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, 2015

EARNINGS PER SHARE

(Dollar amounts in thousands, except per share data)

		Three months ended March 31,
		2015		2014
(Numerator):
Net income available to common stockholders	$	2,207	$	2,065
Plus: Income impact of assumed conversions
Interest on 10% convertible debentures, net of income tax		16		145
Income available to common stockholders plus assumed conversions	$	2,223	$	2,210

(Denominator):
Weighted average number of common shares
outstanding-basic		9,141,244		7,775,895
Plus: Incremental shares of assumed conversions:
Dilutive effect of stock options (1)		49,293		43,582
Dilutive effect of restricted stock units (2)		38,822		47,819
Dilutive effect of convertible promissory notes (3) (4)		215,000		1,840,000
Dilutive potential common shares		303,115		1,931,401
Adjusted weighted-average shares		9,444,359		9,707,296

Basic Earnings Per Share	$	0.24	$	0.27
Diluted Earnings Per Share	$	0.24	$	0.23

(1)For the quarters ended March 31, 2015 and 2014, respectively, there were 115,339 and 64,130 outstanding stock options that were not included in the computation of diluted earnings per share because they were considered anti-dilutive.

(2) For the quarters ended March 31, 2015 and 2014, respectively, there were 25,342 and 15,040 outstanding restricted stock units that were not included in the computation of diluted earnings per share because they were considered anti-dilutive.

(3)At March 31, 2015 and 2014, the Company had $1.1 million and $9.2 million, respectively, 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 were mandatorily convertible at the Conversion Ratio if voluntary conversion had not yet occurred. The principal amount of any Convertible Note that had not been converted will be payable at maturity on June 30, 2017. At March 31, 2015 and 2014, respectively, 215,000 and 1,840,000 of common shares issuable upon conversion of remaining outstanding Convertible Notes are included in the computation of diluted earnings per share since the average market price per share for the three months ended March 31, 2015 and 2014 exceeded the conversion price of $5.00 per share.

(4)On April 1, 2015, all of the outstanding debentures were converted to 215,000 shares of common stock under the provisions for voluntary conversion.