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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 a 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 renewals on the sold book of business. The accompanying interim consolidated financial statements should be read in conjunction with the 2012 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 month periods ending March 31, 2013 and 2012. The consolidated results of operations for the three months ended March 31, 2013 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events to May 1, 2013, 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, 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
March 31, 2013

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

	Three months ended March 31,
	2013			2012
(Numerator):
Net income available to common stockholders	$	1,755		$	1,332
Plus: Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		148			149
Income available to common stockholders plus assumed conversions	$	1,903		$	1,481
(Denominator):
Weighted average number of common shares outstanding-basic		7,940,683			7,914,326
Plus: Incremental shares of assumed conversions:
Dilutive effect of stock options		20,446	(1)		—	(1)
Dilutive effect of restricted stock units		42,779	(2)		19,124
Dilutive effect of convertible promissory notes(3)		1,880,000			1,890,000
Dilutive potential common shares		1,943,225			1,909,124
Adjusted weighted-average shares		9,883,908			9,823,450
Basic Earnings Per Share	$	0.22		$	0.17
Diluted Earnings Per Share	$	0.19		$	0.15

	(1)	At March 31, 2013 and 2012, respectively, there was 58,756 and 103,400 outstanding stock options which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.
	(2)	At March 31, 2013, there were 35,177 outstanding restricted stock units which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.
	(3)	At March 31, 2013 and 2012, respectively, the Company had $9.40 million and $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. Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of the Company’s common stock at the conversion ratio. On October 1, 2014, one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not yet occurred. The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. At March 31, 2013 and 2012, respectively, the entire 1,880,000 and 1,890,000 of common shares are included since the average market price per share for the three months ended March 31, 2013 and 2012 exceeded the conversion price of $5.00 per share.
4.	Recent Accounting Pronouncements
	In February 2013 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under GAAP. The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. The provisions of this guidance did not have a significant impact on the consolidated financial condition, results of operation or liquidity of the Company.

10

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

	In February 2013 the FASB has issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the Emerging Issues Task Force). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The provisions of this guidance are not expected to 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). Two of the Company’s securities available for sale at March 31, 2013 and December 31, 2012 were measured using Level 3 inputs.
	Non-impaired loans and deposits - the fair value of fixed rate non-impaired loans and deposits and non-impaired variable rate loans and deposits with infrequent repricing or repricing limits, is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes (Level 3 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
March 31, 2013

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. 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.

Convertible promissory notes - fair value of convertible promissory notes is based on current rates for similar financing (Level 3 inputs).

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:

	March 31, 2013		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	$	3,066	$	—	$	3,066	$	—
Mortgage-backed securities		170,531		—		168,103		2,428
Asset-backed securities		4,305		—		4,305		—
Obligations of states and political subdivisions		60,168		—		60,168		—
Private placement and corporate bonds		6,099		2,537		3,562		—
Other securities		1,654		—		1,654		—
Total securities available for sale		245,823		2,537		240,858		2,428
Mortgage servicing rights		948		—		948		—
Total	$	246,771	$	2,537	$	241,806	$	2,428

	December 31, 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	$	2,011	$	—	$	2,011	$	—
Mortgage-backed securities		169,121		—		166,018		3,103
Asset-backed securities		4,290		—		4,290		—
Obligations of states and political subdivisions		58,871		—		58,871		—
Private placement and corporate bonds		6,072		2,502		3,570		—
Other securities		1,654		—		1,654		—
Total securities available for sale		242,019		2,502		236,414		3,103
Mortgage servicing rights		839		—		839		—
Total	$	242,858	$	2,502	$	237,253	$	3,103

12

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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 months ended March 31, 2013			For the year ended December 31, 2012
Balance, beginning of period	$	3,103		$	16,262
Transfer into Level 3		—			—
Net unrealized losses		(24	)		542
Transfer out of Level 3		—			(10,593	)
Principal payments		(651	)		(3,108	)
Balance, end of period	$	2,428		$	3,103

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:

	March 31, 2013		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans with allocated allowances	$	1,057	$	—	$	—	$	1,057
Foreclosed properties, net		8,579		—		—		8,579
Total	$	9,636	$	—	$	—	$	9,636

	December 31, 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 with allocated allowances	$	4,097	$	—	$	—	$	4,097
Foreclosed properties, net		10,476		—		—		10,476
Total	$	14,573	$	—	$	—	$	14,573

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
March 31, 2013

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

	(Dollar amounts in thousands)
	March 31, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	40,486	$	40,486	$	109,621	$	109,621
Federal funds sold		105		105		1,018		1,018
Securities available for sale		245,823		245,823		242,019		242,019
Loans held for sale		4,415		4,481		894		908
Loans, net		583,089		582,976		586,368		587,166
Federal Home Loan Bank stock		3,598		3,598		3,598		3,598
Mortgage servicing rights		948		948		839		839
Foreclosed properties, net		8,579		8,579		10,476		10,476
Accrued interest receivable		3,095		3,095		2,752		2,752
FINANCIAL LIABILITIES
Deposits	$	758,962	$	759,498	$	806,015	$	806,820
Repurchase agreements		29,110		29,110		51,568		51,568
Federal Home Loan Bank advances		40,000		40,296		40,000		40,404
Subordinated debentures		16,100		16,100		16,100		16,100
Convertible promissory notes		9,400		9,571		9,400		9,316
Accrued interest payable		767		767		766		766

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.

14

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

(d) 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.

(e) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value.

(f) 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.

(g) Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(h) 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.

(i) Subordinated Debentures

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

(j) Convertible Promissory Notes

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

(k) Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

15

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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 March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	3,066	$	16	$	—
Obligations of states and political subdivisions		60,168		3,903		(25	)
Mortgage-backed securities		170,531		4,281		(727	)
Asset-backed securities		4,305		155		(121	)
Private placement and corporate bonds		6,099		480		—
Other securities		1,654		—		—
Totals	$	245,823	$	8,835	$	(873	)

	December 31, 2012
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	2,011	$	3	$	—
Obligations of states and political subdivisions		58,871		4,042		(4	)
Mortgage-backed securities		169,121		4,839		(510	)
Asset-backed securities		4,290		113		(229	)
Private placement and corporate bonds		6,072		443		—
Other securities		1,654		—		—
Totals	$	242,019	$	9,440	$	(743	)

At March 31, 2013 and December 31, 2012, the mortgage-backed securities portfolio was $170.5 million, (69.4%) and $169.1 million, (69.9%), respectively, of the investment portfolios. Approximately 8.9%, or $15.2 million, of the mortgage-backed securities outstanding at March 31, 2013 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 71.9%, or $122.5 million, of the mortgage-backed securities outstanding at March 31, 2013 were issued by either the Federal National Mortgage Association (“FNMA”), the FHLB 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 and comprised approximately 19.2%, or $32.8 million of the outstanding mortgage-backed securities at March 31, 2013. 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
March 31, 2013

Securities with unrealized losses at March 31, 2013 and December 31, 2012, 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):

	March 31, 2013
	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	$	3,248	$	(25	)	$	—	$	—		$	3,248	$	(25	)
Mortgage-backed securities		32,035		(383	)		8,075		(344	)		40,110		(727	)
Asset-backed securities		—		—			608		(121	)		608		(121	)
Total securities temporarily impaired	$	35,283	$	(408	)	$	8,683	$	(465	)	$	43,966	$	(873	)

	December 31, 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	$	529	$	(4	)	$	—	$	—		$	529	$	(4	)
Mortgage-backed securities		14,502		(100	)		6,456		(410	)		20,958		(510	)
Asset-backed securities		—		—			3,210		(229	)		3,210		(229	)
Total securities temporarily impaired	$	15,031	$	(104	)	$	9,666	$	(639	)	$	24,697	$	(743	)

At March 31, 2013, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprised three securities. The asset-backed securities category with continuous unrealized losses for twelve months or more comprised one security.

At December 31, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprised two securities. The asset-backed securities category with continuous unrealized losses for twelve months or more comprised 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
March 31, 2013

7.	Loans
	Loans held for investment, including purchased loan participations from other financial institutions and in the syndicated loan market, are summarized as follows (dollar amounts in thousands):

	March 31, 2013			December 31, 2012
Construction	$	45,495		$	40,901
Real estate-mortgage		124,107			127,315
Real estate-commercial		284,294			291,992
Commercial		110,728			108,890
Consumer		7,532			7,882
Municipal		19,654			18,970
Gross loans		591,810			595,950
Less: Deferred origination fees, net of costs		(408	)		(417	)
Less: Allowance for loan losses		(8,313	)		(9,165	)
Loans, net	$	583,089		$	586,368

Loans having a carrying value of $96.5 million and $97.5 million are pledged as collateral for borrowings from the FHLB at March 31, 2013 and December 31, 2012, respectively.

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2013 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	$	652		$	1,658		$	5,787		$	678		$	102		$	—	$	288		$	9,165
Charge-offs		(1	)		(202	)		(1,210	)		(118	)		(17	)		—		—			(1,548	)
Recoveries		4			15			12			61			4			—		—			96
Provision		88			139			262			(10	)		(17	)		—		138			600
Ending balance	$	743		$	1,610		$	4,851		$	611		$	72		$	—	$	426		$	8,313
Loans:
Ending balance	$	45,495		$	124,107		$	283,886		$	110,728		$	7,532		$	19,654	$	—		$	591,402
ALL		(743	)		(1,610	)		(4,851	)		(611	)		(72	)		—		(426	)		(8,313	)
Recorded investment	$	44,752		$	122,497		$	279,035		$	110,117		$	7,460		$	19,654	$	(426	)	$	583,089
Ending balance:
Individually evaluated	$	1,185		$	1,595		$	14,151		$	1,918		$	7		$	—	$	—		$	18,856
Collectively evaluated		44,310			122,512			269,735			108,810			7,525			19,654		—			572,546
Total	$	45,495		$	124,107		$	283,886		$	110,728		$	7,532		$	19,654	$	—		$	591,402

18

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the twelve months ended December 31, 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		(781	)		(1,216	)		(5,075	)		(492	)		(108	)		—		—			(7,672	)
Recoveries		25			74			557			87			31			—		—			774
Provision		177			805			4,838			313			18			—		(726	)		5,425
Ending balance	$	652		$	1,658		$	5,787		$	678		$	102		$	—	$	288		$	9,165
Loans:
Ending balance	$	40,901		$	127,315		$	291,575		$	108,890		$	7,882		$	18,970	$	—		$	595,533
ALL		(652	)		(1,658	)		(5,787	)		(678	)		(102	)		—		(288	)		(9,165	)
Recorded investment	$	40,249		$	125,657		$	285,788		$	108,212		$	7,780		$	18,970	$	(288	)	$	586,368
Ending balance:
Individually evaluated	$	1,243		$	1,488		$	21,010		$	1,666		$	26		$	—	$	—		$	25,433
Collectively evaluated		39,658			125,827			270,565			107,224			7,856			18,970		—			570,100
Total	$	40,901		$	127,315		$	291,575		$	108,890		$	7,882		$	18,970	$	—		$	595,533

A summary of past due loans at March 31, 2013 and December 31, 2012 is as follows (dollar amounts in thousands):

	March 31, 2013
	30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	491	$	984	$	1,475
Real estate – mortgage		721		954		1,675
Real estate – commercial		3,078		5,458		8,536
Commercial		699		1,236		1,935
Consumer		39		7		46
Municipal		—		—		—
Total	$	5,028	$	8,639	$	13,667

19

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

	December 31, 2012
	30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	—	$	1,042	$	1,042
Real estate – mortgage		618		988		1,606
Real estate – commercial		1,715		11,408		13,123
Commercial		903		984		1,887
Consumer		29		26		55
Municipal		—		—		—
Total	$	3,265	$	14,448	$	17,713

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 is 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 with this rating 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 – Have well defined weaknesses and trends that jeopardize the repayment of the loan. Ranging from workout to legal. Includes loans that are nonaccrual and/or 90 days past due and over.

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 and/or is moved to nonaccrual status.

20

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

Below is a breakdown of loans by risk grading as of March 31, 2013 (dollar amounts in thousands):

	0001-0005		0006A		0006B		0007(1)		Total
Commercial	$	106,893	$	1,089	$	829	$	1,918	$	110,729
Real estate – commercial		232,353		20,667		17,123		14,151		284,294
Construction		40,923		2,163		1,224		1,185		45,495
		380,169		23,919		19,176		17,254		440,518
Real estate - mortgage		120,047		1,398		427		2,234		124,106
Consumer		7,522		—		—		10		7,532
Municipal		19,654		—		—		—		19,654
Total	$	527,392	$	25,317	$	19,603	$	19,498		591,810
Deferred origination fees, net of costs										(408	)
Total loans									$	591,402
Percent of Total Loans		89.1%		4.3%		3.3%		3.3%		100.0%

⁽¹⁾ Included in the 0007 rated loans are $7.6 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, 2012 (dollar amounts in thousands):

	0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	102,038	$	1,835	$	3,351	$	1,666	$	108,890
Real estate – commercial		232,298		19,964		18,720		21,010		291,992
Construction		32,195		5,924		1,539		1,243		40,901
		366,531		27,723		23,610		23,919		441,783
Real estate - mortgage		123,343		1,159		630		2,183		127,315
Consumer		7,856		—		—		26		7,882
Municipal		18,970		—		—		—		18,970
Total	$	516,700	$	28,882	$	24,240	$	26,128		595,950
Deferred origination fees, net of costs										(417	)
Total loans									$	595,533
Percent of Total Loans		86.7%		4.8%		4.1%		4.4%		100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired because fair value exceeds carrying cost.

Loan balances with a risk grading of 0006B or 0007 have decreased by $11.3 million since December 31, 2012. The decrease consisted of $0.2 million of loan balances transferred to foreclosed properties, $1.5 million of charge-offs, and $9.6 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 $527.4 million as of March 31, 2013, representing 89.1% of the total loan portfolio from $516.7 million as of December 31, 2012, representing 86.7% of the total loan portfolio.

21

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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 that 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 Company’s 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
March 31, 2013

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

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

March 31, 2013	Construction		Real Estate- Mortgage		Real Estate- Commercial		Commercial		Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$	126	$	394	$	537	$	—	$	—	$	—	$	—	$	1,057
Unpaid principal balance		151		585		598		13		—		—		—		1,347
Related allowance		25		191		61		13		—		—		—		290
With no related allowance recorded:
Recorded investment	$	832	$	439	$	8,058	$	1,224	$	6	$	—	$	—	$	10,559
Unpaid principal balance		832		439		8,058		1,224		6		—		—		10,559
Related allowance		—		—		—		—		—		—		—		—
Total:
Recorded investment	$	958	$	833	$	8,595	$	1,224	$	6	$	—	$	—	$	11,616
Unpaid principal balance		983		1,024		8,656		1,237		6		—		—		11,906
Related allowance		25		191		61		13		—		—		—		290
Average recorded investment during quarter	$	989	$	1,041	$	11,185	$	797	$	16	$	—	$	—	$	14,028
Interest income recognized while impaired	$	—	$	1	$	55	$	—	$	—	$	—	$	—	$	56

December 31, 2012	Construction		Real Estate- Mortgage		Real Estate- Commercial		Commercial		Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$	130	$	703	$	3,261	$	—	$	3	$	—	$	—	$	4,097
Unpaid principal balance		153		897		4,370		13		4		—		—		5,437
Related allowance		23		194		1,109		13		1		—		—		1,340
With no related allowance recorded:
Recorded investment	$	889	$	547	$	10,516	$	971	$	20	$	—	$	—	$	12,943
Unpaid principal balance		889		547		10,516		971		20		—		—		12,943
Related allowance		—		—		—		—		—		—		—		—
Total:
Recorded investment	$	1,019	$	1,250	$	13,777	$	971	$	23	$	—	$	—	$	17,040
Unpaid principal balance		1,042		1,444		14,886		984		24		—		—		18,380
Related allowance		23		194		1,109		13		1		—		—		1,340
Average recorded investment during quarter	$	2,889	$	2,582	$	22,518	$	791	$	18	$	—	$	—	$	28,798
Interest income recognized while impaired	$	2	$	87	$	230	$	6	$	—	$	—	$	—	$	325

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
March 31, 2013

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

NONPERFORMING LOANS

	March 31,2013		December 31,2012		September 30,2012		June 30,2012		March 31,2012
Nonaccrual loans	$	8,499	$	10,724	$	8,203	$	11,513	$	14,301
Loans restructured in a troubled debt restructuring, nonaccrual		140		3,724		3,812		8,159		8,158
Total nonperforming loans (“NPLs”)	$	8,639	$	14,448	$	12,015	$	19,672	$	22,459
Restructured loans, accruing	$	3,267	$	3,931	$	4,425	$	4,715	$	6,469

During the quarter ended March 31, 2013, $3.6 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter. In addition, $1.8 million of nonaccrual loans were brought current, $0.8 million were charged off, and $0.2 million were transferred to foreclosed properties. Partially offsetting the decreases were $0.5 million of nonaccrual additions.

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

	For the three months ended March 31,
	2013			2012
Beginning balance	$	14,334		$	14,913
Transfer of net realizable value to foreclosed properties		203			3,858
Sale proceeds		(2,049	)		(792	)
Net gain from disposal of foreclosed properties		118			39
Valuation allowance related to properties disposed		(954	)		(740	)
Total foreclosed properties		11,652			17,278
Valuation allowance for losses		(3,073	)		(2,512	)
Total foreclosed properties, net	$	8,579		$	14,766

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

	For the three months ended March 31,
	2013			2012
Beginning balance	$	3,858		$	2,794
Provision charged to operations		169			458
Amounts related to properties disposed		(954	)		(740	)
Balance at end of period	$	3,073		$	2,512

24

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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 carryforward periods, experience with operating loss and tax credit carryforwards 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 March 31, 2013 and December 31, 2012, the Company determined that no valuation allowance was required to be taken against the deferred income tax asset.
	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.

25

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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

          DEFERRED INCOME TAXES – AVAILABLE FOR SALE SECURITIES

	For the three months ended March 31,
	2013			2012
Balances at beginning of period	$	(3,435	)	$	(2,468	)
Net change during period		313			(434	)
Balances at end of period	$	(3,122	)	$	(2,902	)

          DEFERRED INCOME TAXES – OTHER THAN AVAILABLE FOR SALE SECURITIES

	For the three months ended March 31,
	2013			2012
Balances at beginning of period	$	9,793		$	9,613
Net change during period		(644	)		34
Balances at end of period	$	9,149		$	9,647

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 $3.6 million at March 31, 2013 and $3.3 million at December 31, 2012. The current book value of UFS at March 31, 2013 is approximately $7,161 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 a valuation model that calculates the fair value using assumptions that market participants would use in estimating the present value of future net servicing income.

26

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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

MORTGAGE SERVICING RIGHTS

	For the three months ended March 31,
	2013			2012
Balance at beginning of period	$	839		$	634
Additions from loans sold with servicing retained		111			45
Loan payments and payoffs		(53	)		(36	)
Changes in valuation		51			54
Fair value of MSRs at the end of period	$	948		$	697

Unpaid principal balance of loans serviced for others was $126.0 million and $85.8 million at March 31, 2013 and March 31, 2012, 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. Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. 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. The outstanding principal balance at March 31, 2013 is $9.40 million.

27

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

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.
	Changes in troubled debt restructurings for the three months ended March 31, 2013 are as follows (dollars in thousands):

	Construction		Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer		Municipal		Total
Accruing
Beginning of period	$	—	$	455		$	3,476		$	—		$	—	$	—	$	3,931
Principal payments		—		—			(13	)		—			—		—		(13	)
Charge-offs		—		—			—			—			—		—		—
Advances		—		—			—			—			—		—		—
New restructured		—		—			700			—			—		—		700
Transferred out of TDRs		—		(385	)		(966	)		—			—		—		(1,351	)
Transfers to nonaccrual		—		—			—			—			—		—		—
March 31, 2013	$	—	$	70		$	3,197		$	—		$	—	$	—	$	3,267
Nonaccrual
Beginning of period	$	—	$	—		$	3,710		$	14		$	—	$	—	$	3,724
Principal payments		—		—			(2,985	)		(1	)		—		—		(2,986	)
Charge-offs		—		—			(598	)		—			—		—		(598	)
Advances		—		—			—			—			—		—		—
New restructured		—		—			—			—			—		—		—
Transfers to foreclosed properties		—		—			—			—			—		—		—
Transfers from accruing		—		—			—			—			—		—		—
March 31, 2013	$	—	$	—		$	127		$	13		$	—	$	—	$	140
Totals
Beginning of period	$	—	$	455		$	7,186		$	14		$	—	$	—	$	7,655
Principal payments		—		—			(2,998	)		(1	)		—		—		(2,999	)
Charge-offs		—		—			(598	)		—			—		—		(598	)
Advances		—		—			—			—			—		—		—
New restructured		—		—			700			—			—		—		700
Transfers out of TDRs		—		(385	)		(966	)		—			—		—		(1,351	)
Transfers to foreclosed properties		—		—			—			—			—		—		—
March 31, 2013	$	—	$	70		$	3,324		$	13		$	—	$	—	$	3,407

28

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

During the quarter ended March 31, 2013, $0.7 million of loan balance relating to one loan was transferred to restructured status. This loan was restructured as an A/B split structure. Also during the quarter, $3.6 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $3.0 million were received. The remaining balance of $0.6 million was charged off.

A summary of troubled debt restructurings as of March 31, 2013 and December 31, 2012 is as follows (dollar amounts in thousands):

	March 31, 2013				December 31, 2012
	Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		—	$	—		—	$	—
Real estate – mortgage		1		70		5		455
Real estate – commercial		7		3,324		12		7,186
Commercial		1		13		1		14
Consumer		—		—		—		—
Municipal		—		—		—		—
Total		9	$	3,407		18	$	7,655

A summary of troubled debt restructurings as of March 31, 2013 by restructure type is as follows (dollar amounts in thousands):

	Accruing		Nonaccruing		Total
A/B split	$	760	$	—	$	760
Payment schedule changes		477		140		617
Interest rate reduction		2,030		—		2,030
Total	$	3,267	$	140	$	3,407

15. 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)

	March 31, 2013		December 31, 2012
Commitments to fund unused home equity line loans	$	57,144	$	55,891
Commitments to fund 1-4 family loans		5,866		12,931
Commitments to fund residential real estate construction loans		1,380		2,435
Commitments unused on commercial lines of credit loans		151,449		149,569
Commitments unused on consumer lines of credit loans		9,764		9,525
Total commitments to extend credit	$	225,603	$	230,351
Financial standby letters of credit	$	9,857	$	15,499

29

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 March 31, 2013 and December 31, 2012 and our consolidated results of operations for the three months ended March 31, 2013 and 2012. 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, 2012.

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, 2012, which are incorporated herein by reference, and other risks that may be identified or discussed in this Form 10-Q.

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.

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.

30

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.

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 2012, 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, 2012, our valuation exceeded our carrying value by a range of 47% to 58%. As of March 31, 2013, there are no conditions that would require goodwill impairment to be reevaluated.

31

Results of Operations

The following table sets forth our results of operations and related summary information for the three month periods ended March 31, 2013 and 2012.

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

	Three months ended March 31,
	2013			2012
Net income, as reported	$	1,755		$	1,332
Earnings per share-basic, as reported	$	0.22		$	0.17
Earnings per share-diluted, as reported	$	0.19		$	0.15
Cash dividends declared per share	$	0.04		$	0.01
Return on average assets		0.73	%		0.50	%
Return on average equity		7.60	%		6.23	%
Efficiency ratio (1)		67.14	%		71.55	%

⁽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 $1.8 million for the three months ended March 31, 2013 increased from net income of $1.3 million for the comparable period in 2012. Net interest income was $7.4 million for the quarter ended March 31, 2013 and $8.3 million for the comparable quarter last year, resulting from a $1.6 million reduction in interest income offset by a $0.7 million reduction in interest expense. A PFLL of $0.6 million was charged to operations for the first quarter of 2013, which is $1.2 million lower than the $1.8 million PFLL taken during the comparable quarter of 2012. Noninterest income decreased by $0.5 million in the first quarter of 2013 versus the comparable quarter of 2012, primarily due to reduced net securities gains of $0.7 million offset by a $0.2 million increase in net gain on sale of loans. Noninterest expense declined to $6.8 million for the first quarter of 2013 compared to $7.8 million in the similar quarter last year primarily due to reduced costs associated with four branches sold in the third quarter of 2012 and reduced costs related to the operation of other real estate.

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 $7.6 million for the three months ended March 31, 2013, compared to $8.6 million for the same period in 2012. The decrease for the first quarter of 2013 resulted primarily from a $1.7 million decrease in interest income on interest earning assets offset by a $0.7 million decrease in interest expense in funding costs on interest-bearing liabilities. Contributing to the reduction in funding costs, average noninterest-bearing demand deposits increased from $98.5 million during the first quarter of 2012 to $116.3 million for the comparable period in 2013.

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 decreased 7 bps to 3.35% for the first quarter of 2013 compared to 3.42% for the same period in 2012, resulting primarily from a 23 bps decrease in the cost of interest-bearing liabilities from 0.92% to 0.69%, more than offset by a 30 bps decrease in the yield on earning assets from 4.34% to 4.04%. 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.

32

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 first quarter of 2013 was 3.45%, down 6 bps from 3.51% for the comparable period in 2012.

For the three months ended March 31, 2013, average interest-earning assets decreased $87.3 million from the same period in 2012. Decreases in average loans of $40.5 million (6.4%), taxable securities of $46.5 million (18.2%) and federal funds sold and interest-bearing due from financial institutions balances of $1.4 million (2.9%), partially offset by an increase in tax exempt securities of $1.1 million (2.4%) account for the net decrease. The decrease in loans is primarily attributable to the sale of $36.8 million of loans in conjunction with the sale of four branches in the third quarter of 2012.

33

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

	Three months ended March 31, 2013							Three months ended March 31, 2012
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Average Earning Assets:
Loans, net 1,2	$	593,632	$	7,098		4.85	%	$	634,131	$	8,080		5.12	%
Taxable securities		208,344		1,223		2.35	%		254,805		1,906		2.99	%
Tax exempt securities 1		45,261		565		5.00	%		44,207		564		5.10	%
Federal funds sold and interest-bearing due from financial institutions		46,263		35		0.31	%		47,645		30		0.25	%
Total earning assets		893,500		8,921		4.04	%		980,788		10,580		4.34	%
Noninterest earning assets		86,366							91,210
Total assets	$	979,866						$	1,071,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Interest-Bearing Liabilities:
Total interest-bearing deposits	$	660,324		763		0.47	%	$	762,525		1,394		0.74	%
Customer repurchase agreements		35,387		20		0.23	%		35,078		23		0.26	%
Federal Home Loan Bank advances		40,000		199		2.02	%		55,000		258		1.88	%
Convertible promissory notes		9,400		244		10.37	%		9,450		245		10.37	%
Subordinated debentures		16,100		67		1.66	%		16,100		78		1.93	%
Total interest-bearing liabilities		761,211		1,293		0.69	%		878,153		1,998		0.92	%
Demand deposits		116,346							98,509
Accrued expenses and other liabilities		8,645							9,336
Stockholders’ equity		93,664							86,000
Total liabilities and stockholders’ equity	$	979,866						$	1,071,998
Net interest income			$	7,628						$	8,582
Interest rate spread (3)						3.35	%						3.42	%
Net interest margin (4)						3.45	%						3.51	%

(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.

34

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 March 31, 2013 compared to the three months ended March 31, 2012:

	Increase (Decrease) due to (1)
	Volume			Rate			Net
Interest income:
Loans	$	(542	)	$	(440	)	$	(982	)
Taxable securities		(324	)		(359	)		(683	)
Tax exempt securities		12			(11	)		1
Federal funds sold and interest-bearing due from financial institutions		(1	)		6			5
Total interest-earning assets	$	(855	)	$	(804	)	$	(1,659	)
Interest expense:
Total interest-bearing deposits	$	(274	)	$	(357	)	$	(631	)
Repurchase agreements/short-term borrowings		—			(3	)		(3	)
FHLB advances		(94	)		35			(59	)
Convertible promissory notes		(1	)		—			(1	)
Subordinated debentures		—			(11	)		(11	)
Total interest-bearing liabilities	$	(369	)	$	(336	)	$	(705	)
Net interest income	$	(486	)	$	(468	)	$	(954	)

⁽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 91.2% and 91.5% for the three months ended March 31, 2013 and 2012, 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 March 31, 2013 was $0.6 million compared to $1.8 million for the first quarter of 2012. Impairments of less than $0.1 million on loans not previously identified with associated loan balances of $0.2 million were recorded during the first quarter of 2013.

Net loan charge-offs for the three months ended March 31, 2013 and 2012 were $1.5 million and $1.1 million, respectively. During the first quarter of 2013, a $0.7 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 $3.2 million. Net annualized charge-offs to average loans were 0.99% for the three months ended March 31, 2013 compared to 0.72% for the same period in 2012. For the three months ended March 31, 2013, nonperforming loans decreased by $5.8 million (40.2%) to $8.6 million from $14.4 million at December 31, 2012. 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 March 31, 2013 and the related PFLL charged to earnings for the quarter ended March 31, 2013 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 month periods ended March 31, 2013 and 2012, respectively.

NONINTEREST INCOME
(Dollar amounts in thousands)

	Three months ended
	March 31, 2013			March 31, 2012		% Change
Fees from fiduciary services	$	251		$	240		4.6	%
Fees from loan servicing		150			159		(5.7	)%
Service charges on deposit accounts		628			772		(18.7	)%
Other fee income		162			188		(13.8	)%
Financial services income		313			208		50.5	%
Net gains on sales of loans		594			361		64.5	%
Net change in valuation of mortgage servicing rights		(2	)		18		(111.1	)%
Net gains (losses) from sale of securities		(12	)		678		(101.8	)%
Gains from sale of fixed assets		—			2		(100.0	)%
Increase in cash surrender value of life insurance		78			93		(16.1	)%
Equity in income of UFS subsidiary		235			177		32.8	%
Other income		102			149		(31.5	)%
Total Noninterest Income	$	2,499		$	3,045		(17.9	)%

Noninterest income decreased $0.5 million (17.9%) for the three months ended March 31, 2013 versus the comparable period in 2012 primarily due to decreased gains from the sale of securities of $0.6 million (101.8%).

Included in the fees for other services to customers in noninterest income 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 months ended March 31, 2013 and 2012, respectively.

NONINTEREST EXPENSE
(Dollar amounts in thousands)

	Three months ended
	March 31, 2013		March 31, 2012		% Change
Salaries and employee benefits	$	4,185	$	4,427		(5.5	)%
Occupancy		524		624		(16.0	)%
Equipment		295		270		9.3	%
Data processing and courier		207		229		(9.6	)%
Operation of foreclosed properties		199		596		(66.6	)%
Business development and advertising		156		171		(8.8	)%
Charitable contributions		19		15		26.7	%
Stationery and supplies		103		132		(22.0	)%
Director fees		94		101		(6.9	)%
FDIC insurance		191		362		(47.2	)%
Legal and professional		174		100		74.0	%
Loan and collection		95		210		(54.8	)%
Other outside services		199		183		8.7	%
Other operating expenses		367		413		(11.1	)%
Total Noninterest Expense	$	6,808	$	7,833		(13.1	)%

Total noninterest expense decreased $1.0 million (13.1%) for the three months ended March 31, 2013 compared to the same period in 2012. The noninterest expense to average assets ratio was 2.8% for the three months ended March 31, 2013 compared to 3.0% for the same period in 2012. The decrease in expense was primarily attributable to a $0.4 million (66.6%) decrease in expenses related to foreclosed properties in addition to a decrease in overall operating costs associated with the sale of four branches in third quarter 2012. Valuation write-downs on foreclosed properties were down $0.3 million while FDIC insurance expense was down $0.2 million.

Net overhead expense is total noninterest expense less total noninterest income. The net overhead expense to average assets ratio was at 1.8% for the three months ended March 31, 2013, unchanged compared to the three months ended March 31, 2012. 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 67.1% for the three months ended March 31, 2013 from 71.6% for the comparable period last year. This is primarily due to the $1.0 million decrease in noninterest expense discussed above.

Expenses related to the operation of foreclosed properties held for sale by the Bank decreased $0.3 million to $0.2 million for the three month period ended March 31, 2013 compared to $0.6 million for the same period in 2012 consisting of a $0.3 million decrease in write-downs due to the revaluation of properties held. 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 $4.2 million for the three months ended March 31, 2013, compared to $4.4 million for the three months ended March 31, 2012. The number of full-time equivalent employees decreased from 296 at March 31, 2012 to 262 at March 31, 2013 primarily related to the sale of four branches in third quarter 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 2013 salary expense is $0.1 million of expense related to our long-term equity incentive plan.

Included in noninterest expense is FDIC insurance premiums of $0.2 million for the three months ended March 31, 2013 compared to $0.4 million for the same period a year ago, a decrease of $0.2 million (47.2%). This decrease is attributable to the reduction in net assets resulting from the sale of four branches in the third quarter of 2012 as well as a reduction by the FDIC in the assessment rate applied to the company’s calculation.

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Income Taxes:

We recorded an income tax expense of $0.7 million for the three months ended March 31, 2013 versus an expense of $0.5 million for the same period in 2012. The increase in tax expense is primarily attributable to a $0.7 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 March 31, 2013, we determined that no valuation allowance was required to be taken against our deferred income tax assets. We continue to assess the amount of tax benefits we may realize.

Financial Condition

Loans:

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

LOAN PORTFOLIO ANALYS
(Dollar amounts in thousands)

	March 31, 2013			December 31, 2012			Percent Change
Amount of Loans by Type:
Real estate-mortgage:
Commercial	$	284,294		$	291,992			(2.6	)%
1-4 Family residential
First liens		80,791			83,579			(3.3	)%
Junior liens		6,440			6,482			(0.6	)%
Home equity		36,875			37,254			(1.0	)%
Commercial, financial and agricultural		110,729			108,890			1.7	%
Real estate-construction		45,495			40,901			11.2	%
Installment
Credit cards and related plans		1,407			1,433			(1.8	)%
Other		6,125			6,449			(5.0	)%
Obligations of states and political subdivisions		19,654			18,970			3.6	%
Less: Deferred origination fees, net of costs		(408	)		(417	)		2.2	%
Less: Allowance for loan losses		(8,313	)		(9,165	)		9.3	%
Total	$	583,089		$	586,368			(0.6	)%

Net loans decreased $3.3 million (0.6%) from $586.4 million at December 31, 2012 to $583.1 million at March 31, 2013. In addition to originating loans, we buy and sell loan participations with other financial institutions located in markets we serve. These loans are underwritten to the same lending standards as the loans we originate. Additionally, we purchase syndicated loans in the national market which represent small portions of large national credits. These credits are also subject to our normal underwriting guidelines.

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 March 31, 2013 was $8.3 million, compared to $9.2 million at December 31, 2012. 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.

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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. If the carrying value of the loan exceeds the fair value less estimated cost to sell, a specific reserve is established. Such reserves are reviewed by the Delinquent Account Review Team.

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 received on nonaccrual loans is 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)

	March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012		March 31, 2012
Nonperforming Assets:
Nonaccrual loans	$	8,499	$	10,724	$	8,203	$	11,513	$	14,301
Nonaccrual loans, restructured		140		3,724		3,812		8,159		8,158
Total nonperforming loans (“NPLs”)	$	8,639	$	14,448	$	12,015	$	19,672	$	22,459
Foreclosed properties, net		8,579		10,476		10,451		10,357		14,766
Total nonperforming assets (“NPAs”)	$	17,218	$	24,924	$	22,466	$	30,029	$	37,225
Restructured loans, accruing(1)	$	3,267	$	3,931	$	4,425	$	4,715	$	6,469

Ratios:
ALL to Net Charge-offs (“NCOs”) (annualized)	1.41	x	1.33	x	1.56	x	3.28	x	2.46	x
NCOs to average loans (annualized)	0.99	%	1.11	%	1.08	%	0.61	%	0.72	%
ALL to total loans	1.40	%	1.54	%	1.77	%	2.00	%	1.76	%
NPLs to total loans	1.45	%	2.42	%	1.99	%	3.10	%	3.52	%
NPAs to total assets	1.80	%	2.44	%	2.28	%	2.89	%	3.49	%
ALL to NPLs	96.23	%	63.44	%	88.71	%	64.73	%	50.09	%

⁽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 March 31, 2013, NPAs were reduced by $7.7 million when $2.2 million of foreclosed properties were sold, with a loss of $0.1 million recognized on the sale, and $3.6 million of collateral securing non-performing loans were sold within the quarter. A $0.7 million charge off was taken in the first quarter of 2013 in conjunction with the sale. Additionally, $1.8 million of non-performing loans were brought current and $0.8 million was charged off.

Restructured loans accruing at March 31, 2013 were $3.2 million. There were no accruing restructured loans transferred to nonaccrual during the first quarter of 2013. In addition, $1.4 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 $5.8 million from December 31, 2012 to March 31, 2013.

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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)

	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012
Secured by real estate	$	4,290		$	2,333		$	5,549		$	2,831		$	2,831
Commercial and industrial loans		699			903			—			182			182
Loans to individuals		39			29			38			51			51
Total	$	5,028		$	3,265		$	5,587		$	3,064		$	3,064
Percentage of total loans		0.85	%		0.55	%		0.93	%		0.48	%		0.90	%

As indicated above, loan balances 30 to 89 days past due have increased by $1.8 million since December 31, 2012. Compared to March 31, 2012, loan balances 30 to 89 days past due have increased $2.0 million. Subsequent to March 31, 2013, $0.8 million of past due loans were renewed and are now current. Additionally, $1.1 million of past due loans are expected to have satisfactory repayment arrangements made with the borrowers to bring these loans current. Of the $1.1 million, $0.9 million is guaranteed by the SBA.

Information regarding foreclosed properties is as follows:

FORECLOSED PROPERTIE
(Dollar amounts in thousands)

	Three months ended March 31, 2013			Twelve months ended December 31, 2012			Three months ended March 31, 2012
Beginning balance	$	14,334		$	14,913		$	14,913
Transfer of loans to foreclosed properties		203			9,487			3,858
Sales proceeds, net		(2,049	)		(8,040	)		(792	)
Net gain from sale of foreclosed properties		118			194			39
Valuation allowance related to properties disposed		(954	)		(2,220	)		(740	)
Total foreclosed properties, net		11,652			14,334			17,278
Valuation allowance for losses		(3,073	)		(3,858	)		(2,512	)
Total foreclosed properties, net	$	8,579		$	10,476		$	14,766

VALUATION ALLOWANCE ON FORECLOSED PROPERTIES

	Three months ended March 31, 2013			Twelve months ended December 31, 2012			Three months ended March 31, 2012
Beginning balance	$	3,858		$	2,794		$	2,794
Provision charged to operations		169			3,284			458
Allowance recovered on properties disposed		(954	)		(2,220	)		(740	)
Ending balance	$	3,073		$	3,858		$	2,512

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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 March 31, 2013, the investment portfolio (comprising investment securities available for sale) increased $3.8 million (1.6%) to $245.8 million compared to $242.0 million at December 31, 2012. At March 31, 2013, the investment portfolio represented 25.7% of total assets compared to 23.6% at December 31, 2012. For the three months ended March 31, 2013, principal payments of $15.8 million were received on maturing investments. For the three months ended, March 31, 2013, we purchased $21.1 million of securities for a net cash decrease of $5.3 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 $0.5 million at March 31, 2013, representing 53.3% of total gross unrealized securities losses and 0.2% 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 March 31, 2013 and December 31, 2012, 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 March 31, 2013, the highest concentration of loans underlying mortgage-backed securities issued in any state was issued in California, representing approximately 22.0% of the total amount invested in residential mortgage-backed securities.

Deposits:

Total deposits at March 31, 2013 decreased $47.0 million (5.8%) to $759.0 million from $806.0 million at December 31, 2012. The decrease for the quarter was a result of a $13.2 million (5.8%) decrease in time deposits from $227.7 million at December 31, 2012 to $214.5 million at March 31, 2013, a $34.0 million (12.0%) decrease in our non-interest bearing and interest bearing demand deposits from $282.6 million at December 31, 2012 to $248.6 million at March 31, 2013, partially offset by an increase of $0.2 million (0.1%) in our savings deposits from $295.7 million at December 31, 2012 to $295.9 million at March 31, 2013. Total interest-bearing deposits decreased $30.6 million (4.5%) while non-interest-bearing deposits decreased $16.5 million (12.5%) from December 31, 2012 to March 31, 2013. During March 2013, a $2.5 million brokered certificate of deposit matured and was not renewed.

The decrease in total deposits from December 31, 2012 to March 31, 2013 is usual seasonal customer withdrawals. 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 FHLB and through the discount window at the Federal Reserve.

Other Funding Sources:

Securities sold under agreements to repurchase decreased $22.5 million (43.6%) from $51.6 million at December 31, 2012 to $29.1 million at March 31, 2013. We did not have any federal funds purchased at either March 31, 2013 or December 31, 2012.

FHLB advances were $40.0 million at March 31, 2013, unchanged from December 31, 2012. 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 March 31, 2013, the interest rate on these securities was 1.63%. 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.

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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. At March 31, 2013, we are current on all interest payments on the TruPS.

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 March 31, 2013 and December 31, 2012 was $9.4 million.

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. Beginning on July 1, 2014, we may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. 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 of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not yet occurred. The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017.

Contractual Obligations:

We use a variety of financial instruments in the normal course of business to meet the financial needs of our customers. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Contractual obligations disclosed in the 2012 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 March 31, 2013:

CONTRACTUAL OBLIGATIONS
(Dollar amounts in thousands)

	Within 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
Certificates of deposit and other time deposit obligations	$	146,591	$	64,797	$	3,153	$	—	$	214,541
Repurchase agreements		29,110		—		—		—		29,110
Federal Home Loan Bank advances		15,000		25,000		—		—		40,000
Subordinated debentures		—		—		—		16,100		16,100
Convertible promissory notes (1)		—		9,400		—		—		9,400
Total	$	190,701	$	99,197	$	3,153	$	16,100	$	309,151

⁽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.

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Off- Balance Sheet Arrangements:

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

LENDING RELATED COMMITMENTS
(Dollar amounts in thousands)

	March 31, 2013		December 31, 2012
Commitments to fund unused home equity line loans	$	57,144	$	55,891
Commitments to fund 1-4 family loans		5,866		12,931
Commitments to fund residential real estate construction loans		1,380		2,435
Commitments unused on commercial lines of credit loans		151,449		149,569
Commitments unused on consumer lines of credit loans		9,764		9,525
Total commitments to extend credit	$	225,603	$	230,351
Financial standby letters of credit	$	9,857	$	15,499

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 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.

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 three months ended March 31, 2013, principal payments totaling $15.8 million were received on maturing investments. In addition, we purchased $21.1 million in investments in the same period. Approximately 8.9%, or $15.2 million, of the mortgage-backed securities outstanding at March 31, 2013 were issued and guaranteed by GNMA or the VA, agencies of the United States government. An additional 71.9%, or $122.5 million, of the mortgage-backed securities outstanding at March 31, 2013 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, and comprised approximately 19.2%, or $32.8 million, of the outstanding mortgage-backed securities at March 31, 2013. 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.

Deposit decreases, reflected as a financing activity in the March 31, 2013 unaudited consolidated statements of cash flows, resulted in $47.1 million of cash outflow during the first three months of 2013. 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 certificates of deposit decreased $5.7 million from $31.3 million at December 31, 2012 to $25.6 million at March 31, 2013, due to brokered certificate of deposits that matured in the first quarter that were 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 $183.9 million, or 31.1% of total loans, maturing within one year of March 31, 2013. 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.

44

Within the classification of short-term borrowings at March 31, 2013, securities sold under agreements to repurchase totaled $29.1 million compared to $51.6 million at the end of 2012. 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 March 31, 2013 and December 31, 2012.

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.

Capital Resources:

Stockholders’ equity at March 31, 2013 and December 31, 2012 was $94.3 million and $93.1 million, respectively, reflecting an increase of $1.2 million (1.3%) during the first three months of 2013. The increase in stockholders’ equity was primarily related to our net income of $1.8 million net of a decrease in comprehensive income of $0.4 million (as a result of a decrease in unrealized gains on available for sale securities) and dividends of $0.04 per share declared and paid during the quarter ended March 31, 2013. The ratio of stockholders’ equity to assets was 9.9% and 9.1% at March 31, 2013 and December 31, 2012, respectively.

In April 2013, we declared a $0.05 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.

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 March 31, 2013, 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%.

45

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

	March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012
Company	16.39	%	15.96	%	15.28	%	14.24	%
Bank	16.20	%	15.89	%	15.22	%	14.15	%

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

The following tables present our and the Bank’s capital ratios as of March 31, 2013 and December 31, 2012:

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 March 31, 2013
Total Capital (to Risk-Weighted Assets)
Company	$	111,800		16.39	%	$	54,581		8.00	%	$	N/A		N/A
Bank		110,447		16.20	%		54,567		8.00	%		68,208		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Company	$	94,087		13.79	%	$	27,291		4.00	%	$	N/A		N/A
Bank		102,134		14.98	%		27,283		4.00	%		40,925		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	94,087		9.72	%	$	38,737		4.00	%	$	N/A		N/A
Bank		102,134		10.54	%		38,747		4.00	%		48,434		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, 2012
Total Capital (to Risk-Weighted Assets)
Company`	$	109,932		15.96	%	$	55,111		8.00	%	$	N/A		N/A
Bank		109,358		15.89	%		55,047		8.00	%		68,809		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Company	$	91,914		13.34	%	$	27,556		4.00	%	$	N/A		N/A
Bank		100,750		14.64	%		27,524		4.00	%		41,286		6.00	%
Tier 1 Capital (to Average Assets)
Company	$	91,914		9.41	%	$	39,056		4.00	%	$	N/A		N/A
Bank		100,750		10.31	%		39,101		4.00	%		48,876		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.

46

As of March 31, 2013, 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, 2012, as described in our 2012 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 March 31, 2013.

INTEREST SENSITIVITY
(Dollar amounts in thousands)

	Change in Net Interest Income Over One Year Horizon
	At March 31, 2013						At December 31, 2012
	Dollar change (in thousands)			Percentage change			Dollar change (in thousands)			Percentage change
Change in levels of interest rates
+200 bp	$	(737	)		(2.5	)%	$	(211	)		(0.7	)%
+100 bp		(712	)		(2.4	)%		(398	)		(1.4	)%
Base		—			—			—			—
-100 bp		(1,006	)		(3.4	)%		(1,089	)		(3.7	)%
-200 bp		(1,636	)		(5.5	)%		(1,733	)		(5.9	)%

As shown above, at March 31, 2013, the effect of an immediate 200 bp increase in interest rates would have decreased our net interest income by $0.7 million or 2.5% versus by $0.2 million or 0.7% at December 31, 2012. The increase in the impact of an immediate 200 bp increase in interest rates from December 31, 2012 to March 31, 2013 was a result of a reduction in interest-bearing cash balances offset in part by a decline in interest-bearing deposit balances. The effect of an immediate 200 bp reduction in rates would have decreased our net interest income by $1.6 million or 5.5% versus by $1.7 million or 5.9% at December 31, 2012. 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 March 31, 2013. 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.

47

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, 2012. There have been no material changes to the risk factors since then.

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

During the quarter ended March 31, 2013, 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.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

48

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 (Loss), (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.

49

SIGNATURES

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

		BAYLAKE CORP.
Date:	May 1, 2013	/s/ Robert J. Cera
		Robert J. Cera
		President and Chief Executive Officer
Date:	May 1, 2013	/s/ Kevin L. LaLuzerne
		Kevin L. LaLuzerne
		Treasurer and Chief Financial Officer

50

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:	May 1, 2013
/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:	May 1, 2013
/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:	May 1, 2013
/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:	May 1, 2013
/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

Investments (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 245,823	$ 242,019
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	170,531	169,121
Percentage of investment portfolio	69.40%	69.90%
Number of securities	3	2
Issued And Guaranteed By GMNA Or VA [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	15,200
Percentage of investment portfolio	8.90%
Issued By FNMA or FHLMC [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	122,500
Percentage of investment portfolio	71.90%
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of securities	1	2
Non-agency [Member] | Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 32,800
Percentage of investment portfolio	19.20%

XML

Promissory Notes (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2010
Promissory Notes [Abstract]
Stated percentage of interest rate on Convertible Notes	10.00%
Convertible Notes, due date	Jun. 30, 2017
Total Convertible Notes issued	$ 9,400	$ 9,400	$ 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%

XML

Foreclosed Properties, Net (Summary Of Foreclosed Properties) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012	Dec. 31, 2011
Foreclosed Properties, Net [Abstract]
Beginning balance	$ 14,334	$ 14,913
Transfer of net realizable value to foreclosed properties	203	3,858
Sale proceeds	(2,049)	(792)
Net gain from disposal of foreclosed properties	118	39
Valuation allowance related to properties disposed	(954)	(740)
Total foreclosed properties	11,652	17,278
Valuation allowance for losses	(3,073)	(2,512)	(3,858)	(2,794)
Total foreclosed properties, net	$ 8,579	$ 14,766	$ 10,476

XML

Troubled Debt Restructuring (Schedule Of Accrual And Nonaccrual Status Of Troubled Debt Restructuring) (Details) (USD $)	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended					3 Months Ended										3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2013 Construction [Member]	Dec. 31, 2012 Construction [Member]	Mar. 31, 2013 Real Estate - Mortgage [Member]	Dec. 31, 2012 Real Estate - Mortgage [Member]	Mar. 31, 2013 Real Estate - Commercial [Member]	Dec. 31, 2012 Real Estate - Commercial [Member]	Mar. 31, 2013 Commercial [Member]	Dec. 31, 2012 Commercial [Member]	Mar. 31, 2013 Consumer [Member]	Dec. 31, 2012 Consumer [Member]	Mar. 31, 2013 Municipal Loans [Member]	Mar. 31, 2013 Accruing [Member]	Sep. 30, 2012 Accruing [Member]	Jun. 30, 2012 Accruing [Member]	Mar. 31, 2012 Accruing [Member]	Mar. 31, 2013 Accruing [Member] Construction [Member]	Mar. 31, 2013 Accruing [Member] Real Estate - Mortgage [Member]	Mar. 31, 2013 Accruing [Member] Real Estate - Commercial [Member]	Mar. 31, 2013 Accruing [Member] Commercial [Member]	Mar. 31, 2013 Accruing [Member] Consumer [Member]	Mar. 31, 2013 Accruing [Member] Municipal Loans [Member]	Mar. 31, 2013 Nonaccrual [Member]	Mar. 31, 2012 Nonaccrual [Member]	Sep. 30, 2012 Nonaccrual [Member]	Jun. 30, 2012 Nonaccrual [Member]	Mar. 31, 2013 Nonaccrual [Member] Construction [Member]	Mar. 31, 2013 Nonaccrual [Member] Real Estate - Mortgage [Member]	Mar. 31, 2013 Nonaccrual [Member] Real Estate - Commercial [Member]	Mar. 31, 2013 Nonaccrual [Member] Commercial [Member]	Mar. 31, 2013 Nonaccrual [Member] Consumer [Member]	Mar. 31, 2013 Nonaccrual [Member] Municipal Loans [Member]	Mar. 31, 2012 Payment Schedule Changes [Member]
Financing Receivable, Modifications [Line Items]
December 31, 2011	$ 7,655,000				$ 455,000		$ 7,186,000		$ 14,000					$ 3,931,000	$ 4,425,000	$ 4,715,000	$ 6,469,000		$ 455,000	$ 3,476,000				$ 3,724,000		$ 3,812,000	$ 8,159,000			$ 3,710,000	$ 14,000
Principal payments	(2,999,000)						(2,998,000)		(1,000)					(13,000)						(13,000)				(2,986,000)						(2,985,000)	(1,000)
Charge-offs	(598,000)						(598,000)																	(598,000)						(598,000)
Advances
New restructured	700,000						700,000							700,000						700,000														700,000
Transfers out of TDRs	(1,351,000)				(385,000)		(966,000)							(1,351,000)					(385,000)	(966,000)
Transfers to nonaccrual
Transfers to foreclosed properties
Transfers from accruing
September 30,2012	3,407,000	7,655,000			70,000	455,000	3,324,000	7,186,000	13,000	14,000				3,267,000	4,425,000	4,715,000	6,469,000		70,000	3,197,000				140,000	8,158,000	3,812,000	8,159,000			127,000	13,000
Restructured loans reduced when collateral securing the loans was sold within the period																								3,600,000	3,600,000
Principal payments received																									3,000,000
Remaining balance charged off	$ 1,548,000	$ 7,672,000	$ 1,000	$ 781,000	$ 202,000	$ 1,216,000	$ 1,210,000	$ 5,075,000	$ 118,000	$ 492,000	$ 17,000	$ 108,000												$ 800,000	$ 600,000

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Allowance For Loan Losses ("ALL") (Schedule Of Information Regarding Impaired Loans) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	$ 1,057	$ 4,097
With an allowance recorded: Unpaid principal balance	1,347	5,437
With an allowance recorded: Related allowance	290	1,340
With no related allowance recorded: Recorded Investment	10,559	12,943
With no related allowance recorded: Unpaid principal balance	10,559	12,943
Total: Recorded investment	11,616	17,040
Total: Unpaid principal balance	11,906	18,380
Average recorded investment during quarter	14,028	28,798
Interest income recognized while impaired	56	325
Construction [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	126	130
With an allowance recorded: Unpaid principal balance	151	153
With an allowance recorded: Related allowance	25	23
With no related allowance recorded: Recorded Investment	832	889
With no related allowance recorded: Unpaid principal balance	832	889
Total: Recorded investment	958	1,019
Total: Unpaid principal balance	983	1,042
Average recorded investment during quarter	989	2,889
Interest income recognized while impaired		2
Real Estate - Mortgage [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	394	703
With an allowance recorded: Unpaid principal balance	585	897
With an allowance recorded: Related allowance	191	194
With no related allowance recorded: Recorded Investment	439	547
With no related allowance recorded: Unpaid principal balance	439	547
Total: Recorded investment	833	1,250
Total: Unpaid principal balance	1,024	1,444
Average recorded investment during quarter	1,041	2,582
Interest income recognized while impaired	1	87
Real Estate - Commercial [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment	537	3,261
With an allowance recorded: Unpaid principal balance	598	4,370
With an allowance recorded: Related allowance	61	1,109
With no related allowance recorded: Recorded Investment	8,058	10,516
With no related allowance recorded: Unpaid principal balance	8,058	10,516
Total: Recorded investment	8,595	13,777
Total: Unpaid principal balance	8,656	14,886
Average recorded investment during quarter	11,185	22,518
Interest income recognized while impaired	55	230
Commercial [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Unpaid principal balance	13	13
With an allowance recorded: Related allowance	13	13
With no related allowance recorded: Recorded Investment	1,224	971
With no related allowance recorded: Unpaid principal balance	1,224	971
Total: Recorded investment	1,224	971
Total: Unpaid principal balance	1,237	984
Average recorded investment during quarter	797	791
Interest income recognized while impaired		6
Consumer [Member]
Financing Receivable, Impaired [Line Items]
With an allowance recorded: Recorded Investment		3
With an allowance recorded: Unpaid principal balance		4
With an allowance recorded: Related allowance		1
With no related allowance recorded: Recorded Investment	6	20
With no related allowance recorded: Unpaid principal balance	6	20
Total: Recorded investment	6	23
Total: Unpaid principal balance	6	24
Average recorded investment during quarter	16	18
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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Commitments And Contingencies (Tables)

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies [Abstract]

Lending Related Commitments

LENDING RELATED COMMITMENTS

(Dollar amounts in thousands)

		March 31,  2013		December 31, 2012
Commitments to fund unused home equity line loans	$	57,144	$	55,891
Commitments to fund 1-4 family loans		5,866		12,931
Commitments to fund residential real estate construction loans		1,380		2,435
Commitments unused on commercial lines of credit loans		151,449		149,569
Commitments unused on consumer lines of credit loans		9,764		9,525
Total commitments to extend credit	$	225,603	$	230,351
Financial standby letters of credit	$	9,857	$	15,499

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Troubled Debt Restructuring (Summary Of Troubled Debt Restructurings By Restructure Type) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012
Total	$ 3,407	$ 7,655
A/B Note Structure [Member]
Total	760
Payment Schedule Changes [Member]
Total	617
Interest Rate Reduction [Member]
Total	2,030
Accruing [Member]
Total	3,267	3,931	4,425	4,715	6,469
Accruing [Member] | A/B Note Structure [Member]
Total	760
Accruing [Member] | Payment Schedule Changes [Member]
Total	477
Accruing [Member] | Interest Rate Reduction [Member]
Total	2,030
Nonaccrual [Member]
Total	140	3,724	3,812	8,159	8,158
Nonaccrual [Member] | Payment Schedule Changes [Member]
Total	$ 140

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Fair Value (Tables)

3 Months Ended

Mar. 31, 2013

Fair Value [Abstract]

Assets Measured At Fair Value On A Recurring Basis

		March 31, 2013		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	$	3,066	$	–	$	3,066	$	–
Mortgage-backed securities		170,531		–		168,103		2,428
Asset-backed securities		4,305		–		4,305		–
Obligations of states and political subdivisions		60,168		–		60,168		–
Private placement and corporate bonds		6,099		2,537		3,562		–
Other securities		1,654		–		1,654		–
Total securities available for sale		245,823		2,537		240,858		2,428
Mortgage servicing rights		948		–		948		–
Total	$	246,771	$	2,537	$	241,806	$	2,428

		December 31, 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	$	2,011	$	–	$	2,011	$	–
Mortgage-backed securities		169,121		–		166,018		3,103
Asset-backed securities		4,290		–		4,290		–
Obligations of states and political subdivisions		58,871		–		58,871		–
Private placement and corporate bonds		6,072		2,502		3,570		–
Other securities		1,654		–		1,654		–
Total securities available for sale		242,019		2,502		236,414		3,103
Mortgage servicing rights		839		–		839		–
Total	$	242,858	$	2,502	$	237,253	$	3,103

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

		For the three months ended March 31, 2013		For the year ended December 31, 2012
Balance, beginning of period	$	3,103	$	16,262
Transfer into Level 3		–		–
Net unrealized losses		(24)		542
Transfer out of Level 3		–		(10,593)
Principal payments		(651)		(3,108)
Balance, end of period	$	2,428	$	3,103

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:

		March 31, 2013		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans with allocated allowances	$	1,057	$	–	$	–	$	1,057
Foreclosed properties, net		8,579		–		–		8,579
Total	$	9,636	$	–	$	–	$	9,636

		December 31, 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 with allocated allowances	$	4,097	$	–	$	–	$	4,097
Foreclosed properties, net		10,476		–		–		10,476
Total	$	14,573	$	–	$	–	$	14,573

Required Financial Disclosures About Fair Value Of Financial Instruments

	(Dollar amounts in thousands)
	March  31, 2013					December 31, 2012
		Carrying Amount		Fair Value			Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	40,486	$	40,486	$		109,621	$	109,621
Federal funds sold		105		105			1,018		1,018
Securities available for sale		245,823		245,823			242,019		242,019
Loans held for sale		4,415		4,481			894		908
Loans, net		583,089		582,976			586,368		587,166
Federal Home Loan Bank stock		3,598		3,598			3,598		3,598
Mortgage servicing rights		948		948			839		839
Foreclosed properties, net		8,579		8,579			10,476		10,476
Accrued interest receivable		3,095		3,095			2,752		2,752
FINANCIAL LIABILITIES
Deposits	$	758,962	$	759,498	$		806,015	$	806,820
Repurchase agreements		29,110		29,110			51,568		51,568
Federal Home Loan Bank advances		40,000		40,296			40,000		40,404
Subordinated debentures		16,100		16,100			16,100		16,100
Convertible promissory notes		9,400		9,571			9,400		9,316
Accrued interest payable		767		767			766		766

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Income Taxes (Reconciliation Of Beginning And Ending Amounts Of Unrecognized Tax Benefits) (Details)	3 Months Ended
	Mar. 31, 2013
Income Taxes [Abstract]
Tax benefit recognition threshold, likelihood of being realized	50.00%

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Loans (Schedule Of Loans Held For Investment) (Details) (USD $)	Mar. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	$ 591,810,000	$ 595,950,000
Less: Deferred Origination Fees, net of costs	(408,000)	(417,000)
Less: Allowance for Loan Losses	(8,313,000)	(9,165,000)	(10,638,000)
Loans, net	583,089,000	586,368,000
Loans carrying value	96,500,000	97,500,000
Construction [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	45,495,000	40,901,000
Less: Allowance for Loan Losses	(743,000)	(652,000)	(1,231,000)
Loans, net	44,752,000	40,249,000
Real Estate - Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	124,107,000	127,315,000
Less: Allowance for Loan Losses	(1,610,000)	(1,658,000)	(1,995,000)
Loans, net	122,497,000	125,657,000
Real Estate - Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	284,294,000	291,992,000
Less: Allowance for Loan Losses	(4,851,000)	(5,787,000)	(5,467,000)
Loans, net	279,035,000	285,788,000
Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	110,728,000	108,890,000
Less: Allowance for Loan Losses	(611,000)	(678,000)	(770,000)
Loans, net	110,117,000	108,212,000
Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	7,532,000	7,882,000
Less: Allowance for Loan Losses	(72,000)	(102,000)	(161,000)
Loans, net	7,460,000	7,780,000
Municipal Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross Loans	19,654,000	18,970,000
Loans, net	$ 19,654,000	$ 18,970,000

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Fair Value (Assets Measured At Fair Value On A Non-Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	$ 9,636	$ 14,573
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	9,636	14,573
Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	1,057	4,097
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	1,057	4,097
Foreclosed Properties, Net [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total	8,579	10,476
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	$ 8,579	$ 10,476

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Equity Investment (Details) (USD $) In Millions, except Share data, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
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	$ 3.6	$ 3.3
Current book value per share of common stock in UFS	$ 7,161

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Allowance For Loan Losses ("ALL") (Schedule Of Nonperforming Loans) (Details) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012
Nonaccrual loans	$ 8,499,000	$ 14,301,000	$ 10,724,000	$ 8,203,000	$ 11,513,000
Restructured loans	3,407,000		7,655,000
Total nonperforming loans ("NPLs")	8,639,000	22,459,000	14,448,000	12,015,000	19,672,000
Remaining balance charged off	1,548,000		7,672,000
Transferred to ORE	203,000	3,858,000
Nonaccrual [Member]
Restructured loans	140,000	8,158,000	3,724,000	3,812,000	8,159,000
Restructured loans reduced when collateral securing the loans was sold within the period	3,600,000	3,600,000
Remaining balance charged off	800,000	600,000
Nonaccrual additions	500,000
Accruing [Member]
Restructured loans	3,267,000	6,469,000	3,931,000	4,425,000	4,715,000
Nonaccrual Loans Brought Current [Member]
Nonaccrual loans	$ 1,800,000

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Basis Of Presentation

3 Months Ended

Mar. 31, 2013

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 a 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 renewals on the sold book of business. The accompanying interim consolidated financial statements should be read in conjunction with the 2012 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 month periods ending March 31, 2013 and 2012. The consolidated results of operations for the three months ended March 31, 2013 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events to May1, 2013, the date the interim consolidated financial statements were issued.

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Loans (Allowance For Loan Losses And Recorded Investment In Loans) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	$ 9,165	$ 10,638	$ 10,638
Charge-offs	(1,548)		(7,672)
Recoveries	96		774
Provision	600	1,750	5,425
Allowance for Loan Losses: Ending Balance	8,313		9,165
Loans: Ending Balance	591,402		595,533
ALL	(8,313)		(9,165)
Loans, net	583,089		586,368
Ending balance: Individually evaluated	18,856		25,433
Ending balance: Collectively evaluated	572,546		570,100
Construction [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	652	1,231	1,231
Charge-offs	(1)		(781)
Recoveries	4		25
Provision	88		177
Allowance for Loan Losses: Ending Balance	743		652
Loans: Ending Balance	45,495		40,901
ALL	(743)		(652)
Loans, net	44,752		40,249
Ending balance: Individually evaluated	1,185		1,243
Ending balance: Collectively evaluated	44,310		39,658
Real Estate - Mortgage [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	1,658	1,995	1,995
Charge-offs	(202)		(1,216)
Recoveries	15		74
Provision	139		805
Allowance for Loan Losses: Ending Balance	1,610		1,658
Loans: Ending Balance	124,107		127,315
ALL	(1,610)		(1,658)
Loans, net	122,497		125,657
Ending balance: Individually evaluated	1,595		1,488
Ending balance: Collectively evaluated	122,512		125,827
Real Estate - Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	5,787	5,467	5,467
Charge-offs	(1,210)		(5,075)
Recoveries	12		557
Provision	262		4,838
Allowance for Loan Losses: Ending Balance	4,851		5,787
Loans: Ending Balance	283,886		291,575
ALL	(4,851)		(5,787)
Loans, net	279,035		285,788
Ending balance: Individually evaluated	14,151		21,010
Ending balance: Collectively evaluated	269,735		270,565
Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	678	770	770
Charge-offs	(118)		(492)
Recoveries	61		87
Provision	(10)		313
Allowance for Loan Losses: Ending Balance	611		678
Loans: Ending Balance	110,728		108,890
ALL	(611)		(678)
Loans, net	110,117		108,212
Ending balance: Individually evaluated	1,918		1,666
Ending balance: Collectively evaluated	108,810		107,224
Consumer [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	102	161	161
Charge-offs	(17)		(108)
Recoveries	4		31
Provision	(17)		18
Allowance for Loan Losses: Ending Balance	72		102
Loans: Ending Balance	7,532		7,882
ALL	(72)		(102)
Loans, net	7,460		7,780
Ending balance: Individually evaluated	7		26
Ending balance: Collectively evaluated	7,525		7,856
Municipal Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans: Ending Balance	19,654		18,970
Loans, net	19,654		18,970
Ending balance: Collectively evaluated	19,654		18,970
Not Specifically Allocated [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	288	1,014	1,014
Provision	138		(726)
Allowance for Loan Losses: Ending Balance	426		288
ALL	(426)		(288)
Loans, net	$ (426)		$ (288)

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Foreclosed Properties, Net (Tables)

3 Months Ended

Mar. 31, 2013

Foreclosed Properties, Net [Abstract]

Summary Of Foreclosed Properties

		For the three months ended March 31,
		2013			2012
Beginning balance	$	14,334	$	14,913
Transfer of net realizable value to foreclosed properties		203		3,858
Sale proceeds		(2,049)		(792)
Net gain from disposal of foreclosed properties		118		39
Valuation allowance related to properties disposed		(954)		(740)
Total foreclosed properties		11,652		17,278
Valuation allowance for losses		(3,073)		(2,512)
Total foreclosed properties, net	$	8,579	$	14,766

Changes In The Valuation Allowance For Losses On Foreclosed Properties

		For the three months ended March 31,
		2013		2012
Beginning balance	$	3,858	$	2,794
Provision charged to operations		169		458
Amounts related to properties disposed		(954)		(740)
Balance at end of period	$	3,073	$	2,512

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

3 Months Ended

Mar. 31, 2013

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

Schedule Of Information Regarding Impaired Loans

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

March 31, 2013		Construction						Real Estate- Mortgage					Real Estate- Commercial					Commercial					Consumer				Municipal					Not Specifically Allocated					Totals
With an allowance recorded:
Recorded investment	$		126	$				394	$			537		$		–			$		–			$		–		$		–			$		1,057
Unpaid principal balance			151					585				598				13					–					–				–					1,347
Related allowance			25					191				61				13					–					–				–					290
With no related allowance recorded:
Recorded investment	$		832		$			439		$		8,058		$		1,224			$		6			$		–		$		–			$		10,559
Unpaid principal balance			832					439				8,058				1,224					6					–				–					10,559
Related allowance			–					–				–				–					–					–				–					–
Total:
Recorded investment	$		958			$	833		$		8,595				$		1,224			$		6			$		–		$		–			$		11,616
Unpaid principal balance			983				1,024				8,656						1,237					6					–				–					11,906
Related allowance			25				191				61						13					–					–				–					290
Average recorded investment during quarter	$		989			$	1,041		$		11,185				$		797			$		16			$		–		$		–			$		14,028
Interest income recognized while impaired	$		–			$	1		$		55				$		–			$		–			$		–		$		–			$		56

December 31, 2012		Construction				Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$		130	$	703		$	3,261		$	–		$	3		$	–	$	–	$	4,097
Unpaid principal balance			153		897			4,370			13			4			–		–		5,437
Related allowance			23		194			1,109			13			1			–		–		1,340
With no related allowance recorded:
Recorded investment	$		889	$	547		$	10,516		$	971		$	20		$	–	$	–	$	12,943
Unpaid principal balance			889		547			10,516			971			20			–		–		12,943
Related allowance			–		–			–			–			–			–		–		–
Total:
Recorded investment	$		1,019	$	1,250		$	13,777		$	971		$	23		$	–	$	–	$	17,040
Unpaid principal balance			1,042		1,444			14,886			984			24			–		–		18,380
Related allowance			23		194			1,109			13			1			–		–		1,340
Average recorded investment during quarter	$		2,889	$	2,582		$	22,518		$	791		$	18		$	–	$	–	$	28,798
Interest income recognized while impaired	$		2	$	87		$	230		$	6		$	–		$	–	$	–	$	325

Schedule Of Nonperforming Loans

NONPERFORMING LOANS

		March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012		March 31, 2012
Nonaccrual loans	$	8,499	$	10,724	$	8,203	$	11,513	$	14,301
Loans restructured in a troubled debt restructuring, nonaccrual		140		3,724		3,812		8,159		8,158
Total nonperforming loans (“NPLs”)	$	8,639	$	14,448	$	12,015	$	19,672	$	22,459
Restructured loans, accruing	$	3,267	$	3,931	$	4,425	$	4,715	$	6,469

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Troubled Debt Restructuring (Summary Of Troubled Debt Restructurings) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013 contract	Dec. 31, 2012 contract
Financing Receivable, Modifications [Line Items]
Number of Modifications	9	18
Recorded Investment	$ 3,407	$ 7,655
Construction [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications
Recorded Investment
Real Estate - Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	1	5
Recorded Investment	70	455
Real Estate - Commercial [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	7	12
Recorded Investment	3,324	7,186
Commercial [Member]
Financing Receivable, Modifications [Line Items]
Number of Modifications	1	1
Recorded Investment	13	14
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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Loans (Schedule Of Past Due Loans) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	$ 5,028	$ 3,265
90 Days & Over or on Non-accrual	8,639	14,448
Total	13,667	17,713
Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	491
90 Days & Over or on Non-accrual	984	1,042
Total	1,475	1,042
Real Estate - Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	721	618
90 Days & Over or on Non-accrual	954	988
Total	1,675	1,606
Real Estate - Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	3,078	1,715
90 Days & Over or on Non-accrual	5,458	11,408
Total	8,536	13,123
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	699	903
90 Days & Over or on Non-accrual	1,236	984
Total	1,935	1,887
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days Past Due (accruing)	39	29
90 Days & Over or on Non-accrual	7	26
Total	46	55
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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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2013

Available-for-sale Securities [Member]

Deferred Income Taxes [Line Items]

Summary Of Changes In Deferred Income Tax Balances

		For the three months ended March 31,
		2013		2012
Balances at beginning of period	$	(3,435)	$	(2,468)
Net change during period		313		(434)
Balances at end of period	$	(3,122)	$	(2,902)

Other Than Available For Sale Securities [Member]

Deferred Income Taxes [Line Items]

Summary Of Changes In Deferred Income Tax Balances

		For the three months ended March 31,
		2013		2012
Balances at beginning of period	$	9,793	$	9,613
Net change during period		(644)		34
Balances at end of period	$	9,149	$	9,647

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Mortgage Servicing Rights (Tables)

3 Months Ended

Mar. 31, 2013

Mortgage Servicing Rights [Abstract]

Summary Of Changes In the Carrying Value Of MSRs

MORTGAGE SERVICING RIGHTS

		For the three months ended March 31,
		2013		2012
Balance at beginning of period	$	839	$	634
Additions from loans sold with servicing retained		111		45
Loan payments and payoffs		(53)		(36)
Changes in valuation		51		54
Fair value of MSRs at the end of period	$	948	$	697

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Reconciliation of net income to net cash provided by operating activities:
Net Income	$ 1,755	$ 1,332
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	322	314
Amortization of debt issuance costs	9	9
Provision for losses on loans	600	1,750
Net amortization of premium/discount on securities	745	757
Increase in cash surrender value of life insurance	(78)	(93)
Net realized loss (gain) on sale of securities	12	(678)
Net gain on sale of loans	(594)	(361)
Proceeds from sale of loans held for sale	22,851	19,558
Origination of loans held for sale	(25,889)	(19,222)
Change in valuation of mortgage servicing rights, net of payments and payoffs	2	(18)
Provision for valuation allowance on foreclosed properties	169	458
Net gain on sale of premises and equipment		(2)
Net gain on disposals of foreclosed properties	(118)	(39)
Provision (benefit) for deferred income tax expense	644	(34)
Stock-based compensation expense	58	27
Tax benefit from exercise/forfeiture of options	(1)
Income in equity of UFS subsidiary	(235)	(177)
Changes in assets and liabilities:
Accrued interest receivable and other assets	572	(811)
Income tax refund	(316)
Accrued expenses and other liabilities	350	(29)
Net cash flow from operating activities	858	2,741
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		17,121
Principal payments on securities available for sale	15,801	16,096
Purchase of securities available for sale	(21,097)	(26,937)
Proceeds from FHLB stock redemption		2,082
Proceeds from sale of foreclosed properties	2,049	792
Proceeds from sale of premises and equipment		2
Loan originations and payments, net	2,476	(10,916)
Additions to premises and equipment	(354)	(260)
Net change in federal funds sold	913	513
Dividend from UFS Subsidiary		600
Net cash flow from investing activities	(212)	(907)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	(47,053)	(6,863)
Net change in federal funds purchased and repurchase agreements	(22,458)	(14,289)
Tax benefit from vesting of restricted stock units	29	12
Proceeds from exercise of stock options	18
Cash dividends paid	(317)	(79)
Net cash used in financing activities	(69,781)	(21,219)
Net change in cash	(69,135)	(19,385)
Beginning cash	109,621	86,980
Ending cash	40,486	67,595
Supplemental cash flow information:
Interest paid	1,292	1,728
Income taxes (paid) refunded, net	316	(920)
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties	203	3,858
Mortgage servicing rights resulting from sale of loans	$ 111	$ 45

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Troubled Debt Restructuring (Tables)

3 Months Ended

Mar. 31, 2013

Troubled Debt Restructuring [Abstract]

Schedule Of Accrual And Nonaccrual Status Of Troubled Debt Restructuring

Changes in troubled debt restructurings for the three months ended March 31, 2013 are as follows (dollars in thousands):

Construction

Real Estate-Mortgage

Real Estate-Commercial

Commercial

Consumer

Municipal

Total

Accruing

Beginning of period

$

–

$

455

$

3,476

$

–

$

–

$

–

$

3,931

Principal payments

–

–

(13)

–

–

–

(13)

Charge-offs

–

–

–

–

–

–

–

Advances

–

–

–

–

–

–

–

New restructured

–

–

700

–

–

–

700

Transferred out of TDRs

–

(385)

(966)

–

–

–

(1,351)

Transfers to nonaccrual

–

–

–

–

–

–

–

March 31, 2013

$

–

$

70

$

3,197

$

–

$

–

$

–

$

3,267

Nonaccrual

Beginning of period

$

–

$

–

$

3,710

$

14

$

–

$

–

$

3,724

Principal payments

–

–

(2,985)

(1)

–

–

(2,986)

Charge-offs

–

–

(598)

–

–

–

(598)

Advances

–

–

–

–

–

–

–

New restructured

–

–

–

–

–

–

–

Transfers to foreclosed properties

–

–

–

–

–

–

–

Transfers from accruing

–

–

–

–

–

–

–

March 31, 2013

$

–

$

–

$

127

$

13

$

–

$

–

$

140

Totals
Beginning of period	$	–	$	455	$	7,186	$	14	$	–	$	–	$	7,655
Principal payments		–		–		(2,998)		(1)		–		–		(2,999)
Charge-offs		–		–		(598)		–		–		–		(598)
Advances		–		–		–		–		–		–		–
New restructured		–		–		700		–		–		–		700
Transfers out of TDRs		–		(385)		(966)		–		–		–		(1,351)
Transfers to foreclosed properties		–		–		–		–		–		–		–
March 31, 2013	$	–	$	70	$	3,324	$	13	$	–	$	–	$	3,407

Summary Of Troubled Debt Restructurings

	March 31, 2013				December 31, 2012
		Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		–	$	–		–	$	–
Real estate – mortgage		1		70		5		455
Real estate – commercial		7		3,324		12		7,186
Commercial		1		13		1		14
Consumer		–		–		–		–
Municipal		–		–		–		–
Total		9	$	3,407		18	$	7,655

Summary Of Troubled Debt Restructurings By Restructure Type)

		Accruing		Nonaccruing		Total
A/B split	$	760	$	–	$	760
Payment schedule changes		477		140		617
Interest rate reduction		2,030		–		2,030
Total	$	3,267	$	140	$	3,407

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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	Mar. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 245,823	$ 242,019
Gross Unrealized Gains	8,835	9,440
Gross Unrealized Losses	(873)	(743)
U.S. Government-Sponsored Agency Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	3,066	2,011
Gross Unrealized Gains	16	3
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	60,168	58,871
Gross Unrealized Gains	3,903	4,042
Gross Unrealized Losses	(25)	(4)
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	170,531	169,121
Gross Unrealized Gains	4,281	4,839
Gross Unrealized Losses	(727)	(510)
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	4,305	4,290
Gross Unrealized Gains	155	113
Gross Unrealized Losses	(121)	(229)
Private Placement And Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	6,099	6,072
Gross Unrealized Gains	480	443
Other Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities available for sale	$ 1,654	$ 1,654

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Mortgage Servicing Rights (Summary Of Changes In The Carrying Value Of MSRs) (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Mortgage Servicing Rights [Abstract]
Balance at beginning of period	$ 839,000	$ 634,000
Additions from loans sold with servicing retained	111,000	45,000
Changes in valuation	(53,000)	(36,000)
Loan payments and payoffs	51,000	54,000
Fair value of MSRs at the end of period	948,000	697,000
Unpaid principal balance of loans serviced for others	$ 126,000,000	$ 85,800,000

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
ASSETS
Cash and due from financial institutions	$ 40,486	$ 109,621
Federal funds sold	105	1,018
Securities available for sale	245,823	242,019
Loans held for sale	4,415	894
Loans, net of allowance of $8,313 and $9,165 at March 31, 2013 and December 31, 2012 respectively	583,089	586,368
Cash surrender value of life insurance	23,139	23,061
Premises and equipment, net	20,850	20,818
Premises and equipment held for sale	1,068	1,068
Federal Home Loan Bank stock	3,598	3,598
Foreclosed properties, net	8,579	10,476
Goodwill	6,641	6,641
Deferred Income Taxes	6,027	6,358
Accrued interest receivable	3,095	2,752
Other assets	9,015	9,279
Total Assets	955,930	1,023,971
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing	115,974	132,477
Interest-bearing	642,988	673,538
Total Deposits	758,962	806,015
Federal Home Loan Bank advances	40,000	40,000
Repurchase Agreements	29,110	51,568
Subordinated debentures	16,100	16,100
Convertible promissory notes	9,400	9,400
Accrued expenses and other liabilities	8,094	7,744
Total Liabilities	861,666	930,827
Commitments and Contingencies - Note 16
Common stock, $5 par value, authorized 50,000,000 shares; Issued-8,176,847 shares at March 31, 2013 and 8,158,360 at December 31, 2012; Outstanding-7,955,834 shares at March 31, 2013 and 7,937,347 at December 31, 2012	40,884	40,792
Additional paid-in capital	12,204	12,192
Retained earnings	39,886	38,448
Treasury stock (221,013 shares at March 31, 2013 and December 31, 2012)	(3,549)	(3,549)
Accumulated other comprehensive income	4,839	5,261
Total Stockholders' Equity	94,264	93,144
Total Liabilities and Stockholders' Equity	$ 955,930	$ 1,023,971

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Loans (Breakdown Of Loans By Risk Grading) (Details) (USD $)	3 Months Ended			12 Months Ended
	Mar. 31, 2013		Mar. 31, 2012	Dec. 31, 2012
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	$ 440,518,000			$ 441,783,000
Gross loans	591,810,000			595,950,000
Deferred Origination Fees, net of costs	(408,000)			(417,000)
Loans: Ending Balance	591,402,000			595,533,000
Percent of Total Loans	100.00%			100.00%
Transfers from loans to foreclosed properties	203,000		3,858,000
Charge-offs	1,548,000			7,672,000
0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	380,169,000			366,531,000
Gross loans	527,392,000			516,700,000
Percent of Total Loans	89.10%			86.70%
0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	23,919,000			27,723,000
Gross loans	25,317,000			28,882,000
Percent of Total Loans	4.30%			4.80%
0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	19,176,000			23,610,000
Gross loans	19,603,000			24,240,000
Percent of Total Loans	3.30%			4.10%
0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	17,254,000	[1]		23,919,000	[2]
Gross loans	19,498,000	[1]		26,128,000	[2]
Percent of Total Loans	3.30%	[1]		4.40%	[2]
0007 Rated Loans Not Impaired [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	7,600,000			5,200,000
0006B Or 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Decrease in loan balances	11,300,000
Transfers from loans to foreclosed properties	200,000
Charge-offs	1,500,000
Decrease in loan balances due to net payments and loan rating changes	9,600,000
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	110,729,000			108,890,000
Gross loans	110,728,000			108,890,000
Loans: Ending Balance	110,728,000			108,890,000
Charge-offs	118,000			492,000
Commercial [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	106,893,000			102,038,000
Commercial [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,089,000			1,835,000
Commercial [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	829,000			3,351,000
Commercial [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,918,000	[1]		1,666,000	[2]
Real Estate - Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	284,294,000			291,992,000
Gross loans	284,294,000			291,992,000
Loans: Ending Balance	283,886,000			291,575,000
Charge-offs	1,210,000			5,075,000
Real Estate - Commercial [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	232,353,000			232,298,000
Real Estate - Commercial [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	20,667,000			19,964,000
Real Estate - Commercial [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	17,123,000			18,720,000
Real Estate - Commercial [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	14,151,000	[1]		21,010,000	[2]
Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	45,495,000			40,901,000
Gross loans	45,495,000			40,901,000
Loans: Ending Balance	45,495,000			40,901,000
Charge-offs	1,000			781,000
Construction [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	40,923,000			32,195,000
Construction [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	2,163,000			5,924,000
Construction [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,224,000			1,539,000
Construction [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross commercial loans	1,185,000	[1]		1,243,000	[2]
Real Estate - Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	124,106,000			127,315,000
Gross loans	124,107,000			127,315,000
Loans: Ending Balance	124,107,000			127,315,000
Charge-offs	202,000			1,216,000
Real Estate - Mortgage [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	120,047,000			123,343,000
Real Estate - Mortgage [Member] | 0006A [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	1,398,000			1,159,000
Real Estate - Mortgage [Member] | 0006B [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	427,000			630,000
Real Estate - Mortgage [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	2,234,000	[1]		2,183,000	[2]
Consumer [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	7,532,000			7,882,000
Gross loans	7,532,000			7,882,000
Loans: Ending Balance	7,532,000			7,882,000
Charge-offs	17,000			108,000
Consumer [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	7,522,000			7,856,000
Consumer [Member] | 0007 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	10,000	[1]		26,000	[2]
Municipal Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	19,654,000			18,970,000
Gross loans	19,654,000			18,970,000
Loans: Ending Balance	19,654,000			18,970,000
Municipal Loans [Member] | 0001-0005 [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross consumer loans	$ 19,654,000			$ 18,970,000

[1] Included in the 0007 rated loans are $7.6 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 because fair value exceeds carrying cost.

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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, 2012	$ 40,792	$ 12,192	$ 38,448	$ (3,549)	$ 5,261	$ 93,144
Balance, Shares at Dec. 31, 2012	7,937,347
Net income for period			1,755			1,755
Net changes in unrealized losses on securities available for sale					(747)	(747)
Reclassification adjustment for net losses realized in income					12	12
Tax effect					313	313
Total comprehensive income						1,333
Stock based compensation expense, net		58				58
Vesting of Restricted Stock Units ("RSUs"), Amount	70	(70)
Vesting of Restricted Stock Units ("RSUs"), Shares	14,027
Tax benefit from vesting of RSUs		29				29
Exercise of stock options, Amount	22	(4)				18
Exercise of stock options, Shares	4,460
Tax benefit from exercise of options/RSUs		4				4
Tax expense from forfeiture of unexercised options/RSUs		(5)				(5)
Cash dividends ($0.04 per share)			(317)			(317)
Balance at Mar. 31, 2013	$ 40,884	$ 12,204	$ 39,886	$ (3,549)	$ 4,839	$ 94,264
Balance, Shares at Mar. 31, 2013	7,955,834

XML

Fair Value (Assets Measured At Fair Value On A Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	$ 245,823	$ 242,019
Mortgage servicing rights	948	839	697	634
Total	246,771	242,858
U.S. Government-Sponsored Agency Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	3,066	2,011
Mortgage-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	170,531	169,121
Asset-Backed Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	4,305	4,290
Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	60,168	58,871
Private Placement And Corporate Bonds [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Total securities available for sale	6,099	6,072
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	2,537	2,502
Mortgage servicing rights
Total	2,537	2,502
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	2,537	2,502
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	240,858	236,414
Mortgage servicing rights	948	839
Total	241,806	237,253
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	3,066	2,011
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	168,103	166,018
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	4,305	4,290
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	60,168	58,871
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	3,562	3,570
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	2,428	3,103
Total	2,428	3,103
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	$ 2,428	$ 3,103

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Troubled Debt Restructuring

3 Months Ended

Mar. 31, 2013

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.

Changes in troubled debt restructurings for the three months ended March 31, 2013 are as follows (dollars in thousands):

Construction

Real Estate-Mortgage

Real Estate-Commercial

Commercial

Consumer

Municipal

Total

Accruing

Beginning of period

$

–

$

455

$

3,476

$

–

$

–

$

–

$

3,931

Principal payments

–

–

(13)

–

–

–

(13)

Charge-offs

–

–

–

–

–

–

–

Advances

–

–

–

–

–

–

–

New restructured

–

–

700

–

–

–

700

Transferred out of TDRs

–

(385)

(966)

–

–

–

(1,351)

Transfers to nonaccrual

–

–

–

–

–

–

–

March 31, 2013

$

–

$

70

$

3,197

$

–

$

–

$

–

$

3,267

Nonaccrual

Beginning of period

$

–

$

–

$

3,710

$

14

$

–

$

–

$

3,724

Principal payments

–

–

(2,985)

(1)

–

–

(2,986)

Charge-offs

–

–

(598)

–

–

–

(598)

Advances

–

–

–

–

–

–

–

New restructured

–

–

–

–

–

–

–

Transfers to foreclosed properties

–

–

–

–

–

–

–

Transfers from accruing

–

–

–

–

–

–

–

March 31, 2013

$

–

$

–

$

127

$

13

$

–

$

–

$

140

Totals
Beginning of period	$	–	$	455	$	7,186	$	14	$	–	$	–	$	7,655
Principal payments		–		–		(2,998)		(1)		–		–		(2,999)
Charge-offs		–		–		(598)		–		–		–		(598)
Advances		–		–		–		–		–		–		–
New restructured		–		–		700		–		–		–		700
Transfers out of TDRs		–		(385)		(966)		–		–		–		(1,351)
Transfers to foreclosed properties		–		–		–		–		–		–		–
March 31, 2013	$	–	$	70	$	3,324	$	13	$	–	$	–	$	3,407

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

During the quarter ended March 31, 2013, $0.7 million of loan balance relating to one loan was transferred to restructured status. This loan was restructured as an A/B split structure. Also during the quarter, $3.6 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter and principal payments of $3.0 million were received. The remaining balance of $0.6 million was charged off.

A summary of troubled debt restructurings as of March 31, 2013 and December 31, 2012 is as follows (dollar amounts in thousands):

	March 31, 2013				December 31, 2012
		Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment
Construction		–	$	–		–	$	–
Real estate – mortgage		1		70		5		455
Real estate – commercial		7		3,324		12		7,186
Commercial		1		13		1		14
Consumer		–		–		–		–
Municipal		–		–		–		–
Total		9	$	3,407		18	$	7,655

A summary of troubled debt restructurings as of March 31, 2013 by restructure type is as follows (dollar amounts in thousands):

		Accruing		Nonaccruing		Total
A/B split	$	760	$	–	$	760
Payment schedule changes		477		140		617
Interest rate reduction		2,030		–		2,030
Total	$	3,267	$	140	$	3,407

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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
	Mar. 31, 2013	Mar. 31, 2012
Fair Value [Abstract]
Balance, beginning of period	$ 3,103	$ 16,262
Net unrealized gains	(24)	542
Transfer out of Level 3		(10,593)
Principal payments	(651)	(3,108)
Balance, end of period	$ 2,428	$ 3,103

XML

Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2013

Earnings Per Share [Abstract]

Schedule Of Earnings Per Share

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended March 31,
		2013		2012
(Numerator):
Net income available to common stockholders	$	1,755	$	1,332
Plus:  Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		148		149
Income available to common stockholders plus  assumed conversions	$	1,903	$	1,481
(Denominator):
Weighted average number of common shares
outstanding-basic		7,940,683		7,914,326
Plus:  Incremental shares of assumed conversions:
Dilutive effect of stock options		20,446	(1)	–	(1)
Dilutive effect of restricted stock units		42,779	(2)	19,124
Dilutive effect of convertible promissory notes (3)		1,880,000		1,890,000
Dilutive potential common shares		1,943,225		1,909,124
Adjusted weighted-average shares		9,883,908		9,823,450
Basic Earnings Per Share	$	0.22	$	0.17
Diluted Earnings Per Share	$	0.19	$	0.15

⁽¹⁾At March 31, 2013 and 2012, respectively, there was 58,756 and 103,400 outstanding stock options, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽²⁾At March 31, 2013, there were 35,177 outstanding restricted stock units which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽³⁾At March 31, 2013 and 2012, respectively, the Company had $9.40 million and $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.  Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of the Company’s common stock at the conversion ratio. On October 1, 2014,  one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not yet occurred.  The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. At March 31, 2013 and 2012, respectively, the entire 1,880,000 and 1,890,000 of common shares are included since the average market price per share for the three months ended March 31, 2013 and 2012 exceeded the conversion price of $5.00 per share.

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Consolidated Statement Of Changes In Stockholders' Equity And Comprehensive Income (Parenthetical) (USD $)	3 Months Ended
	Mar. 31, 2013
Consolidated Statement Of Changes In Stockholders' Equity And Comprehensive Income [Abstract]
Cash dividends, per share	$ 0.04

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Consolidated Balance Sheets [Abstract]
Loans, allowance	$ 8,313	$ 9,165
Common stock, par value	$ 5	$ 5
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	8,176,347	8,158,360
Common stock, shares outstanding	7,955,834	7,937,347
Treasury stock, shares	221,013	221,013

XML

Foreclosed Properties, Net

3 Months Ended

Mar. 31, 2013

Foreclosed Properties, Net [Abstract]

Foreclosed Properties, Net

9.Foreclosed Properties, Net

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

		For the three months ended March 31,
		2013			2012
Beginning balance	$	14,334	$	14,913
Transfer of net realizable value to foreclosed properties		203		3,858
Sale proceeds		(2,049)		(792)
Net gain from disposal of foreclosed properties		118		39
Valuation allowance related to properties disposed		(954)		(740)
Total foreclosed properties		11,652		17,278
Valuation allowance for losses		(3,073)		(2,512)
Total foreclosed properties, net	$	8,579	$	14,766

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

		For the three months ended March 31,
		2013		2012
Beginning balance	$	3,858	$	2,794
Provision charged to operations		169		458
Amounts related to properties disposed		(954)		(740)
Balance at end of period	$	3,073	$	2,512

XML

Document And Entity Information	3 Months Ended
	Mar. 31, 2013	Apr. 30, 2013
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2013
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2013
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		7,969,552

XML

Income Taxes

3 Months Ended

Mar. 31, 2013

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 carryforward periods, experience with operating loss and tax credit carryforwards 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 March 31, 2013 and December 31, 2012, the Company determined that no valuation allowance was required to be taken against the deferred income tax asset.

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.

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

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

DEFERRED INCOME TAXES – AVAILABLE FOR SALE SECURITIES

		For the three months ended March 31,
		2013		2012
Balances at beginning of period	$	(3,435)	$	(2,468)
Net change during period		313		(434)
Balances at end of period	$	(3,122)	$	(2,902)

DEFERRED INCOME TAXES – OTHER THAN AVAILABLE FOR SALE SECURITIES

		For the three months ended March 31,
		2013		2012
Balances at beginning of period	$	9,793	$	9,613
Net change during period		(644)		34
Balances at end of period	$	9,149	$	9,647

XML

Consolidated Statements Of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
INTEREST AND DIVIDEND INCOME
Loans, including fees	$ 7,021	$ 8,010
Taxable securities	1,223	1,906
Tax exempt securities	374	372
Federal funds sold	35	30
Total Interest and Dividend Income	8,653	10,318
INTEREST EXPENSE
Deposits	763	1,394
Repurchase agreements	20	23
Federal Home Loan Bank advances and other debt	199	258
Subordinated debentures	67	78
Convertible promissory notes	244	245
Total Interest Expense	1,293	1,998
Net interest income	7,360	8,320
Provision for loan losses	600	1,750
Net interest income after provision for loan losses	6,760	6,570
NONINTEREST INCOME
Fees from fiduciary activities	251	240
Fees from loan servicing	150	159
Fees for other services to customers	1,103	1,168
Net gain on sale of loans	594	361
Net loss in mortgage servicing rights	(2)	18
Net gain on sale of securities	(12)	678
Net gain/(loss) on sale of premises and equipment		2
Increase in cash surrender value of life insurance	78	93
Income in equity of UFS subsidiary	235	177
Other income	102	149
Total Noninterest Income	2,499	3,045
NONINTEREST EXPENSE
Salaries and employee benefits	4,185	4,427
Occupancy expense	524	624
Equipment expense	295	270
Data processing and courier expense	207	229
FDIC insurance expense	191	362
Operation of other real estate	199	596
Loan and collection expense	95	210
Other outside services	199	183
Other operating expenses	913	932
Total Noninterest Expense	6,808	7,833
Income before provision for income taxes	2,451	1,782
Provision for income taxes	696	450
Net Income	$ 1,755	$ 1,332
Basic earnings per share	$ 0.22	$ 0.17
Diluted earnings per share	$ 0.19	$ 0.15

XML

Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2013

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

4.Recent Accounting Pronouncements

In February 2013 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be  disclosed elsewhere in  the financial statements under GAAP.   The amendments apply

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. The provisions of this guidance did not have a significant impact on the consolidated financial condition, results of operation or liquidity of the Company.

In February 2013 the FASB has issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the Emerging Issues Task Force). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The provisions of this guidance are not expected to have a significant impact on the consolidated financial condition, results of operation or liquidity of the Company.

XML

Earnings Per Share

3 Months Ended

Mar. 31, 2013

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

March 31, 2013

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended March 31,
		2013		2012
(Numerator):
Net income available to common stockholders	$	1,755	$	1,332
Plus:  Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		148		149
Income available to common stockholders plus  assumed conversions	$	1,903	$	1,481
(Denominator):
Weighted average number of common shares
outstanding-basic		7,940,683		7,914,326
Plus:  Incremental shares of assumed conversions:
Dilutive effect of stock options		20,446	(1)	–	(1)
Dilutive effect of restricted stock units		42,779	(2)	19,124
Dilutive effect of convertible promissory notes (3)		1,880,000		1,890,000
Dilutive potential common shares		1,943,225		1,909,124
Adjusted weighted-average shares		9,883,908		9,823,450
Basic Earnings Per Share	$	0.22	$	0.17
Diluted Earnings Per Share	$	0.19	$	0.15

⁽¹⁾At March 31, 2013 and 2012, respectively, there was 58,756 and 103,400 outstanding stock options, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽²⁾At March 31, 2013, there were 35,177 outstanding restricted stock units which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

⁽³⁾At March 31, 2013 and 2012, respectively, the Company had $9.40 million and $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.  Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of the Company’s common stock at the conversion ratio. On October 1, 2014,  one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not yet occurred.  The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. At March 31, 2013 and 2012, respectively, the entire 1,880,000 and 1,890,000 of common shares are included since the average market price per share for the three months ended March 31, 2013 and 2012 exceeded the conversion price of $5.00 per share.

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Commitments And Contingencies

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies [Abstract]

Commitments And Contingencies

15.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)

		March 31,  2013		December 31, 2012
Commitments to fund unused home equity line loans	$	57,144	$	55,891
Commitments to fund 1-4 family loans		5,866		12,931
Commitments to fund residential real estate construction loans		1,380		2,435
Commitments unused on commercial lines of credit loans		151,449		149,569
Commitments unused on consumer lines of credit loans		9,764		9,525
Total commitments to extend credit	$	225,603	$	230,351
Financial standby letters of credit	$	9,857	$	15,499

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Equity Investment

3 Months Ended

Mar. 31, 2013

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 $3.6 million at March 31, 2013 and $3.3 million at December 31, 2012.  The current book value of UFS at March 31, 2013 is approximately $7,161 per share.

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Loans

3 Months Ended

Mar. 31, 2013

Loans [Abstract]

Loans

7.Loans

Loans held for investment including purchased loan participations from other financial institutions and in the syndicated loan market, are summarized as follows (dollar amounts in thousands):

		March 31, 2013		December 31, 2012
Construction	$	45,495	$	40,901
Real estate-mortgage		124,107		127,315
Real estate-commercial		284,294		291,992
Commercial		110,728		108,890
Consumer		7,532		7,882
Municipal		19,654		18,970
Gross loans		591,810		595,950
Less: Deferred origination fees, net of costs		(408)		(417)
Less: Allowance for loan losses		(8,313)		(9,165)
Loans, net	$	583,089	$	586,368

Loans having a carrying value of $96.5 million and $97.5 million are pledged as collateral for borrowings from the FHLB at March 31, 2013 and December 31, 2012, respectively.

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2013 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	$			652	$	1,658		$		5,787	$	678	$	102		$	–		$		288	$	9,165
Charge-offs				(1)		(202)				(1,210)		(118)		(17)			–				–		(1,548)
Recoveries				4		15				12		61		4			–				–		96
Provision				88		139				262		(10)		(17)			–				138		600
Ending balance	$			743	$	1,610		$		4,851	$	611	$	72		$	–		$		426	$	8,313
Loans:
Ending balance		$		45,495	$	124,107			$	283,886	$	110,728	$	7,532	$		19,654	$		–		$	591,402
ALL				(743)		(1,610)				(4,851)		(611)		(72)			–			(426)			(8,313)
Recorded investment		$		44,752	$	122,497	$			279,035	$	110,117	$	7,460	$		19,654	$		(426)		$	583,089
Ending balance:
Individually evaluated			$	1,185	$	1,595			$	14,151	$	1,918	$	7		$	–	$		–		$	18,856
Collectively evaluated				44,310		122,512				269,735		108,810		7,525			19,654			–			572,546
Total			$	45,495	$	124,107			$	283,886	$	110,728	$	7,532		$	19,654	$		–		$	591,402

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the twelve months ended December 31, 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		(781)			(1,216)			(5,075)		(492)		(108)			–			–			(7,672)
Recoveries		25			74			557		87		31			–			–			774
Provision		177			805			4,838		313		18			–			(726)			5,425
Ending balance	$	652		$	1,658		$	5,787	$	678	$	102	$		–	$		288	$		9,165
Loans:
Ending balance	$	40,901		$	127,315	$		291,575	$	108,890	$	7,882		$	18,970	$		–	$		595,533
ALL		(652)			(1,658)			(5,787)		(678)		(102)			–			(288)			(9,165)
Recorded investment	$	40,249		$	125,657	$		285,788	$	108,212	$	7,780		$	18,970	$		(288)	$		586,368
Ending balance:
Individually evaluated	$	1,243		$	1,488	$		21,010	$	1,666	$	26		$	–	$		–	$		25,433
Collectively evaluated		39,658			125,827			270,565		107,224		7,856			18,970			–			570,100
Total	$	40,901		$	127,315	$		291,575	$	108,890	$	7,882		$	18,970	$		–	$		595,533

A summary of past due loans at March 31, 2013 and December 31, 2012 is as follows (dollar amounts in thousands):

	March 31, 2013
		30-89 Days Past Due (accruing)		90 Days & Over or            on Non-accrual		Total
Construction	$	491	$	984	$	1,475
Real estate – mortgage		721		954		1,675
Real estate – commercial		3,078		5,458		8,536
Commercial		699		1,236		1,935
Consumer		39		7		46
Municipal		–		–		–
Total	$	5,028	$	8,639	$	13,667

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

	December 31, 2012
		30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	–	$	1,042	$	1,042
Real estate – mortgage		618		988		1,606
Real estate – commercial		1,715		11,408		13,123
Commercial		903		984		1,887
Consumer		29		26		55
Municipal		–		–		–
Total	$	3,265	$	14,448	$	17,713

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 is 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 with this rating 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 – Have well defined weaknesses and trends that jeopardize the repayment of the loan.  Ranging from workout to legal.  Includes loans that are nonaccrual and/or 90 days past due and over.

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 and/or is moved to nonaccrual status.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

Below is a breakdown of loans by risk grading as of March 31, 2013 (dollar amounts in thousands):

		0001-0005		0006A					0006B					0007(1)					Total
Commercial	$	106,893	$			1,089		$		829	$		1,918		$		110,729
Real estate – commercial		232,353				20,667				17,123			14,151				284,294
Construction		40,923				2,163				1,224			1,185				45,495
		380,169				23,919				19,176			17,254				440,518
Real estate - mortgage		120,047				1,398				427			2,234				124,106
Consumer		7,522			–					–		10						7,532
Municipal		19,654			–					–		–						19,654
Total	$	527,392	$		25,317		$			19,603	$	19,498						591,810
Deferred origination fees, net of costs																		(408)
Total loans																$		591,402

Percent of Total Loans89.1%4.3%3.3%3.3%100.0%

⁽¹⁾ Included in the 0007 rated loans are $7.6 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, 2012 (dollar amounts in thousands):

		0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	102,038	$	1,835	$	3,351	$	1,666	$	108,890
Real estate – commercial		232,298		19,964		18,720		21,010		291,992
Construction		32,195		5,924		1,539		1,243		40,901
		366,531		27,723		23,610		23,919		441,783
Real estate - mortgage		123,343		1,159		630		2,183		127,315
Consumer		7,856		–		–		26		7,882
Municipal		18,970		–		–		–		18,970
Total	$	516,700	$	28,882	$	24,240	$	26,128		595,950
Deferred origination fees, net of costs										(417)
Total loans									$	595,533

Percent of Total Loans86.7%4.8%4.1%4.4%100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired because fair value exceeds carrying cost.

Loan balances with a risk grading of 0006B or 0007 have decreased by $11.3 million since December 31, 2012. The decrease consisted of $0.2 million of loan balances transferred to foreclosed properties, $1.5 million of charge-offs, and $9.6 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 $527.4 million as of March 31, 2013, representing 89.1% of the total loan portfolio from $516.7 million as of December 31, 2012, representing 86.7% of the total loan portfolio.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

XML

Fair Value

3 Months Ended

Mar. 31, 2013

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).  Two of the Company’s securities available for sale at March 31, 2013 and December 31, 2012 were measured using Level 3 inputs.

Non-impaired loans and deposits - the fair value of fixed rate non-impaired loans and deposits and non-impaired variable rate loans and deposits with infrequent repricing or repricing limits, is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes (Level 3 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).

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

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.  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.

Convertible promissory notes - fair value of convertible promissory notes is based on current rates for similar financing (Level 3 inputs).

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:

		March 31, 2013		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	$	3,066	$	–	$	3,066	$	–
Mortgage-backed securities		170,531		–		168,103		2,428
Asset-backed securities		4,305		–		4,305		–
Obligations of states and political subdivisions		60,168		–		60,168		–
Private placement and corporate bonds		6,099		2,537		3,562		–
Other securities		1,654		–		1,654		–
Total securities available for sale		245,823		2,537		240,858		2,428
Mortgage servicing rights		948		–		948		–
Total	$	246,771	$	2,537	$	241,806	$	2,428

		December 31, 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	$	2,011	$	–	$	2,011	$	–
Mortgage-backed securities		169,121		–		166,018		3,103
Asset-backed securities		4,290		–		4,290		–
Obligations of states and political subdivisions		58,871		–		58,871		–
Private placement and corporate bonds		6,072		2,502		3,570		–
Other securities		1,654		–		1,654		–
Total securities available for sale		242,019		2,502		236,414		3,103
Mortgage servicing rights		839		–		839		–
Total	$	242,858	$	2,502	$	237,253	$	3,103

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

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 months ended March 31, 2013		For the year ended December 31, 2012
Balance, beginning of period	$	3,103	$	16,262
Transfer into Level 3		–		–
Net unrealized losses		(24)		542
Transfer out of Level 3		–		(10,593)
Principal payments		(651)		(3,108)
Balance, end of period	$	2,428	$	3,103

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:

		March 31, 2013		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans with allocated allowances	$	1,057	$	–	$	–	$	1,057
Foreclosed properties, net		8,579		–		–		8,579
Total	$	9,636	$	–	$	–	$	9,636

		December 31, 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 with allocated allowances	$	4,097	$	–	$	–	$	4,097
Foreclosed properties, net		10,476		–		–		10,476
Total	$	14,573	$	–	$	–	$	14,573

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

March 31, 2013

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

	(Dollar amounts in thousands)
	March  31, 2013					December 31, 2012
		Carrying Amount		Fair Value			Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash	$	40,486	$	40,486	$		109,621	$	109,621
Federal funds sold		105		105			1,018		1,018
Securities available for sale		245,823		245,823			242,019		242,019
Loans held for sale		4,415		4,481			894		908
Loans, net		583,089		582,976			586,368		587,166
Federal Home Loan Bank stock		3,598		3,598			3,598		3,598
Mortgage servicing rights		948		948			839		839
Foreclosed properties, net		8,579		8,579			10,476		10,476
Accrued interest receivable		3,095		3,095			2,752		2,752
FINANCIAL LIABILITIES
Deposits	$	758,962	$	759,498	$		806,015	$	806,820
Repurchase agreements		29,110		29,110			51,568		51,568
Federal Home Loan Bank advances		40,000		40,296			40,000		40,404
Subordinated debentures		16,100		16,100			16,100		16,100
Convertible promissory notes		9,400		9,571			9,400		9,316
Accrued interest payable		767		767			766		766

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.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(d)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.

(e)Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value.

(f)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.

(g)Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(h)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.

(i)Subordinated Debentures

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

(j)Convertible Promissory Notes

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

(k)Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

XML

Investments

3 Months Ended

Mar. 31, 2013

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 March 31, 2013 and December 31, 2012 are as follows:

		March 31, 2013
			Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$		3,066	$	16	$	–
Obligations of states and political subdivisions			60,168		3,903		(25)
Mortgage-backed securities			170,531		4,281		(727)
Asset-backed securities			4,305		155		(121)
Private placement and corporate bonds			6,099		480		–
Other securities			1,654		–		–
Totals	$		245,823	$	8,835	$	(873)

		December 31, 2012
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	2,011	$	3	$	–
Obligations of states and political subdivisions		58,871		4,042		(4)
Mortgage-backed securities		169,121		4,839		(510)
Asset-backed securities		4,290		113		(229)
Private placement and corporate bonds		6,072		443		–
Other securities		1,654		–		–
Totals	$	242,019	$	9,440	$	(743)

At March 31, 2013 and December 31, 2012, the mortgage-backed securities portfolio was $170.5 million, (69.4%) and $169.1 million, (69.9%), respectively, of the investment portfolios.  Approximately 8.9%, or $15.2 million, of the mortgage-backed securities outstanding at March 31, 2013 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 71.9%, or $122.5 million, of the mortgage-backed securities outstanding at March 31, 2013 were issued by either the Federal National Mortgage Association (“FNMA”), the FHLB 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 and comprised approximately 19.2%, or $32.8 million of the outstanding mortgage-backed securities at March 31, 2013.  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
March 31, 2013

Securities with unrealized losses at March 31, 2013 and December 31, 2012, 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):

	March 31, 2013
	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	$	3,248	$	(25)	$	–		$	–	$		3,248	$	(25)
Mortgage-backed securities		32,035		(383)		8,075			(344)			40,110		(727)
Asset-backed securities		–		–		608			(121)			608		(121)
Total securities temporarily impaired	$	35,283	$	(408)	$	8,683		$	(465)	$		43,966	$	(873)

	December 31, 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	$	529	$	(4)	$	–	$	–	$	529	$	(4)
Mortgage-backed securities		14,502		(100)		6,456		(410)		20,958		(510)
Asset-backed securities		–		–		3,210		(229)		3,210		(229)
Total securities temporarily impaired	$	15,031	$	(104)	$	9,666	$	(639)	$	24,697	$	(743)

At March 31, 2013, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprisedthree securities.  The asset-backed securities category with continuous unrealized losses for twelve months or more comprisedone security.

At December 31, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprised two securities.  The asset-backed securities category with continuous unrealized losses for twelve months or more comprised 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.

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Allowance For Loan Losses ("ALL")

3 Months Ended

Mar. 31, 2013

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 that 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 Company’s 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
March 31, 2013

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

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

March 31, 2013		Construction						Real Estate- Mortgage					Real Estate- Commercial					Commercial					Consumer				Municipal					Not Specifically Allocated					Totals
With an allowance recorded:
Recorded investment	$		126	$				394	$			537		$		–			$		–			$		–		$		–			$		1,057
Unpaid principal balance			151					585				598				13					–					–				–					1,347
Related allowance			25					191				61				13					–					–				–					290
With no related allowance recorded:
Recorded investment	$		832		$			439		$		8,058		$		1,224			$		6			$		–		$		–			$		10,559
Unpaid principal balance			832					439				8,058				1,224					6					–				–					10,559
Related allowance			–					–				–				–					–					–				–					–
Total:
Recorded investment	$		958			$	833		$		8,595				$		1,224			$		6			$		–		$		–			$		11,616
Unpaid principal balance			983				1,024				8,656						1,237					6					–				–					11,906
Related allowance			25				191				61						13					–					–				–					290
Average recorded investment during quarter	$		989			$	1,041		$		11,185				$		797			$		16			$		–		$		–			$		14,028
Interest income recognized while impaired	$		–			$	1		$		55				$		–			$		–			$		–		$		–			$		56

December 31, 2012		Construction				Real Estate- Mortgage			Real Estate- Commercial			Commercial			Consumer		Municipal		Not Specifically Allocated		Totals
With an allowance recorded:
Recorded investment	$		130	$	703		$	3,261		$	–		$	3		$	–	$	–	$	4,097
Unpaid principal balance			153		897			4,370			13			4			–		–		5,437
Related allowance			23		194			1,109			13			1			–		–		1,340
With no related allowance recorded:
Recorded investment	$		889	$	547		$	10,516		$	971		$	20		$	–	$	–	$	12,943
Unpaid principal balance			889		547			10,516			971			20			–		–		12,943
Related allowance			–		–			–			–			–			–		–		–
Total:
Recorded investment	$		1,019	$	1,250		$	13,777		$	971		$	23		$	–	$	–	$	17,040
Unpaid principal balance			1,042		1,444			14,886			984			24			–		–		18,380
Related allowance			23		194			1,109			13			1			–		–		1,340
Average recorded investment during quarter	$		2,889	$	2,582		$	22,518		$	791		$	18		$	–	$	–	$	28,798
Interest income recognized while impaired	$		2	$	87		$	230		$	6		$	–		$	–	$	–	$	325

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
March 31, 2013

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

NONPERFORMING LOANS

		March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012		March 31, 2012
Nonaccrual loans	$	8,499	$	10,724	$	8,203	$	11,513	$	14,301
Loans restructured in a troubled debt restructuring, nonaccrual		140		3,724		3,812		8,159		8,158
Total nonperforming loans (“NPLs”)	$	8,639	$	14,448	$	12,015	$	19,672	$	22,459
Restructured loans, accruing	$	3,267	$	3,931	$	4,425	$	4,715	$	6,469

During the quarter ended March  31, 2013, $3.6 million of nonaccrual restructured loans were reduced when the collateral securing the loans were sold within the quarter. In addition, $1.8 million of nonaccrual loans were brought current, $0.8 million were charged off, and $0.2 million were transferred to foreclosed properties. Partially offsetting the decreases were $0.5 million of nonaccrual additions.

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013		Mar. 31, 2012		Dec. 31, 2012	Dec. 31, 2010
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Net income available to common shareholders	$ 1,755		$ 1,332
Income available to common stockholders plus assumed conversions	1,903		1,481
Weighted average number of common shares outstanding-basic	7,940,683		7,914,326
Dilutive effect of stock options	20,446
Dilutive effect of restricted stock units	42,779	[1]	19,124	[1]
Dilutive effect of convertible promissory notes	1,880,000		1,890,000
Dilutive potential common shares	1,943,225	[2]	1,909,124	[2]
Adjusted weighted-average shares	9,883,908		9,823,450
Basic Earnings Per Share	$ 0.22		$ 0.17
Diluted Earnings Per Share	$ 0.19		$ 0.15
Convertible promissory notes	$ 9,400		$ 9,450		$ 9,400	$ 9,450
Conversion ratio of principal to shares	20.00%
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%
Conversion price per share	$ 5.00
Convertible Notes [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Dilutive effect of convertible promissory notes	1,880,000		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	58,756
Restricted Stock Units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities excluded from computation of earnings per share	35,177

[1] At March 31, 2013 and 2012, respectively, there was 58,756 and 103,400 outstanding stock options, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

[2] At March 31, 2013, there were 35,177 outstanding restricted stock units which are not included in the computation of diluted earnings per share because they are considered anti-dilutive. (3)At March 31, 2013 and 2012, respectively, the Company had $9.40 million and $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. Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of the Company’s common stock at the conversion ratio. On October 1, 2014, one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if voluntary conversion has not yet occurred. The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. At March 31, 2013 and 2012, respectively, the entire 1,880,000 and 1,890,000 of common shares are included since the average market price per share for the three months ended March 31, 2013 and 2012 exceeded the conversion price of $5.00 per share.

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Income Taxes (Summary Of Changes In Deferred Income Tax Balances) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Available-for-sale Securities [Member]
Deferred Income Taxes [Line Items]
Balances at beginning of period	$ (3,435)	$ (2,468)
Net change during period	313	(434)
Balances at end of period	(3,122)	(2,902)
Other Than Available For Sale Securities [Member]
Deferred Income Taxes [Line Items]
Balances at beginning of period	9,793	9,613
Net change during period	(644)	34
Balances at end of period	$ 9,149	$ 9,647

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Promissory Notes

3 Months Ended

Mar. 31, 2013

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. Beginning on July 1, 2014, the Company may redeem the notes in whole or in part. A notice of redemption supersedes and takes priority over any notice of conversion. 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. The outstanding principal balance at March 31, 2013 is $9.40 million.

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Investments (Tables)

3 Months Ended

Mar. 31, 2013

Investments [Abstract]

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

		March 31, 2013
			Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$		3,066	$	16	$	–
Obligations of states and political subdivisions			60,168		3,903		(25)
Mortgage-backed securities			170,531		4,281		(727)
Asset-backed securities			4,305		155		(121)
Private placement and corporate bonds			6,099		480		–
Other securities			1,654		–		–
Totals	$		245,823	$	8,835	$	(873)

		December 31, 2012
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government-sponsored agency securities	$	2,011	$	3	$	–
Obligations of states and political subdivisions		58,871		4,042		(4)
Mortgage-backed securities		169,121		4,839		(510)
Asset-backed securities		4,290		113		(229)
Private placement and corporate bonds		6,072		443		–
Other securities		1,654		–		–
Totals	$	242,019	$	9,440	$	(743)

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

	March 31, 2013
	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	$	3,248	$	(25)	$	–		$	–	$		3,248	$	(25)
Mortgage-backed securities		32,035		(383)		8,075			(344)			40,110		(727)
Asset-backed securities		–		–		608			(121)			608		(121)
Total securities temporarily impaired	$	35,283	$	(408)	$	8,683		$	(465)	$		43,966	$	(873)

	December 31, 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	$	529	$	(4)	$	–	$	–	$	529	$	(4)
Mortgage-backed securities		14,502		(100)		6,456		(410)		20,958		(510)
Asset-backed securities		–		–		3,210		(229)		3,210		(229)
Total securities temporarily impaired	$	15,031	$	(104)	$	9,666	$	(639)	$	24,697	$	(743)

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Foreclosed Properties, Net (Changes In The Valuation Allowance For Losses On Foreclosed Properties) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Foreclosed Properties, Net [Abstract]
Beginning balance	$ 3,858	$ 2,794
Provision charged to operations	169	458
Amounts related to properties disposed	(954)	(740)
Balance at end of period	$ 3,073	$ 2,512

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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	Mar. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	$ 35,283	$ 15,031
Less than 12 Months, Unrealized Loss	(408)	(104)
12 Months or More, Fair Value	8,683	9,666
12 Months or More, Unrealized Loss	(465)	(639)
Total Fair Value	43,966	24,697
Total Unrealized Loss	(873)	(743)
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	3,248	529
Less than 12 Months, Unrealized Loss	(25)	(4)
Total Fair Value	3,248	529
Total Unrealized Loss	(25)	(4)
Mortgage-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	32,035	14,502
Less than 12 Months, Unrealized Loss	(383)	(100)
12 Months or More, Fair Value	8,075	6,456
12 Months or More, Unrealized Loss	(344)	(410)
Total Fair Value	40,110	20,958
Total Unrealized Loss	(727)	(510)
Asset-Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
12 Months or More, Fair Value	608	3,210
12 Months or More, Unrealized Loss	(121)	(229)
Total Fair Value	608	3,210
Total Unrealized Loss	$ (121)	$ (229)

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Consolidated Statement Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statement Of Comprehensive Income [Abstract]
Net Income	$ 1,755	$ 1,332
Other comprehensive income, net of tax
Net unrealized holding gains arising during period	(747)	1,779
Less: reclassification adjustment for gains included in net income	12	(678)
Tax effect	313	(434)
Other comprehensive income	(422)	667
Total comprehensive income	$ 1,333	$ 1,999

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Use Of Estimates

3 Months Ended

Mar. 31, 2013

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, 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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Commitments And Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	$ 225,603	$ 230,351
Unused Home Equity Line Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	57,144	55,891
One To Four Family Residential Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	5,866	12,931
Residential Real Estate Construction Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	1,380	2,435
Commitments Unused On Commercial Lines Of Credit Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	151,449	149,569
Commitments Unused On Consumer Lines Of Credit Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	9,764	9,525
Financial Standby Letters of Credit [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total commitments to extend credit	$ 9,857	$ 15,499

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Loans (Tables)

3 Months Ended

Mar. 31, 2013

Loans [Abstract]

Schedule Of Loans Held For Investment

		March 31, 2013		December 31, 2012
Construction	$	45,495	$	40,901
Real estate-mortgage		124,107		127,315
Real estate-commercial		284,294		291,992
Commercial		110,728		108,890
Consumer		7,532		7,882
Municipal		19,654		18,970
Gross loans		591,810		595,950
Less: Deferred origination fees, net of costs		(408)		(417)
Less: Allowance for loan losses		(8,313)		(9,165)
Loans, net	$	583,089	$	586,368

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 three months ended March 31, 2013 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	$			652	$	1,658		$		5,787	$	678	$	102		$	–		$		288	$	9,165
Charge-offs				(1)		(202)				(1,210)		(118)		(17)			–				–		(1,548)
Recoveries				4		15				12		61		4			–				–		96
Provision				88		139				262		(10)		(17)			–				138		600
Ending balance	$			743	$	1,610		$		4,851	$	611	$	72		$	–		$		426	$	8,313
Loans:
Ending balance		$		45,495	$	124,107			$	283,886	$	110,728	$	7,532	$		19,654	$		–		$	591,402
ALL				(743)		(1,610)				(4,851)		(611)		(72)			–			(426)			(8,313)
Recorded investment		$		44,752	$	122,497	$			279,035	$	110,117	$	7,460	$		19,654	$		(426)		$	583,089
Ending balance:
Individually evaluated			$	1,185	$	1,595			$	14,151	$	1,918	$	7		$	–	$		–		$	18,856
Collectively evaluated				44,310		122,512				269,735		108,810		7,525			19,654			–			572,546
Total			$	45,495	$	124,107			$	283,886	$	110,728	$	7,532		$	19,654	$		–		$	591,402

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the twelve months ended December 31, 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		(781)			(1,216)			(5,075)		(492)		(108)			–			–			(7,672)
Recoveries		25			74			557		87		31			–			–			774
Provision		177			805			4,838		313		18			–			(726)			5,425
Ending balance	$	652		$	1,658		$	5,787	$	678	$	102	$		–	$		288	$		9,165
Loans:
Ending balance	$	40,901		$	127,315	$		291,575	$	108,890	$	7,882		$	18,970	$		–	$		595,533
ALL		(652)			(1,658)			(5,787)		(678)		(102)			–			(288)			(9,165)
Recorded investment	$	40,249		$	125,657	$		285,788	$	108,212	$	7,780		$	18,970	$		(288)	$		586,368
Ending balance:
Individually evaluated	$	1,243		$	1,488	$		21,010	$	1,666	$	26		$	–	$		–	$		25,433
Collectively evaluated		39,658			125,827			270,565		107,224		7,856			18,970			–			570,100
Total	$	40,901		$	127,315	$		291,575	$	108,890	$	7,882		$	18,970	$		–	$		595,533

Schedule Of Past Due Loans

	March 31, 2013
		30-89 Days Past Due (accruing)		90 Days & Over or            on Non-accrual		Total
Construction	$	491	$	984	$	1,475
Real estate – mortgage		721		954		1,675
Real estate – commercial		3,078		5,458		8,536
Commercial		699		1,236		1,935
Consumer		39		7		46
Municipal		–		–		–
Total	$	5,028	$	8,639	$	13,667

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013

	December 31, 2012
		30-89 Days Past Due (accruing)		90 Days & Over or on Non-accrual		Total
Construction	$	–	$	1,042	$	1,042
Real estate – mortgage		618		988		1,606
Real estate – commercial		1,715		11,408		13,123
Commercial		903		984		1,887
Consumer		29		26		55
Municipal		–		–		–
Total	$	3,265	$	14,448	$	17,713

Breakdown Of Loans By Risk Grading

Below is a breakdown of loans by risk grading as of March 31, 2013 (dollar amounts in thousands):

		0001-0005		0006A					0006B					0007(1)					Total
Commercial	$	106,893	$			1,089		$		829	$		1,918		$		110,729
Real estate – commercial		232,353				20,667				17,123			14,151				284,294
Construction		40,923				2,163				1,224			1,185				45,495
		380,169				23,919				19,176			17,254				440,518
Real estate - mortgage		120,047				1,398				427			2,234				124,106
Consumer		7,522			–					–		10						7,532
Municipal		19,654			–					–		–						19,654
Total	$	527,392	$		25,317		$			19,603	$	19,498						591,810
Deferred origination fees, net of costs																		(408)
Total loans																$		591,402

Percent of Total Loans89.1%4.3%3.3%3.3%100.0%

⁽¹⁾ Included in the 0007 rated loans are $7.6 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, 2012 (dollar amounts in thousands):

		0001-0005		0006A		0006B		0007(2)		Total
Commercial	$	102,038	$	1,835	$	3,351	$	1,666	$	108,890
Real estate – commercial		232,298		19,964		18,720		21,010		291,992
Construction		32,195		5,924		1,539		1,243		40,901
		366,531		27,723		23,610		23,919		441,783
Real estate - mortgage		123,343		1,159		630		2,183		127,315
Consumer		7,856		–		–		26		7,882
Municipal		18,970		–		–		–		18,970
Total	$	516,700	$	28,882	$	24,240	$	26,128		595,950
Deferred origination fees, net of costs										(417)
Total loans									$	595,533

Percent of Total Loans86.7%4.8%4.1%4.4%100.0%

⁽²⁾ Included in the 0007 rated loans are $5.2 million of loans that are not impaired because fair value exceeds carrying cost.

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Fair Value (Required Financial Disclosures About Fair Value Of Financial Instruments) (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available for sale	$ 245,823	$ 242,019
Mortgage servicing rights	948	839	697	634
Foreclosed properties, net	8,579	10,476	14,766
Accrued interest receivable	3,095	2,752
Carrying Amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash	40,486	109,621
Federal funds sold	105	1,018
Securities available for sale	245,823	242,019
Loans held for sale	4,415	894
Loans, net	583,089	586,368
Federal Home Loan Bank stock	3,598	3,598
Mortgage servicing rights	948	839
Foreclosed properties, net	8,579	10,476
Accrued interest receivable	3,095	2,752
Deposits	758,962	806,015
Repurchase agreements	29,110	51,568
Federal Home Loan Bank advances	40,000	40,000
Subordinated debentures	16,100	16,100
Convertible promissory notes	9,400	9,400
Accrued interest payable	767	766
Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash	40,486	109,621
Federal funds sold	105	1,018
Securities available for sale	245,823	242,019
Loans held for sale	4,481	908
Loans, net	582,976	587,166
Federal Home Loan Bank stock	3,598	3,598
Mortgage servicing rights	948	839
Foreclosed properties, net	8,579	10,476
Accrued interest receivable	3,095	2,752
Deposits	759,498	806,820
Repurchase agreements	29,110	51,568
Federal Home Loan Bank advances	40,296	40,404
Subordinated debentures	16,100	16,100
Convertible promissory notes	9,571	9,316
Accrued interest payable	$ 767	$ 766

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Mortgage Servicing Rights

3 Months Ended

Mar. 31, 2013

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 a valuation model that calculates the fair value using assumptions that market participants would use in estimating the present value of future net servicing income.

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

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

MORTGAGE SERVICING RIGHTS

		For the three months ended March 31,
		2013		2012
Balance at beginning of period	$	839	$	634
Additions from loans sold with servicing retained		111		45
Loan payments and payoffs		(53)		(36)
Changes in valuation		51		54
Fair value of MSRs at the end of period	$	948	$	697

Unpaid principal balance of loans serviced for others was $126.0 million and $85.8 million at March 31, 2013 and March 31, 2012, respectively.