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

June 30, 2014

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended June 30,				Six months ended June 30,
		2014		2013		2014		2013
(Numerator):
Net income available to common stockholders	$	2,159	$	1,731	$	4,224	$	3,486
Plus: Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		130		148		259		296
Income available to common stockholders plus assumed conversions	$	2,289	$	1,879	$	4,483	$	3,782

(Denominator):
Weighted average number of common shares
outstanding-basic		7,907,761		7,967,782		7,842,192		7,954,308
Plus: Incremental shares of assumed conversions:
Dilutive effect of stock options (1)		44,151		25,502		43,860		23,186
Dilutive effect of restricted stock units (2)		28,270		29,053		37,997		35,506
Dilutive effect of convertible promissory notes (3)		1,635,000		1,880,000		1,635,000		1,880,000
Dilutive potential common shares		1,707,421		1,934,555		1,716,857		1,938,692
Adjusted weighted-average shares		9,615,182		9,902,337		9,559,049		9,893,000

Basic Earnings Per Share	$	0.27	$	0.22	$	0.54	$	0.44
Diluted Earnings Per Share	$	0.24	$	0.19	$	0.47	$	0.38

(1)For the three and six months ended June 30, 2014 and 2013, there were 64,130 and 53,176 outstanding stock options that were not included in the computation of diluted earnings per share because they were considered anti-dilutive.

(2) For the three and six months ended June 30, 2014 and 2013, respectively, there were 15,040 and 68,572 outstanding restricted stock units, respectively, that were not included in the computation of diluted earnings per share because they were considered anti-dilutive.

(3)At June 30, 2014 and 2013, respectively, the Company had $8.18 million and $9.40 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 (the “Conversion Ratio”). Prior to the quarterly interest date preceding the fifth anniversary of issuance of the Convertible Notes 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 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 June 30, 2014 and 2013, respectively, the entire 1,635,000 and 1,880,000 of common shares are included in the computation of diluted earnings per share since the average market price per share for the three and six months ended June 30, 2014 and 2013 exceeded the conversion price of $5.00 per share.