UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
 
 FORM
10-K
 
 (Mark One)
 x
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
Fiscal Year Ended December 31, 2008
 
 or
 
  ̈
              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: 000-24149
 
 CIB
MARINE BANCSHARES, INC.
 (Exact
name of registrant as specified in its charter)
 
 Wisconsin
                37-1203599(State or other jurisdiction of incorporation or organization)
                (I.R.S. Employer Identification No.)N27 W24025 Paul Court, Pewaukee, Wisconsin
                53072(Address
      of principal executive offices)
                (Zip
      Code)
 
 Registrant’s
telephone number, including area code: (262) 695-6010
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 Common
Stock, $1.00 Par Value Per Share
 (Title of
Class)
 
 Indicate
by check mark if the registered is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £   No
R
 
 Indicate
by check mark if the registered is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes £   No
R
 
 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 R   No
£
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. R
  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 £
              Accelerated filer £
              Non-accelerated filer £
              Smaller reporting company R(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 Act). Yes £ No R
 
 While
there is currently no active trading market for shares of CIB Marine’s common
stock, the aggregate market value of the common stock held by nonaffiliates of
the registrant was approximately $23,276,000 (based upon the closing price of
$1.35 per share of the registrant's common stock on the OTC "Pink Sheets" as of
June 30, 2008).
 
 As of
March 31, 2009, there were 18,346,442 shares issued and 18,341,231 shares
outstanding of the registrant’s common stock.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Document
                  
                  Part of Form 10-K Into Which Portions of
                    Documents are IncorporatedNone
  
 
 EXPLANATORY
NOTE
 
 This
document is intended to speak as of December 31, 2008, except as otherwise
noted.
 
 FORM
10-K TABLE OF CONTENTS
 
 PagePart
      IItem
      1
                      —
      Business
                      
                      3Item
      1A
                      —
      Risk Factors
                      
                      14Item
      1B
                      —
      Unresolved Staff Comments
                      
                      21Item
      2
                      —
      Properties
                      
                      21Item
      3
                      —
      Legal Proceedings
                      
                      22Item
      4
                      —
      Submission of Matters to a Vote of Security Holders
                      
                      23Part
      IIItem
      5
                      — Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      24Item
      6
                      —
      Selected Financial Data
                      
                      25Item
      7
                      —
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      26Item
      7A
                      —
      Quantitative and Qualitative Disclosures About Market Risk
                      
                      59Item
      8
                      —
      Financial Statements and Supplementary Data
                      
                      63Item
      9
                      —
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      108Item
      9A(T)
                      —
      Controls and Procedures
                      
                      108Item
      9B
                      —
      Other Information
                      
                      109Part
      IIIItem
      10
                      —
      Directors, Executive Officers and Corporate Governance
                      
                      109Item
      11
                      —
      Executive Compensation
                      
                      112Item
      12
                      —
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      115Item
      13
                      —
      Certain Relationships and Related Transactions, and Director
      Independence
                      
                      117Item
      14
                      —
      Principal Accountant Fees and Services
                      
                      117Part
      IVItem
      15
                      —
      Exhibits and Financial Statement Schedules
                      
                      118Signatures
                      
                      
                      120
 
 2
 
 PART
I
 
 ITEM
1. BUSINESS
 
 CIB
MARINE
 
 CIB
Marine Bancshares, Inc. (“CIB Marine” or the “Company”) is a multi-bank holding
company with its principal executive offices in Pewaukee, Wisconsin, a suburb of
Milwaukee. CIB Marine owned and operated two separately chartered commercial
banking organizations at December 31, 2008: Central Illinois Bank, with its main
office in Champaign, Illinois (“CIB Bank”); and Marine Bank, with its main
office in Wauwatosa, Wisconsin, a suburb of Milwaukee (“Marine Bank” and,
together with CIB Bank, the “Banks”).
 
 CIB
Marine was originally incorporated in the State of Illinois in 1985 as Sidney
Bancorporation, Inc., a one-bank holding company headquartered in Sidney,
Illinois. The Company subsequently changed its name to Central Illinois Bancorp,
Inc. On August 27, 1999, Central Illinois Bancorp, Inc. reincorporated as a
Wisconsin corporation and changed its name to CIB Marine Bancshares,
Inc.
 
 CIB
Marine offers a full array of traditional banking services through its bank
subsidiaries. These services include a broad range of loan products, such as
commercial loans, commercial real estate loans, commercial and residential
construction loans, one-to-four family residential real estate loans, consumer
loans, and commercial and standby letters of credit; accepting demand, savings
and time deposits, providing commercial paper and repurchase agreements; and
providing other banking services.
 
 During
2003, CIB Marine shifted its strategic focus from business development and asset
growth to improving the company’s credit administration function, asset quality,
and liquidity and capital positions. The change in emphasis occurred in response
to a significant deterioration in the credit quality of the loan portfolio and
other credit related matters, including credit concentration risk and weaknesses
in the credit administration process, identified by the bank and bank holding
company regulators during their regular examinations in 2002 and 2003. These
issues subsequently resulted in the issuance of various orders, agreements and
memoranda with the banking regulators, CIB Marine and its bank subsidiaries.
During 2004 and 2005, CIB Marine took a number of actions to improve its
financial condition and corrected the weaknesses which were identified in the
credit administration process. During 2006 and 2007, CIB Marine continued to
take actions to improve its financial condition with a particular emphasis on
strengthening business development and continuing to reduce operating costs,
including the closure or sale of certain of its subsidiary bank branches. In
2008, CIB Marine continued to focus on making changes to its operations to
reduce costs, strengthen liquidity, and strengthen capital ratios at its
subsidiary banks. In August 2008, the deposits, branches, and most loans of its
Florida banking subsidiary, Citrus Bank, NA, were sold.
 
 Additional
Information
 
 See Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations (which includes discussion of CIB Marine’s capital plan in the
“Liquidity and Capital Plan Update” section) and Supplementary Data inPart II of this Form
10-K for more details regarding certain of the above described
items.
 
 Markets
Served
 
 At
December 31, 2008, CIB Marine served the following geographic markets or regions
through its banking subsidiaries. Information on these banks as of December 31,
2008 and the markets they served is set forth in the following
table:
 
 Bank
                          
                          Geographic Market/Region
                          
                          Operated
                            Since
                          
                          Banking
                            Facilities
                          
                          
                          Assets
                          
                          
                          Deposits(Dollars
      in millions)Central
      Illinois Bank
                          
                          Central
      Illinois
                          
                          1987
                          
                          
                          12
                          
                          
                          $
                          484.8
                          
                          
                          $
                          374.1Marine
      Bank
                          
                          Greater
      Milwaukee, Greater Indianapolis, Phoenix
                          
                          1997
                          
                          
                          6
                          
                          
                          $
                          399.3
                          
                          
                          $
                          334.1
  3
 Nonbank
Subsidiaries
 
 At
December 31, 2008, CIB Marine had one wholly-owned operating nonbanking
subsidiary, CIB Marine Information Services, Inc. CIB Marine also had three
wholly-owned nonbanking subsidiaries that had ceased operations and are in the
process of winding down: Mortgage Services, Inc.; CIB Marine Capital, LLC; and
CIB Construction, LLC.
 
 CIB
Marine Information Services, Inc.
 
 CIB
Marine Information Services, Inc. (“CIB Marine Information”), an Illinois
corporation and wholly-owned subsidiary of CIB Marine, was incorporated in
August 1990 as CIB Data Processing Services, Inc. In 2002, CIB Marine changed
the name of the subsidiary to CIB Marine Information Services, Inc. This
subsidiary was organized to provide in-house data processing services,
coordinate computer equipment leases and purchases, license banking software,
and coordinate operation of CIB Marine software. During the fourth quarter of
2007, in CIB Marine’s continuing effort to improve operating efficiencies,
significant portions of CIB Marine’s and subsidiary banks’ data processing was
outsourced to Jack Henry and Associates Inc. Following this migration to
outsourced service bureau support of core customer accounting systems, CIB
Marine Information restructured its staffing and now is focused on a more
limited support of CIB Marine-owned and operated technology and information
networks. As of December 31, 2008, CIB Marine Information had six full-time
equivalent employees. CIB Marine Information does not separately own any
facilities.
 
 Mortgage
Services, Inc.
 
 CIB
Marine sold the operations of Mortgage Services, Inc. (“MSI”), a mortgage
origination and mortgage brokerage services company, in the third quarter of
2004. During 2008, MSI continued to collect payments on its remaining loans and
at December 31, 2008 had $0.5 million in mortgage loans outstanding. CIB Marine
continues to offer residential mortgage loans through its subsidiary
banks.
 
 CIB
Marine Capital, LLC
 
 In April
2001, CIB Marine established CIB Marine Capital, LLC (“CIB Marine Capital”), a
Wisconsin limited liability company. CIB Marine Capital provided leveraged
financing, including mezzanine loans. Typically, the collateral coverage on
these loans was insufficient to secure a senior debt position. These loans were,
by their nature, inherently riskier than senior debt position loans. During
2003, CIB Marine ceased to offer new loans through CIB Marine Capital and began
winding down its affairs. At December 31, 2007, CIB Marine had no loans
outstanding, but continued collection efforts on previously charged-off loans.
During 2008, CIB Marine sold the operations and the majority of the loans of its
Florida banking subsidiary. CIB Marine transferred the loans not purchased by
the buyer of its Florida banking operations to CIB Marine Capital. As of
December 31, 2008, CIB Marine Capital had loans and loans held for sale with a
total net carrying value of $16.5 million. CIB Marine Capital is continuing to
wind down its affairs including the sale or collection of these outstanding
loans.
 
 CIB
Construction, LLC
 
 In 2002,
CIB Marine acquired through its wholly-owned subsidiary, CIB Construction LLC
(“CIB Construction”), 84% of Canron Corporation (“Canron”), a steel fabrication
and erection company that had operations in the United States, Canada and
Mexico. Canron was acquired from a borrower who was in default of its
obligations and it is classified as an asset held for disposal. In September
2003, Canron commenced a voluntary liquidation and winding down of its affairs.
At December 31, 2008, CIB Construction had $1.0 million in assets and $1.7
million in liabilities, including $0.7 million taxes due to its parent resulting
from a tax sharing agreement. For more information on this company see Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Companies Held for Disposal, and Item 8, Note 6-Companies Held for
Disposal and Discontinued Operations in Part II of this Form
10-K.


4
 
 Management
Support Services
 
 In
addition to the support services provided by its nonbank subsidiaries, CIB
Marine, as a holding company, performs a significant portion of its
subsidiaries’ back office services, including credit administration, treasury,
and asset/liability management support services, accounting, finance, audit,
operations, human resources, legal, marketing and advertising. CIB Marine
continues to evaluate opportunities to further reduce these costs and improve
the efficiency of all of its operations. At December 31, 2008, CIB Marine had 73
full-time equivalent employees at the holding company level, a majority of who
are providing the described services to CIB Marine’s subsidiaries.
 
 Total
Employees
 
 At
December 31, 2008, CIB Marine and all of its bank and nonbank subsidiaries had a
combined total of 197 full-time equivalent employees.
 
 COMPETITION
 
 The
banking industry is highly competitive. CIB Marine’s subsidiary banks compete
for loans, deposits and other financial services in their markets and
surrounding areas. In addition to local, regional, and national banking
competition in the markets it serves, CIB Marine competes with other financial
institutions, money market and other mutual funds, insurance companies,
brokerage companies and other non-depository financial service companies,
including certain governmental organizations which may offer subsidized
financing at lower rates than those offered by CIB Marine. Beginning in 2007,
general economic conditions were impacted by credit market turmoil followed by
significant deterioration in the banking industry and a general downturn in the
economy. The continuing weakened performance of the banking industry has
provided particular competitive pressure through both a difficult lending
environment and historically high cost of certificates of deposit and other
consumer pricing compared to other borrowing alternatives and asset yields. This
has increased the pressure on net interest margin at CIB Marine and most other
community banking organizations in its markets.
 
 CIB
Marine believes that its long-standing presence in the communities it serves and
a commitment to local, personal service improves its ability to compete
favorably in attracting retail and business customers.
 
 SUPERVISION
AND REGULATION
 
 General
 
 Bank
holding companies and financial institutions are extensively regulated under
both federal and state law. Any significant change in the banking laws and
regulations applicable to CIB Marine or its banking subsidiaries could
materially impact CIB Marine’s operations or change the manner in which it
conducts business. Federal and state regulation of financial institutions is
intended primarily for the protection of the federal deposit insurance funds and
depositors.
 
 CIB
Marine is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended (the “BHCA”), and is regulated by the Federal Reserve Board
(the “FRB”). CIB Marine’s bank subsidiaries have the Federal Deposit Insurance
Corporation (“FDIC”) as their primary federal regulator, and are also regulated
by the state banking regulator for the state in which they are chartered: the
Illinois Department of Financial and Professional Regulation, Division of Banks
and Real Estate (“DBRE”) or the Wisconsin Department of Financial Institutions,
Division of Banking (“WDFI”).
 
 CIB
Marine and its nonbank subsidiaries are subject to examination by the FRB. The
state banking regulators and FDIC periodically conduct examinations of CIB
Marine’s state bank subsidiaries and nonbank subsidiaries that are under their
regulatory authority.
 
 The bank
regulatory agencies have extensive oversight authority relative to the
depository holding companies and institutions that they supervise. They have
been granted wide-ranging enforcement and supervision powers and exercise this
authority to ensure that depository holding companies and institutions under
their jurisdiction operate on a safe and sound basis and in compliance with
applicable laws. Holding companies and institutions that fail to conduct their
operations on a safe and sound basis or in compliance with applicable laws can
be compelled by the regulators to change the way they do business and may be
subject to regulatory enforcement actions, including encumbrances imposed on
their operations. Currently, CIB Marine is subject to a Written Agreement with
the Federal Reserve Bank of Chicago (the “Reserve Bank”). See Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Regulatory Matters in Part II of this Form 10-K.
  5
  The
following discussion summarizes the material elements of the regulatory
framework applicable to CIB Marine and its subsidiaries. It is not meant to be a
complete discussion of all the federal and state banking statutes and
regulations applicable to CIB Marine and its subsidiaries. To the extent this
discussion describes statutory and regulatory provisions it is qualified in its
entirety by reference to those provisions.
 
 Expansion
Activities
 
 The BHCA
requires every bank holding company to obtain the prior approval of the FRB
before merging with another bank holding company, acquiring substantially all
the assets of any bank or bank holding company, or acquiring directly or
indirectly any ownership or control of more than 5% of the voting shares of any
bank. The BHCA also prohibits a bank holding company, with particular
exceptions, from acquiring direct or indirect ownership of more than 5% of the
voting shares of any company which is not a bank or bank holding company and
from engaging in any business other than that of banking, managing and
controlling banks, or furnishing services to banks and their subsidiaries. Bank
holding companies may, however, engage in some businesses and activities
determined by the FRB to be closely related to banking or managing and
controlling banks.
 
 Interstate
Banking and Branching
 
 The
Riegle-Neal Interstate Banking and Branching Efficiency Act enacted in 1994
permits an adequately capitalized and adequately managed bank holding company,
with FRB approval, to acquire banking institutions located in states other than
the bank holding company’s home state without regard to whether the transaction
is prohibited under state law. In addition, national banks and state banks with
different home states are permitted to merge across state lines, with the
approval of the appropriate federal banking agency, unless the home state of a
participating banking institution has passed legislation prior to June 1, 1997
that expressly prohibits interstate mergers. De novo interstate branching is
permitted if the laws of the host state so authorize.
 
 Capital
Standards
 
 The
federal banking agencies impose risk-based capital requirements and guidelines
on bank holding companies and banks to provide for a measure of capital that
reflects the degree of risk associated with a banking organization’s operations
for both transactions reported on the balance sheet as assets and those recorded
as off-balance sheet items. A bank holding company or bank’s capital, in turn,
is divided into two tiers:
 
 •
              core
      capital (commonly referred to as Tier 1 capital), which generally includes
      common equity, qualifying noncumulative perpetual preferred stock, and for
      bank holding companies, a limited amount of qualifying cumulative
      perpetual preferred stock and minority interests in equity accounts of
      consolidated subsidiaries (including junior subordinated debentures net of
      investment in trust, provided that not more than 25% of the qualifying
      Tier 1 capital may consist of junior subordinated debentures, net of
      investment in trust), less goodwill and certain other intangible assets;
      and
 •
              supplementary
      capital (commonly referred to as Tier 2 capital), which includes, among
      other items, perpetual preferred stock not meeting the Tier 1 definition,
      mandatory convertible securities, and limited amounts of subordinated debt
      and reserves for credit losses.
 
 Bank
holding companies and banks are currently required to maintain Tier 1 capital
equal to at least 4% and “total capital” (the sum of Tier 1 and Tier 2 capital)
equal to at least 8% of its total risk-weighted assets, including certain
off-balance-sheet items such as unused lending commitments and standby letters
of credit.
 
 The FRB
and the FDIC have also adopted rules to incorporate market and interest rate
risk components into their risk-based capital standards. Amendments to the
risk-based capital requirements, incorporating market risk for institutions with
substantial trading activities or institutions where the federal banking
regulator deems it necessary for safety and soundness, became effective January
1, 1998. Under these market risk requirements, capital must be allocated to
support the amount of market risk related to a financial institution’s ongoing
trading activities. The market risk requirements do not presently apply to CIB
Marine or any of its bank subsidiaries.
  6
  The FRB
also requires bank holding companies to maintain a minimum “leverage ratio” of
Tier 1 capital to adjusted total assets of 3% if the bank holding company has
the highest regulatory rating and meets certain other requirements. For all
other bank holding companies, the minimum ratio of Tier 1 capital to total
assets is 4%.
 
 The
regulators may set capital requirements higher than the minimums noted above for
banks and bank holding companies whose circumstances warrant it. For example,
bank holding companies experiencing or anticipating significant growth may be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the FRB has indicated that it will consider a “tangible Tier 1
capital leverage ratio” (deducting all intangibles) and other indications of
capital strength in evaluating proposals for expansion or new
activities.
 
 At
December 31, 2008, all of CIB Marine’s subsidiary banks were in compliance with
these minimum capital requirements and were classified as “well capitalized”.
During 2008 the CIB Marine parent company contributed $5.0 million of capital to
the Banks and, subsequent to December 31, 2008, contributed an additional $2.0
million of capital to the Banks.
 
 At
December 31, 2008 CIB Marine was subject to a Written Agreement (“Agreement”) it
entered into with the Reserve Bank in the second quarter of 2004. Among other
items, the Written Agreement requires CIB Marine to maintain a sufficient
capital position for the consolidated organization including the current and
future capital requirements of each of its subsidiary banks, nonbank
subsidiaries and the consolidated organization. As of December 31, 2008, CIB
Marine’s Tier 1 leverage ratio had declined from 7.92% at December 31, 2007 to
3.58%. As a result, CIB Marine’s Tier 1 leverage ratio fell below the “minimum
capital” threshold applicable under the Agreement and the regulatory guidelines
of the FRB. The decline reflects the continued operating losses of CIB Marine
during 2008. Depending on the extent of continuing losses incurred by CIB Marine
in future periods, as well as the overall size of its balance sheet, further
other-than-temporarily impairment adjustments to its securities portfolio and
potential loan recoveries, CIB Marine’s capital ratios could decline further.
CIB Marine’s ability to increase its capital and meet the requirements of the
Agreement is dependent upon the successful execution of its capital plan
outlined in the liquidity discussion in Part II, Item 7 of this Form
10-K.
 
 For
several years, the U.S. bank regulators have been preparing to implement a new
framework for risk-based capital adequacy developed by the Basel Committee on
Banking Supervision, sometimes referred to as “Basel II.” In November 2007, the
U.S. bank regulators issued final rules, effective April 2008, to implement the
most advanced approach under Basel II for banks with over $250 billion in assets
or over $10 billion in foreign exposure. The regulators have also said they will
propose rules permitting smaller financial institutions, such as CIB Marine and
its bank subsidiaries, to choose between the current method of calculating
risked-based capital (“Basel I”) and the “standardized” approach under Basel II.
The standardized approach under Basel II would lower risk weightings for certain
categories of assets (including mortgages) from the weightings reflected in
Basel I, but would also require an explicit capital charge for operational risk,
which is not required by Basel I. The requirement to maintain a minimum leverage
ratio, which is not risk-based, remains in effect. CIB Marine was not required
to and did not adopt the “standardized” approach.
 
 Holding
Company Obligations
 
 Under
current FRB policy, a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each subsidiary bank. This support may be
required at times when the bank holding company may not have the resources to
provide it. In the event of a bank holding company’s bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the
capital of a subsidiary bank would be assumed by the bankruptcy trustee and
entitled to priority of payment.
 
 7
 
 Cross-Guarantees
Under the Federal Deposit Insurance Act
 
 Under the
Federal Deposit Insurance Act (“FDIA”), when two or more insured depository
institutions are under common control, each of those depository institutions may
be liable for any loss incurred, or expected to be incurred, by the FDIC in
connection with the default of any of the others. Each also may be liable for
any assistance the FDIC provides to the other institutions. “Default” means the
appointment of a conservator or receiver for the institution. Thus, either of
CIB Marine’s banking subsidiaries could be liable to the FDIC if the FDIC were
to suffer a loss in connection with the other of CIB Marine’s banking
subsidiary. This cross-guarantee liability for a loss at a commonly controlled
institution would be subordinated in right of payment to deposit liabilities,
secured obligations, any other general or senior liability, and any obligation
subordinated to depositors or other general creditors, other than obligations
owed to any affiliate of the depository institution (with certain
exceptions).
 
 Safety
and Soundness Guidelines
 
 The
federal banking agencies have adopted guidelines to assist in identifying and
addressing potential safety and soundness concerns before capital becomes
impaired. The guidelines establish operational and managerial standards relating
to internal controls, information systems, and internal audit systems; loan
documentation; credit underwriting; interest rate exposure; asset growth and
asset quality; and compensation, fees, and benefits. In addition, the federal
banking agencies have adopted safety and soundness guidelines for asset quality
and for evaluating and monitoring earnings to ensure that earnings are
sufficient for the maintenance of adequate capital and reserves.
 
 Prompt
Corrective Action
 
 The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
requires the federal banking regulators to take prompt corrective action in
respect to FDIC-insured depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
and “critically undercapitalized.” A depository institution’s capital tier
depends upon how its capital levels compare to various relevant capital measures
and certain other factors established by regulation. Under applicable
regulations, an FDIC-insured bank is defined as well capitalized if it maintains
a leverage ratio of Tier 1 capital to quarterly average total assets of at least
5%, a total capital ratio of qualifying total capital to risk-weighted assets,
including certain off-balance sheet items, of at least 10% and a Tier 1 capital
ratio of Tier 1 capital to risk-weighted assets of at least 6% and is not
otherwise in “troubled condition” as specified by its appropriate federal
regulatory agency.
 
 A bank is
generally considered to be adequately capitalized if it is not defined as well
capitalized but meets all of its minimum capital requirements: a leverage ratio
of 4% or greater (or 3% or greater if it receives the highest composite
examination rating by its examiners, subject to appropriate federal banking
agency guidelines); a total capital ratio of 8% or greater; and a Tier 1 capital
ratio of 4% or greater. A bank will be considered undercapitalized if it fails
to meet any minimum required measure, significantly undercapitalized if it is
significantly below such measure and critically undercapitalized if it maintains
a level of tangible equity capital equal to or less than 2% of total assets. A
bank may be reclassified to be in a capitalization category that is next below
that indicated by its actual capital position if it receives a less than
satisfactory examination rating by its examiners with respect to its assets,
management, earnings, or liquidity that has not been corrected, or it is
determined that the bank is in an unsafe or unsound condition or engages in an
unsafe or unsound practice. The federal banking agencies, however, may not treat
a significantly undercapitalized institution as critically undercapitalized
unless its capital ratio actually warrants such treatment. Regulators also have
the authority to increase minimum capital levels above those requirements
discussed above in which case a bank would no longer be considered well
capitalized.
 
 FDICIA
generally prohibits a depository institution from making any capital
distribution, including payment of dividends or paying any management fee to its
holding company, if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan to become
adequately capitalized. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly
undercapitalized.
 
 8
  Under
FDICIA, a bank that is not well capitalized is generally prohibited from
accepting or renewing brokered deposits and offering interest rates on deposits
significantly higher than the prevailing rate in its normal market area or
nationally depending upon where the deposits are solicited; in addition,
“pass-through” insurance coverage may not be available for certain employee
benefit accounts.
 
 A number
of additional requirements and restrictions may apply to significantly
undercapitalized depository institutions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions may be restricted from making payments
of principal and interest on subordinated debt and are subject to appointment of
a receiver or conservator.
 
 At
December 31, 2008, pursuant to FDIC regulations in 12 C.F.R. Part 325, both of
CIB Marine’s subsidiary banks were classified as well capitalized. However, as
noted in the Subsequent Events section below, in March 2009 Marine Bank
stipulated to a cease and desist order (the “C&D”) which was signed by the
FDIC and the WDFI in early April 2009, and is expected to become effective in
the near future. The C&D primarily resulted from the high level of
nonperforming assets of Marine Bank and the resulting impact on its financial
condition. The C&D requires Marine Bank to take certain corrective actions
focusing on reducing exposure to non-performing loans, charging off all loans
classified as loss, imposes restrictions on lending to credits with existing
non-performing loans, and accruing interest on certain delinquent loans in
addition to charging off previously accrued interest on those loans. Key
provisions also include a restriction on paying dividends without regulatory
approval, a requirement to maintain a minimum tier 1 leverage ratio of 10% at
Marine Bank, retaining qualified management, revising lending policies and
procedures focused on documentation, maintaining an appropriate loan review and
grading system, and adopting a comprehensive budget. Failure to adhere to the
requirements of the actions mandated by the C&D, once it becomes effective,
can result in more severe restrictions and civil monetary penalties. The C&D
added no additional requirements to the asset quality and loan review program
previously implemented and currently maintained by Marine Bank. CIB Marine and
Marine Bank also remain committed to maintaining adequate capital levels.
Generally, enforcement actions such as the C&D can be lifted only after
subsequent examinations substantiate complete correction of the underlying
issues.
 
 In
addition to measures taken under the prompt corrective action provisions,
banking organizations may be subject to potential enforcement actions by the
federal banking agencies for unsafe or unsound practices in conducting their
business for violations of any law, rule, regulation, or any condition imposed
in writing by the agency or any written agreement with the agency. These
enforcement actions may include the appointment of a conservator or receiver for
a bank, the issuance of a cease and desist order that can be judicially
enforced, the termination of a bank’s deposit insurance, the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against officers, directors and other institution-affiliated parties, and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if equitable relief was
not granted. Finally, pursuant to an interagency agreement, the FDIC may examine
without the express permission of the institution’s primary regulator any
institution that has a substandard regulatory examination score or is considered
undercapitalized.
 
 Dividend
Restrictions
 
 The FRB’s
policy regarding dividends is that a bank holding company should not declare or
pay a cash dividend which would impose undue pressure on the capital of its
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company’s financial position. The FRB
believes that a bank holding company should not initiate or continue cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. Pursuant
to the Agreement entered into with the Reserve Bank, CIB Marine has agreed not
to declare or pay dividends without the prior written approval of the Reserve
Bank and the Director of the Division of Banking Supervision and Regulation of
the Board of Governors. In addition, as a result of the Agreement entered into
with its regulator, CIB Marine has elected to defer all interest payments on its
junior subordinated debentures subsequent to December 31, 2003. However, this
deferral period is only permitted for five years, and began expiring in the
first quarter of 2009. According to the terms of its junior subordinated debt
agreements, during the deferral period, CIB Marine may not pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment on
its stock. See Item 7-Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Regulatory Matters in Part II of this Form
10-K for further information on the Agreement. Also, see the liquidity
discussion and capital plan in Item 7 of this Form 10-K for further information
on CIB Marine’s strategies to become current on its junior subordinated
debentures interest payments.
  9
  CIB
Marine’s ability to pay any dividends to its shareholders depends in large part
on the ability of CIB Marine’s subsidiary banks to pay dividends to it. Federal
law prohibits the payment of any dividends that would cause a bank to become
undercapitalized. The ability of state-chartered commercial banks to pay
dividends is also subject to restrictions primarily under the banking laws of
the state under which the bank is organized. In the case of CIB Marine’s
state-chartered banks, the laws of Illinois and Wisconsin are applicable. In
addition, the FRB and the banks’ regulators have the authority to prohibit CIB
Marine and its subsidiary banks from paying dividends, depending upon CIB
Marine’s and the banks’ financial condition, if such payment is deemed to
constitute an unsafe or unsound practice.
 
 Federal
Deposit Insurance
 
 As
FDIC-insured institutions, each of CIB Marine’s subsidiary banks is required to
pay deposit insurance premiums based on the risk each poses to the FDIC
insurance funds. In 2008, the FDIC had the authority to raise or lower
assessment rates on insured deposits in order to achieve certain designated
reserve ratios in the insurance funds and to impose special additional
assessments. The FDIC had adopted a premium rate schedule, which provided for an
assessment range in 2008 of 0.05% to 0.43% of domestic deposits, depending on
the capital category and supervisory category to which the bank was assigned.
For the first quarter of 2009 these ranges will be increased by 0.07%, and
beginning in the second quarter of 2009, the ranges will be 0.07% to 0.775%.
Further, in February 2009, the FDIC issued a proposed interim rule to impose a
special one-time assessment against all financial institutions in the second
quarter of 2009, payable in the third quarter of 2009. The proposed rule is open
to public comment and subject to change. The FDIC’s risk-based insurance
assessment system was amended by the Federal Deposit Insurance Reform Act of
2005. Under regulations effective for 2008, each insured bank is placed in one
of four risk categories based on its level of capital, supervisory ratings and
other risk measures, including debt ratings for large institutions, and its
insurance assessment rate is determined by its risk category. In 2008 there was
a 38 basis point spread between the highest and lowest assessment rates, so that
banks classified by the FDIC in Risk Category I are subject to an insurance
assessment of five to seven basis points (according to the FDIC’s assessment of
the bank’s strength), and banks classified by the FDIC in Risk Category IV are
subject to an insurance assessment rate of 0.43%. Risk assessment rates are
determined on the last day of each quarter. On the assessment invoices received
for the fourth quarter of 2008, both Central Illinois Bank and Marine Bank were
classified in Risk Category II. As further discussed in the Prompt Corrective
Action section, in March 2009 Marine Bank stipulated to a Cease and Desist
order. This could affect the risk category assigned to Marine Bank and result in
higher deposit insurance premiums in 2009.
 
 The FDIC
is authorized to terminate an institution’s deposit insurance upon a finding by
the FDIC that the institution’s financial condition is unsafe or unsound or that
the institution has engaged in unsafe or unsound practices or has violated any
applicable rule, regulation, order or condition enacted or imposed by the
institution’s regulatory agency. The termination of deposit insurance for CIB
Marine’s banks would have a material adverse effect on CIB Marine. In addition
to its insurance assessment, each insured institution is subject to quarterly
debt service assessments in connection with bonds issued by the government
corporation that financed the federal savings and loan bailout.
 
 In
October 2006, the FDIC Board of Directors approved a one-time assessment credit.
This credit, totaling $0.6 million for CIB Marine’s subsidiary banks, has been
recorded as a credit against regular FDIC insurance premium expense beginning in
January 2007 and will continue to be recorded until the credit is exhausted. Of
the $0.6 million, $0.2 million was used to offset the FDIC insurance premium
during both 2008 and 2007, and it is expected the balance of the credit will be
used in 2009.
 
 10
  Restrictions
on Affiliate Transactions
 
 Transactions
between CIB Marine, its subsidiary banks and its nonbank subsidiaries are
subject to a number of restrictions. Federal law imposes restrictions and
limitations on CIB Marine’s subsidiary banks from making extensions of credit
to, or the issuance of a guarantee or letter of credit on behalf of, CIB Marine
or other affiliates, the purchase of, or investment in, stock or other
securities thereof, the taking of such securities as collateral for loans, and
the purchase of assets of CIB Marine or other affiliates. Such restrictions and
limitations prevent CIB Marine or other affiliates from borrowing from the
subsidiary banks unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments by the
subsidiary banks to or in CIB Marine or to or in any other non-banking affiliate
are limited, individually, to 10% of the respective subsidiary bank’s capital
and surplus, and such secured loans are limited in the aggregate to 20% of the
respective subsidiary bank’s capital and surplus. All such transactions must be
on terms that are no less favorable to the bank subsidiary than those that would
be available from nonaffiliated third parties. Moreover, some state banking
laws, like those in Illinois, impose restrictions on affiliate transactions
similar to those imposed by federal law. FRB policies also forbid the payment by
bank subsidiaries of management fees which are unreasonable in amount or exceed
the fair market value of the services rendered or, if no market exists, actual
costs plus a reasonable profit.
 
 At
December 31, 2008, CIB Marine’s subsidiary banks had $0.2 million in outstanding
principal balances on loans secured or partially secured by CIB Marine stock. No
specific reserves were allocated to these loans. While these loans were secured
by CIB Marine stock, the borrowers did not use the proceeds to acquire the
stock.
 
 The
restrictions on loans to directors, executive officers, principal shareholders
and their related interests (collectively referred to herein as “insiders”)
contained in the Federal Reserve Act and Regulation O apply to all federally
insured institutions. These restrictions include limits on loans to one borrower
and conditions that must be met before such a loan can be made. There is also an
aggregate limitation on all loans to insiders and their related interests. These
loans cannot exceed the institution’s total unimpaired capital and surplus, and
the FDIC may determine that a lesser amount is appropriate. Insiders are subject
to enforcement actions for knowingly accepting loans in violation of applicable
restrictions. Regulation O institutions are not subject to the prohibitions of
the Sarbanes-Oxley Act of 2002 on certain loans to insiders.
 
 Community
Reinvestment Act and Fair Lending
 
 CIB
Marine’s subsidiary banks are subject to the Community Reinvestment Act (“CRA”)
and various fair lending requirements and reporting obligations. The CRA
generally requires federal banking agencies to evaluate whether financial
institutions are meeting the credit needs of their local communities, including
low-and moderate-income neighborhoods and to rate such institutions and publicly
disclose such ratings. State and federal agencies also examine financial
institutions compliance with fair lending laws. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. Federal banking agencies are also authorized to take compliance
with such laws and a bank’s CRA rating into consideration when regulating and
supervising other activities of a bank holding company and its banks, including
expansionary activities. As of the date of its most recent examination, each of
CIB Marine’s subsidiary banks had a CRA rating of at least
satisfactory.
 
 Compliance
with Consumer Protection Laws
 
 CIB
Marine’s subsidiary banks are subject to many federal consumer protection
statutes and regulations including the Truth in Lending Act, Truth in Savings
Act, Equal Credit Opportunity Act, the Fair Credit Reporting Act, as amended by
the Fair and Accurate Credit Transactions Act of 2003, Fair Housing Act, Real
Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other
things, these acts:
 
 ·
              require
      banks to disclose credit terms in meaningful and consistent
      ways;
 ·
              prohibit
      discrimination against an applicant in any consumer or business credit
      transaction;
 ·
              prohibit
      discrimination in housing-related lending
  activities;
 ·
              regulate
      the manner in which banks must deal with customers and certain information
      about customers;
 ·
              require
      banks to collect and report applicant and borrower data regarding loans
      for home purchases or improvement
projects;
  11
  ·
              require
      lenders to provide borrowers with information regarding the nature and
      cost of real estate settlements;
 ·
              prohibit
      certain lending practices and limit escrow account amounts with respect to
      real estate transactions; and
 ·
              prescribe
      possible penalties for violations of the requirements of consumer
      protection statutes and
regulations.
 
 Privacy
and Security
 
 The
Gramm-Leach-Bliley Act (“GLBA”) also establishes a minimum federal standard of
financial privacy by, among other provisions, requiring banks to adopt and
disclose privacy policies with respect to consumer information and setting forth
certain rules with respect to the disclosure to third parties of consumer
information. CIB Marine has adopted and disseminated its privacy policies
pursuant to the GLBA. Regulations adopted under the GLBA set standards for
protecting the security, confidentiality and integrity of customer information,
and require notice to regulators, and in some cases, to customers, in the event
of security breaches. A number of states have adopted their own statutes
requiring notification of security breaches. In addition, the GLBA requires the
disclosure of agreements reached with community groups that relate to the CRA,
and contains various other provisions designed to improve the delivery of
financial services to consumers while maintaining an appropriate level of safety
in the financial services industry.
 
 USA
PATRIOT Act of 2001
 
 The USA
PATRIOT Act of 2001 and its implementing regulations (“Patriot Act”) were
enacted and implemented for the purpose of strengthening the ability of the U.S.
Government to intercept and obstruct terrorism by, among others, increasing the
power of the U.S. government to obtain access to information and to investigate
a broad range of criminal activities. The Patriot Act expanded the definition of
money laundering to include terrorism, terrorism support and foreign corruption,
and increases the civil and criminal penalties for money laundering offenses.
The Patriot Act further applies certain anti-money laundering measures to United
States bank accounts of foreign persons; prohibits financial institutions from
establishing, maintaining, administering or managing a correspondent account
with a foreign shell bank; provides for certain forfeitures of funds deposited
in United States interbank accounts by foreign banks; provides the United States
Department of Treasury (“Treasury Department”) with regulatory authority to
ensure that certain accounts are not used to hide the identity of customers
transferring funds and to impose additional reporting requirements with respect
to money laundering activities; provides standards for verifying customer
identification at account opening; and sets forth rules to promote cooperation
among financial institutions, regulators and law enforcement entities in
identifying parties that may be involved in terrorism or money laundering. The
impact of the Patriot Act on financial institutions of all kinds is significant
and wide ranging. Regulatory authorities have increased compliance monitoring
activities and have levied significant fines and sanctions on many firms in the
financial industry. No fines or sanctions have been levied on CIB
Marine.
 
 Sarbanes-Oxley Act of
2002
 
 The
Sarbanes-Oxley Act of 2002 (“Sarbanes”) addresses corporate governance and
accounting oversight matters. Sarbanes required the creation of a five-member
oversight board appointed by the Securities Exchange Commission (“SEC”) that
sets standards for accountants and has investigative and disciplinary powers;
prohibits accounting firms from providing various forms of service to public
audit clients, such as certain consulting services; requires accounting firms to
rotate partners working with public clients every five years; expands disclosure
of corporate operations and internal controls; requires certification of
financial statements by the Chief Executive Officer and the Chief Financial
Officer of public companies; increases penalties and forfeitures for financial
crimes or failing to report events having a material effect on the financial
statements or operations of a public company; and enhances controls on and
reporting of insider trading. CIB Marine is required to provide management’s
report on internal controls over financial reporting in this report, as required
by Section 404 of Sarbanes; however, since it is neither a large accelerated
filer nor an accelerated filer for the fiscal year ended December 31, 2008, its
registered public accounting firm does not need to provide an attestation report
with respect to such internal controls.
 
 12
 
 Exchange
Act
 
 CIB
Marine’s stock is registered with the SEC. Under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), CIB Marine is subject to the information,
reporting, proxy solicitation, insider trading, corporate governance and other
requirements and restrictions of the Exchange Act.
 
 Recent
Regulatory Developments
 
 In
response to global credit and liquidity issues involving a number of financial
institutions, the United States government, particularly the Treasury Department
and the FDIC, have taken a variety of extraordinary measures designed to restore
confidence in the financial markets and to strengthen financial institutions,
including capital injections, guarantees of bank liabilities and the acquisition
of illiquid assets from banks.
 
 On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”) enacted by the U.S. Congress. Pursuant to
the EESA, the Treasury Department was granted the authority to take a range of
actions for the purpose of stabilizing and providing liquidity to the U.S.
financial markets and has proposed several programs, including the purchase by
the Treasury Department of certain troubled assets from financial institutions
(the “Troubled Asset Relief Program” or “TARP”) and the direct purchase by the
Treasury Department of equity of healthy financial institutions (the “Capital
Purchase Program” or “CPP”). The EESA also temporarily raised the limit on
federal deposit insurance coverage provided by the FDIC from $100,000 to
$250,000 per depositor.
 
 Among
other programs and actions taken by the bank regulatory agencies, the FDIC
implemented the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen
confidence and encourage liquidity in the banking system. The TLGP comprises the
Debt Guaranty Program (“DPG”) and the Transaction Account Guarantee Program
(“TAGP”). The DGP guarantees all newly issued senior unsecured debt (e.g.,
promissory notes, unsubordinated unsecured notes and commercial paper) up to
prescribed limits issued by participating entities beginning on October 14, 2008
and continuing through June 30, 2009. For eligible debt issued by that date, the
FDIC will provide the guarantee coverage until the earlier of the maturity date
of the debt or June 30, 2012. The TAGP offers full guarantee for
noninterest-bearing transaction accounts held at FDIC-insured depository
institutions. The unlimited deposit coverage was voluntary for eligible
institutions and was in addition to the $250,000 FDIC deposit insurance per
account that was included as part of the EESA. The limits are presently
scheduled to return to $100,000 on January 1, 2010. The TAGP coverage became
effective on October 14, 2008 and will continue for participating institutions
until December 31, 2009.
 
 Capital
Purchase Program
 
 After
reviewing the matter with its primary federal regulator, CIB Marine determined
not to participate in the CPP at this time.
 
 Temporary
Liquidity Guarantee Program
 
 Initially,
the TLGP programs, the DGP and TAGP, were provided at no cost for the first 30
days. On November 3, 2008, the FDIC extended the opt-out period to December 5,
2008 to provide eligible institutions additional time to consider the terms
before making a final decision regarding participation in the program. CIB
Marine is enrolled in both TAGP and DGP.
 
 On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the
“ARRA”) was signed into law. Section 7001 of the ARRA amended Section 111 of the
EESA in its entirety. While the Treasury Department must promulgate regulations
to implement the restrictions and standards set forth in Section 7001, the ARRA,
among other things, significantly expands the executive compensation
restrictions previously imposed by the EESA. Such restrictions apply to any
entity that has received or will receive financial assistance provided under
TARP, and shall generally continue to apply for as long as any obligations
arising from financial assistance provided under TARP, including preferred stock
issued under the CPP, remains outstanding. Since CIB Marine did not participate
in the CPP, Section 7001 of the ARRA does not apply to it.
  13
 Future
Legislation
 
 Various
legislation is from time to time introduced in Congress and state legislatures
with respect to the regulation of financial institutions. Such legislation may
change the banking statutes and the operating environment of CIB Marine and its
banking subsidiaries in substantial and unpredictable ways. CIB Marine cannot
determine the ultimate effect that potential legislation, or implementing
regulations, if enacted, would have upon the financial condition or results of
operations of CIB Marine or its banking subsidiaries.
 
 AVAILABLE
INFORMATION
 
 CIB
Marine files various reports with the SEC. The reports include the annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act. CIB Marine makes all SEC filings available without
charge to the public on its web site at http://www.cibmarine.com as soon as
reasonably practicable after filed.
 
 ITEM
1A. RISK FACTORS
 
 Forward-Looking
Statements
 
 CIB
Marine has made statements in this Annual Report on Form 10-K, including the
discussion of CIB Marine’s capital plan set forth in Item 7 of Part II of this
Form 10-K, that constitute “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. CIB Marine intends these
forward-looking statements to be subject to the safe harbor created thereby and
is including this statement to avail itself of the safe harbor. Forward-looking
statements are identified generally by statements containing works and phrases
such as “may”, “project”, “are confident”, “should be”, “predict”, “plan”,
“expect”, “estimate”, “anticipate”, and similar expressions. These
forward-looking statements reflect CIB Marine’s current views with respect to
future events and financial performance, which are subject to many uncertainties
and factors relating to CIB Marine’s operations and the business environment,
which could change at any time. Financial information contained in this Form
10-K for 2009 is unaudited.
 
 Forward-looking
statements are subject to significant risks and uncertainties and CIB Marine’s
actual results may differ materially from the results discussed in
forward-looking statements. Factors that might cause such results to differ from
the results discussed in forward-looking statements include, but are not limited
to, the risk factors set forth below.
 
 Risk
Factors
 
 The
following discussion sets forth certain risks that CIB Marine believes could
have a material adverse impact on its financial condition and results of
operations. Additional risks that are not currently known to CIB Marine, or that
it currently believes to be immaterial, may also have a material adverse effect
on its financial condition and results of operations.
 
 There
is substantial doubt concerning the ability of CIB Marine to continue as a going
concern for a reasonable period of time.
 
 Trust
preferred securities (“TruPS”) holders are owed in excess of $100 million, all
of which is currently due and payable. At December 31, 2008, total assets at the
CIB Marine parent company were $117.1 million, which included $13.2 million of
liquid assets. There is no other source of repayment of the TruPS, other than
these assets. CIB Marine defaulted on one series of the TruPS on March 25, 2009
and, absent additional capital, cash or a successful restructuring of the TruPS,
will default on the other  three series of TruPS during the second
quarter of 2009.
 
 As a
result of CIB Marine’s current inability to meet its obligations with regard to
the TruPS, combined with the continued net losses sustained by CIB Marine during
the year, and in consideration of existing regulatory matters, there is
substantial doubt with respect to CIB Marine’s ability to continue as a going
concern.
  14
 CIB
Marine expects Marine Bank to be subject to a formal enforcement action with
regulatory authorities.
 
 Under
applicable laws, the FDIC, as the Banks’ primary federal regulator and deposit
insurer, and the state regulators as the Banks’ chartering authorities, have the
ability to impose additional sanctions, restrictions and requirements on the
Banks if they determine, upon examination or otherwise, violations of laws with
which the Banks must comply, or weaknesses or failures with respect to general
standards of safety and soundness. Applicable law prohibits disclosure of
specific examination findings by an institution although formal enforcement
actions are routinely disclosed by the regulatory authorities. In March 2009
Marine Bank stipulated to a C&D which was signed by the FDIC and the WDFI in
early April 2009, and is expected to become effective in the near future. The
C&D primarily resulted from the high level of nonperforming assets of Marine
Bank and the resulting impact on its financial condition. The C&D requires
Marine Bank to take certain corrective actions focusing on reducing exposure to
non-performing loans, charging off all loans classified as loss, imposes
restrictions on lending to credits with existing non-performing loans, and
accruing interest on certain delinquent loans in addition to charging off
previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.
 
 If
CIB Marine does not successfully renegotiate its trust preferred securities and
its related accrued interest (“TruPS”) it could have a material adverse effect
upon the company.
 
 FRB
guidelines require CIB Marine and the Banks to maintain a minimum Tier I Core
Capital ratio and a minimum Total Risk-Based Capital ratio at each quarter-end.
While the Banks were in compliance with this requirement at December 31, 2008,
CIB Marine’s ratios were below the “well-capitalized” guidelines as of that
date. Based on CIB Marine’s current and projected levels of capital, CIB Marine
anticipates that it will not be able to satisfy the Tier I Core Capital and
Total Risk-Based Capital minimum ratios unless it raises additional capital
through the renegotiation of its TruPS (see the capital plan discussion in the
“Liquidity and Capital Plan Update” section of Item 7 of this Form 10-K). If CIB
Marine cannot restructure its TruPS, its Banks could be subject to further
regulatory enforcement action, including, without limitation, the issuance of
cease and desist orders (which may, among other things, further restrict the
Banks’ business activities and potentially placing them into a conservatorship
or receivership). Furthermore, the TruPS holders could, in certain
circumstances, force or be directed to force CIB Marine into an involuntary
liquidation after the default date of their respective TruPS. Notwithstanding
the renegotiation of the TruPS, the Federal Reserve could take enforcement
action before any such date, which could include the FDIC or the state
regulators placing the Banks into receivership. If the Banks are placed into a
conservatorship or receivership, it is highly likely that this will lead to a
complete loss of all value of CIB Marine’s ownership interest in the Banks, and
CIB Marine subsequently may be exposed to significant claims by the FDIC or the
state regulators. In addition, further restrictions could be placed on the Banks
if following a determination that the Banks are undercapitalized, significantly
undercapitalized, or critically undercapitalized, with increasingly greater
restrictions being imposed as the level of undercapitalization
increases.
 
 CIB
Marine may be adversely affected by current economic and market
conditions.
 
 The
national and global economic downturn has recently resulted in unprecedented
levels of financial market volatility which may depress overall the market value
of financial institutions, limit access to capital, or have a material adverse
effect on the financial condition or results of operations of banking companies
in general and CIB Marine and the Banks in particular. In addition, the possible
duration and severity of the adverse economic cycle is unknown and may
exacerbate CIB Marine's exposure to credit risk.
  15
  CIB
Marine has been particularly exposed to downturns in the U.S. housing and
commercial real estate markets. Dramatic declines in the housing market over the
past year, with falling home prices and increasing foreclosures, unemployment
and under-employment, have negatively impacted the credit performance of
mortgage loans and resulted in significant write-downs of asset values by
financial institutions. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding to borrowers,
including to other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies,
lack of consumer confidence, increased market volatility and widespread
reduction of business activity generally. The resulting economic pressure on
consumers and lack of confidence in the financial markets has adversely affected
CIB Marine’s business, financial condition and results of operations. CIB Marine
does not expect that the difficult conditions in the financial markets are
likely to improve in the near future. A worsening of these conditions would
likely exacerbate the adverse effects of these difficult market conditions on
CIB Marine and others in the financial institutions industry. In particular, CIB
Marine may face the following risks in connection with these
events:
 
 ·
              CIB
      Marine expects to face increased regulation of its industry. Compliance
      with such regulation may increase its costs and limit its ability to
      pursue business opportunities.
 ·
              CIB
      Marine’s ability to assess the creditworthiness of its customers may be
      impaired if the models and approaches it uses to select, manage and
      underwrite its customers become less predictive of future
      behaviors.
 ·
              The
      process CIB Marine uses to estimate losses inherent in its credit exposure
      requires difficult, subjective and complex judgments, including forecasts
      of economic conditions and how these economic predictions might impair the
      ability of its borrowers to repay their loans, which may no longer be
      capable of accurate estimation and which may, in turn, impact the
      reliability of the process.
 ·
              Competition
      in the banking industry could intensify as a result of the increasing
      consolidation of financial services companies in connection with current
      market conditions.
 ·
              CIB
      Marine will be required to pay significantly higher Federal Deposit
      Insurance Corporation premiums because market developments have
      significantly depleted the insurance fund of the FDIC and reduced the
      ratio of reserves to insured
deposits.
 ·
              CIB
      Marine’s liquidity could be negatively impacted by an inability to access
      the capital markets, unforeseen or extraordinary demands on cash, or
      regulatory restrictions, which could, among other things, materially and
      adversely affect its business prospects and financial
      condition.
 
 There
can be no assurance that recently enacted legislation and other measures
undertaken by the Treasury Department, the FRB and other governmental agencies
will help stabilize the U.S. financial system, improve the housing market or be
of specific benefit to CIB Marine.
 
 Since
October 2008, various legislation has been signed into law including the EESA
which, among other measures, authorized the Secretary of the Treasury Department
to establish the TARP. The EESA gives broad authority to the Treasury Department
to purchase, manage, modify, sell and insure the troubled mortgage related
assets that triggered the current economic crisis as well as other “troubled
assets.” The EESA includes additional provisions directed at bolstering the
economy, including:
 
 ·
              Authority
      for the FRB to pay interest on depository institution
      balances;
 ·
              Mortgage
      loss mitigation and homeowner protection;
and
 ·
              Authority
      to the SEC to suspend mark-to-market accounting requirements for any
      issuer or class of category of
transactions.
 
 Pursuant
to the TARP, the Treasury Department has created the CPP to provide access to
capital to financial institutions through a standardized program to acquire
preferred stock (accompanied by warrants) from eligible financial institutions
that will serve as Tier I capital.
 
 The EESA
also contains a number of significant employee benefit and executive
compensation provisions, some of which apply to employee benefit plans
generally, and others which impose on financial institutions that participate in
the TARP program restrictions on executive compensation.
 
 In
October 2008, the FDIC announced the establishment of the TLGP to temporarily
provide insurance for all non-interest bearing transaction accounts and
guarantees of certain newly issued senior unsecured debt issued by financial
institutions (such as the Banks), bank holding companies and savings and loan
holding companies (such as CIB Marine).
  16
  There can
be no assurance as to the actual impact that the EESA and such related measures
undertaken to alleviate the credit crisis will have generally on the financial
markets, including the extreme levels of volatility and limited credit
availability currently being experienced The failure of such measures to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect CIB Marine’s
business, financial condition, results of operations, access to credit or the
trading price of its common stock.
 
 Finally,
there can be no assurance regarding the specific impact that such measures may
have on CIB Marine—or whether (or to what extent) CIB Marine will be able to
benefit from such programs.
 
 CIB
Marine is subject to increases in FDIC insurance premiums and a one-time special
assessment by the FDIC.
 
 Effective
January 1, 2007, the FDIC adopted a risk-based system for assessment of deposit
insurance premiums under which all institutions are required to pay at least
minimum annual premiums. In addition, in an effort to replenish the Deposit
Insurance Fund in the wake of the recent increase in bank failures in the United
States, the FDIC changed its rate structure in December 2008 to generally
increase premiums effective for assessments in the first quarter of 2009.
Further, in February 2009, the FDIC issued a proposed interim rule to impose a
special one-time assessment against all financial institutions in the second
quarter of 2009, payable in the third quarter of 2009. The proposed rule is open
to public comment and subject to change. The system categorizes institutions
into one of four risk categories depending on capitalization and supervisory
rating criteria. Due to the Banks’ performance in 2008 and these changes to the
FDIC rate structure, their FDIC insurance premiums could increase significantly
for 2009 and have a material adverse effect on CIB Marine’s results of
operations.
 
 The
creditworthiness of other financial institutions couldadversely affect CIB
Marine.
 
 CIB
Marine’s ability to engage in routine funding transactions could be adversely
impacted by the actions and commercial soundness of other banks and financial
institutions. Banks are interrelated as a result of lending, clearing,
counterparty and other relationships. As a result, defaults by, or even rumors
or questions about, one or more banks or the general banking industry have led
to market-wide liquidity problems and could lead to losses or defaults by CIB
Marine or by other financial institutions. Many of the transactions engaged in
by CIB Marine and the Banks in the ordinary course of business expose CIB Marine
to credit risk in the event of default of its counterparty or customer. In such
instances, the collateral held by CIB Marine may be insufficient to mitigate its
losses, as it may be unable to realize upon or liquidate at prices sufficient to
recover the full amount of the exposure due it. Such losses could have a
material and adverse affect on CIB Marine’s result of operations.
 
 Terrorism,
acts of war, international conflicts and natural disasters could negatively
affect CIB Marine’s business and financial condition.
 
 Acts or
threats of war or terrorism, international conflicts (including conflict in the
Middle East), natural disasters, and the actions taken by the U.S. and other
governments in response to such events, could disrupt business operations and
negatively impact general business and economic conditions in the U.S. If
terrorist activity, acts of war, other international hostilities or natural
disasters disrupt business operations, trigger technology delays or failures, or
damage physical facilities of the Banks, their customers or service providers,
or cause an overall economic decline, the financial condition and operating
results of CIB Marine could be materially adversely affected. The potential for
future occurrences of these events has created many economic and political
uncertainties that could seriously harm CIB Marine’s business and results of
operations in ways that cannot presently be predicted.
  17
  CIB
Marine’s earnings also are significantly affected by the fiscal and monetary
policies of the federal government and its agencies, which could affect
repayment of loans and thereby materially adversely affect CIB
Marine.
 
 The
policies of the FRB impact CIB Marine significantly. The FRB regulates the
supply of money and credit in the United States. Its policies directly and
indirectly influence the rate of interest earned on loans and paid on borrowings
and interest-bearing deposits and can also affect the value of financial
instruments CIB Marine holds. Those policies determine to a significant extent
CIB Marine’s cost of funds for lending and investing. Changes in those policies
are beyond CIB Marine’s control and are difficult to predict. FRB policies can
affect the Banks’ borrowers, potentially increasing the risk that they may fail
to repay their loans. For example, a tightening of the money supply by the FRB
could reduce the demand for a borrower’s products and services. This could
adversely affect the borrower’s earnings and ability to repay its loan, which
could materially adversely affect CIB Marine.
 
 CIB Marine has suffered large losses
in recent years and may not be able to execute its strategic plan and return to
profitability.
 
 Although
CIB Marine has developed and implemented strategies to improve its profitability
in the future, there can be no assurance that these strategies will be
successful. CIB Marine’s strategic plans are dependent on its ability to attract
and retain borrowing customers, commercial loan officers and core deposits, all
of which have been negatively impacted as a result of losses and a weakened
financial condition. If CIB Marine is unable to execute its strategic plans and
return to profitability, it will have a material impact on its business, results
of operations and financial condition. The inability to return to profitability
may require CIB Marine to sell bank subsidiaries, reduce the size of bank
subsidiaries and/or reduce staff. There can be no assurance that if CIB Marine
is required to sell assets, it will be able to do so on acceptable terms.
Regulators could take further action against CIB Marine in the event it does not
return to profitability and maintain adequate capital levels.
 
 CIB
Marine is subject to liquidity risk.
 
 Liquidity
risk is the potential that CIB Marine will be unable to meet its obligations as
they come due or capitalize on growth opportunities as they arise because of an
inability to liquidate assets or obtain funding on a timely basis, at a
reasonable cost and within acceptable risk tolerances. Liquidity is required to
fund credit obligations to borrowers, withdrawals by depositors, repayment of
debt when due or called, operating expenses and capital expenditures, among
other things.
 
 Liquidity
is derived primarily from bank-issued deposit growth and retention; principal
and interest payments on loans; sale, maturity and prepayment of investment
securities; net cash provided from operations; and access to other funding
sources, including secured and unsecured borrowings.
 
 CIB
Marine’s liquidity can be affected by a variety of factors, including general
economic conditions, market disruption, operational problems affecting third
parties or CIB Marine, unfavorable pricing, competition, CIB Marine’s credit
rating and any regulatory restrictions. In addition, some of the borrowing
sources customarily utilized by CIB Marine have been restricted or unavailable
due to CIB Marine’s operating performance and financial condition and could be
further restricted.
 
 CIB Marine’s results of operations
are subject to general and regional economic conditions, which are beyond its
control.
 
 CIB
Marine’s success depends to a large degree on the general economic conditions of
the diverse geographic markets its Banks serve. Local economic conditions have a
significant impact on the generation of commercial, commercial real estate, and
real estate loans; the ability of borrowers to repay these loans; and the value
of the collateral securing these loans. Adverse changes in the economic
conditions of the markets in which the Banks operate could also negatively
impact the financial results of CIB Marine’s operations. For example, adverse
changes in these factors could lead to reduced interest income and an increase
in the provision for loan losses. This is consistent with what has occurred
during the current economic downturn with CIB Marine incurring significant
losses and a corresponding reduction in shareholders’ equity during the past
year.
 
 18
  CIB Marine operates in a highly
regulated environment and is subject to supervision and examination by
various federal and state regulatory agencies.
 
 As a bank
holding company, CIB Marine is regulated by the FRB, and each of the Banks is
regulated separately by various federal and state banking regulators. This
regulation is primarily intended to protect the Banks’ customers and their
deposits rather than CIB Marine’s shareholders. In addition, CIB Marine’s common
stock is registered under the Exchange Act and it is subject to regulation by
the SEC and to public reporting requirements.
 
 As of
March 25, 2009, CIB Marine remained under the Agreement with the Reserve Bank
which continues to impose certain restrictions and reporting requirements
including, but not limited to:
 
 ·
              Restrictions
      on dividend payments and redemption of shares of CIB Marine stock without
      regulatory approval;
 ·
              Adoption
      of a comprehensive plan to improve
earnings;
 ·
              Development
      of a plan to correct and prevent violations of banking laws and
      regulations related to affiliate
transactions.
 
 In
addition, banking regulators can take actions at any time which could have an
adverse impact on CIB Marine. These actions could include raising minimum
capital amounts, restricting growth or other actions.
 
 During
2008, the CIB Marine parent company contributed $5.0 million of capital to the
Banks and, subsequent to December 31, 2008 contributed an additional $2.0
million of capital to the Banks.
 
 The Banks’ loan portfolios contain
concentrations of credit to one borrower, related borrowers or
borrowers in the same industry, which creates special credit
risks.
 
 Credit
risk at the Banks is primarily related to the risk that a borrower will not be
able to repay some or all of their obligations to the Banks. Concentrations of
credit risk occur when the aggregate amount owed by one borrower, a group of
related borrowers, or borrowers within the same or related industries or groups
represent a relatively large percentage of the total capital or total credit
extended by a Bank. Although each loan in a concentration may be of sound
quality, concentration risks represent a risk not present when the same loan
amounts are extended to borrowers that are not a part of a concentration. Loans
concentrated in one borrower depend, to a large degree, upon the financial
capability and character of the individual borrower. Loans made to a group of
related borrowers can be susceptible to financial problems experienced by one or
a few members of that group. Loans made to borrowers that are part of the same
or related industries or groups can be all adversely impacted with respect to
their ability to repay some or all their obligations when adverse conditions
prevail in the broader economy or even within just the respective industries or
groups.
 
 At
December 31, 2008, CIB Marine had certain concentrations of credit risk, which
are described in more detail in the “Credit Concentrations” section of Item 7 of
this Form 10-K.
 
 CIB Marine’s profitability is
dependent upon its ability to manage net interest income.
 
 CIB
Marine’s primary source of income is net interest income, which is the
difference between the interest income earned on interest-earnings assets
(consisting primarily of loans and securities) and the interest expense paid on
interest-bearing liabilities (consisting primarily of deposits and other
borrowings). The level of net interest income is a function of the average
balance of interest-earning assets, the average balance of interest-bearing
liabilities, and the spread between the yield on such assets and the cost of
such liabilities. These factors are influenced by the Banks’ ability to attract
loans and core deposits and the pricing and mix of these and other
interest-earnings assets and interest-bearing liabilities which, in turn, are
impacted by such external factors as the local economy, competition for loans
and deposits, monetary policy, and market interest rates.
  19
  The level
of net interest income is influenced by movements in such rates of interest, and
the pace at which such movements occur. If the interest rates on
interest-bearing liabilities increase at a faster pace than the interest rates
on interest-earning assets, the result could be a reduction in net interest
income and with it, a reduction in earnings. CIB Marine’s net interest income
and earnings would be similarly impacted if the interest rates on
interest-earning assets decline more quickly than the interest rates on
interest-bearing liabilities. In addition, such changes in interest rates could
have an effect on the ability to originate loans and attract and retain
deposits; the fair value of financial assets and liabilities; and the average
life of loan and securities portfolios.
 
 CIB
Marine is subject to credit risk.
 
 CIB
Marine is exposed to the risk that third parties that owe the Banks money,
securities, or other assets will not repay their obligations. Credit risk arises
anytime the Banks commit, invest or otherwise extend funds through contractual
agreements, whether reflected on or off the balance sheet. These parties may
default on their obligations due to bankruptcy, lack of liquidity, operational
failure or other reasons.
 
 CIB
Marine’s credit risk is concentrated in the Banks’ loan portfolios. Credit risk
is affected by a variety of factors including credit-worthiness of the borrower,
the sufficiency of underlying collateral, the enforceability of third-party
guarantees, changing economic and industry conditions and concentrations of
credit by loan type, terms or geographic area, changes in the financial
condition of the borrower or other party, and by credit and underwriting
policies.
 
 CIB
Marine has established an allowance for loan loss which represents management’s
best estimate of probable losses inherent in the Banks’ loan portfolios. The
determination of the appropriate level of the allowance involves a high degree
of subjectivity. If CIB Marine’s assumptions and judgments are incorrect, its
allowance may not be sufficient and additional provisions may need to be made.
In addition, bank regulatory agencies periodically review the adequacy of the
allowance and may require an increase in the allowance or loan charge-offs.
Increases in the allowance or charge-offs could have a material adverse effect
on CIB Marine’s financial condition and results of operations.
 
 The
current economic environment poses significant challenges to CIB Marine’s
efforts to execute its capital plan.
 
 CIB
Marine is operating in a difficult and uncertain economic environment which
makes a quick return to profitability unlikely. This will continue to put
pressure on already declining capital ratios at CIB Marine. In addition to the
deteriorating credit quality due to the economic downturn, troubled worldwide
credit markets and the specific contraction of the U.S. housing market which
have been reflected in higher provision for loan losses and loan charge-offs,
these same trends may also cause valuation changes and losses in other balance
sheet items, most notably the investment portfolio. During future periods, as
the full effects of the economic conditions on CIB Marine’s investment portfolio
are determined, CIB Marine may experience write-downs in its investment
portfolio if it is determined in the future that some of the investments have
been other-than-temporarily impaired (“OTTI”). OTTI adjustments to assets or a
continued deterioration in condition would further reduce the level of capital
and could result in CIB Marine or the Banks being considered undercapitalized.
Being undercapitalized from a regulatory standpoint would likely result in
additional restrictions being placed on CIB Marine, further restricting its
ability to meet its obligations as they come due. At both December 31, 2008 and
2007, CIB Marine was subject to the Agreement it entered into with the Reserve
Bank in the second quarter of 2004. Failure to comply with the Agreement could
have a material adverse effect on CIB Marine and its operations.
 
 CIB
Marine’s accounting policies and methods are critical to how it reports its
financial condition and results of operations and require management to make
estimates about matters that are uncertain.
 
 Accounting
policies and methods are fundamental to how CIB Marine records and reports the
financial condition and results of operations. Management must exercise judgment
in selecting and applying many of these accounting policies and methods so they
comply with Generally Accepted Accounting Principles in the United States (“US
GAAP”).
 
 Management
has identified certain accounting policies as being critical because they
require management’s judgment to ascertain the valuations of assets,
liabilities, commitments and contingencies. A variety of factors could affect
the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset, or reducing a liability. CIB Marine has
established detailed policies and control procedures that are intended to ensure
these critical accounting estimates and judgments are well controlled and
applied consistently. In addition, the policies and procedures are intended to
ensure that the process for changing methodologies occurs in an appropriate
manner. Because of the uncertainty surrounding CIB Marine’s judgments and the
estimates pertaining to these matters, CIB Marine cannot guarantee that it will
not be required to adjust accounting policies or restate prior period financial
statements. See the “Critical Accounting Policies” in the Management’s
Discussion and Analysis Section and Item 8, Note 1-Summary of Significant
Accounting Policies, in Part II of this Form 10-K.
  20
  Changes
in accounting standards could adversely affect CIB Marine’s reported financial
results.
 
 The
bodies that set accounting standards for public companies, including the
Financial Accounting Standards Board (“FASB”), the SEC and others, periodically
change or revise existing interpretations of the accounting and reporting
standards that govern the way that CIB Marine reports its financial condition
and results of operations. These changes can be difficult to predict and can
materially impact CIB Marine’s reported financial results. In some cases, CIB
Marine could be required to apply a new or revised accounting standard, or a new
or revised interpretation of an accounting standard, retroactively, which could
have a negative impact on reported results or result in the restatement of CIB
Marine’s financial statements for prior periods.
 
 CIB
Marine’s disclosure controls and procedures may not prevent or detect all errors
or acts of fraud.
 
 CIB
Marine’s disclosure controls and procedures are designed to reasonably assure
that information required to be disclosed in reports filed or submitted under
the Exchange Act is accumulated and communicated to management, and recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. CIB Marine believes that any disclosure controls and
procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
 
 These
inherent limitations include the realities that judgments in decision-making can
be faulty, that alternative reasoned judgments can be drawn, or that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of
the inherent limitations in CIB Marine’s control system, misstatements due to
error or fraud may occur and not be detected.
 
 Significant
legal actions could subject CIB Marine to substantial uninsured
liabilities.
 
 CIB
Marine is from time to time subject to claims related to its operations. These
claims and legal actions, including supervisory actions by regulators, could
involve large monetary claims and significant defense costs. Substantial legal
liability or significant regulatory action against CIB Marine could have
material adverse financial effects or cause significant reputational harm to it,
which in turn, could seriously harm its business prospects. CIB Marine may be
exposed to substantial uninsured liabilities, which could affect its results of
operations and financial condition.
 
 ITEM
1B. UNRESOLVED STAFF COMMENTS
 
 None.
  ITEM
2. PROPERTIES
 
 The
following table provides information relating to the material real properties
owned or leased by CIB Marine and its subsidiaries as of December 31, 2008. The
Banks lease or sublease office space to CIB Marine and to its nonbank
subsidiaries.
  21
  Location
                      
                      Owned or
                        Leased
                      
                      Date Opened
                        or AcquiredSUBSIDIARY
      BANKS:CENTRAL
      ILLINOIS BANK FACILITIESSidney,
      Illinois
                      
                      Owned
                      
                      
                      09/87Champaign,
      Illinois
                      
                      Owned
                      
                      
                      09/88Urbana,
      Illinois
                      
                      Owned
                      
                      
                      03/90Arrowsmith,
      Illinois
                      
                      Owned
                      
                      
                      10/91Champaign,
      Illinois (Midtown)
                      
                      Owned
                      
                      
                      04/94Monticello,
      Illinois
                      
                      Leased
                      
                      
                      05/95Danville,
      Illinois
                      
                      Owned
                      
                      
                      08/95Decatur,
      Illinois
                      
                      Leased
                      
                      
                      10/95Peoria,
      Illinois
                      
                      Leased
                      
                      
                      09/97East
      Peoria, Illinois
                      
                      Leased
                      
                      
                      10/97Bloomington,
      Illinois
                      
                      Owned
                      
                      
                      10/00Peoria,
      Illinois (Knoxville) (a loan production office)
                      
                      Leased
                      
                      
                      12/01Peoria,
      Illinois (Grand Prairie)
                      
                      Leased
                      
                      
                      04/03MARINE
      BANK FACILITIESPewaukee,
      Wisconsin
                      
                      Leased
                      
                      
                      02/98Wauwatosa,
      Wisconsin
                      
                      Leased
                      
                      
                      05/98Franklin,
      Wisconsin
                      
                      Leased
                      
                      
                      08/00Indianapolis,
      Indiana
                      
                      Leased
                      
                      
                      09/98Carmel,
      Indiana
                      
                      Leased
                      
                      
                      08/00Scottsdale,
      Arizona
                      
                      Leased
                      
                      
                      10/01NONBANK
      SUBSIDIARIES:CIB
      MARINE BANCSHARES, INC.Champaign,
      Illinois
                      
                      Leased
                      
                      
                      10/99Chicago,
      Illinois
                      
                      Leased
                      
                      
                      02/08Naperville,
      Illinois
                      
                      Leased
                      
                      
                      02/06
 
 None of
the properties owned by CIB Marine or its subsidiaries are subject to
encumbrances material to the operations of CIB Marine and its subsidiaries. CIB
Marine considers the conditions of its properties to be generally good and
adequate for the current needs of the businesses of it and its
subsidiaries.
 
 ITEM
3. LEGAL PROCEEDINGS
 
 Material
pending litigation, other than that of a routine nature in the ordinary course
of business, is as follows:
 
 In June
2004, John C. Ruedi, a former employee of CIB Marine, filed an action against
CIB Marine in the Circuit Court of the Sixth Judicial District, Champaign
County, Illinois for rescission or damages, including punitive damages, in
connection with plaintiff’s October 1, 2002 exercise of options issued by CIB
Marine to acquire 36,688 shares of CIB Marine common stock at various exercise
prices. On June 3, 2005, a first consolidated complaint was filed by Dennis
Lewis, a shareholder, and other alleged shareholders of CIB Marine in the United
States District Court for the Central District of Illinois, Urbana Division,
against CIB Marine and certain of its current and former officers and directors.
The filing consolidated two actions that had been filed in January 2005: one
filed by Lewis in the United States District Court for the Central District of
Illinois, Urbana Division and another filed in the United States District Court
for the Central District of Illinois, Peoria Division by Elaine Sollberger, a
purported shareholder, whose claims were voluntarily dismissed in connection
with the consolidation and were not reasserted in the consolidated complaint.
Plaintiffs sought to maintain the action as a class action, claiming violations
of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by CIB Marine and
other defendants and liability of certain defendants other than CIB Marine under
Section 20(a) of the Exchange Act as controlling persons. The federal court in
Urbana, Illinois granted the motion of CIB Marine and several other defendants
to transfer the action to the United States District Court for the Eastern
District of Wisconsin, sitting in Milwaukee, Wisconsin.
 
 On August
14, 2008, a settlement conference was held in the Dennis Lewis and John Ruedi
matters. As a result of that settlement conference, the remaining defendants
reached an agreement with the plaintiffs in both suits to settle those cases.
The general terms of the settlement involved the payment by CIB Marine of
approximately $3.4 million, together with an additional amount paid by CIB
Marine’s and individual defendants’ insurers, inclusive of costs, and the
defendants’ agreement to certification of a plaintiff class for purposes of
participating in the settlement (all persons who purchased CIB Marine’s stock
between January 21, 2000 and April 12, 2004), in exchange for which all claims
against CIB Marine, its insurer and the individual defendants in both lawsuits
would be dismissed.
  22
  The
parties’ agreement to settle the cases was subject to a number of conditions
including the final approval of the terms of the settlement in the Lewis case by
the court in that case. Those conditions were satisfied in the fourth quarter of
2008 and an order was entered dismissing the Lewis case. In December 2008, CIB
Marine paid the agreed upon amount to settle both cases. An order has been
entered in the Lewis case dismissing the claims against CIB Marine and the
individual defendants. No appeal has been taken from the approval of the
settlement in the Lewis case. A final order dismissing the Ruedi case in
accordance with the settlement was entered in February 2009.
 
 As part
of the settlement of the Ruedi and Lewis cases, CIB Marine, the individual
insureds, and the insurer executed mutual releases discharging all parties of
all liability or obligations on existing or future claims under the policy or
claims for recovery from any insured.
 
 In 2003
CIB Marine charged-off $41.7 million related to a condominium project in
Chicago. The loan had been originated by CIB Marine’s former Chicago-based
banking subsidiary, but the bank’s claims against the borrower and guarantors
were transferred to CIB Marine in November 2004 when the bank was sold to an
unaffiliated third party. Since then, CIB Marine has pursued collection from the
guarantors on the loan. CIB Marine continues to pursue its claims, including
available appeals, but it does not expect any material, favorable outcome from
the collection proceedings.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 CIB
Marine did not submit any matters to a vote of its shareholders during the
quarter ended December 31, 2008.
 
 Supplemental
Item. Executive Officers of Registrant.
 
 The
following table sets forth the names, ages and positions of all executive
officers of CIB Marine at March 1, 2009, the period that each has held positions
with CIB Marine, and a brief account of each officer’s business experience
during at least the past five years. Under CIB Marine’s by-laws, executive
officers are elected annually by the Board of Directors, and each executive
officer holds office until his/her successor has been duly elected and qualified
or until the earlier of his/her death, resignation or removal.
 
 Name and Age
                                      
                                      Office and ExperienceJohn
      P. Hickey, Jr. (61)
                                      
                                      Mr.
      Hickey has served as President and Chief Executive Officer of CIB Marine
      since March 2007, Chairman of CIB Marine since February 1, 2009, Director
      of CIB Marine since May 2007, and Director, President and CEO of Marine
      Bank since April 2006. Prior to joining Marine Bank, Mr. Hickey was Senior
      Vice President of Business Banking at Guaranty Bank in 2006; and from 2001
      to 2005 held senior management positions with Marsh McLennan, first as
      Managing Director of the Western region, then as the Managing Director of
      a substantial business segment of the company.Edwin
      J. Depenbrok (52)
                                      
                                      Mr.
      Depenbrok was appointed a non-employee Senior Vice President and Chief
      Financial Officer of CIB Marine in January 2008. Mr. Depenbrok, through
      his consulting firm, dbrok group, LLC (“dbrok”), was engaged as a
      consultant by CIB Marine in February 2007 to provide financial management
      services. Mr. Depenbrok founded and has been employed by dbrok since
      2001.Charles
      J. Ponicki (58)
                                      
                                      Mr.
      Ponicki has served as Senior Vice President and Chief Credit Officer of
      CIB Marine since January 2008, and was Wisconsin Market President of
      Marine Bank from September 2007 to December 2007. From 2006 to September
      2007, Mr. Ponicki provided acquisition sourcing and due diligence, credit
      policy and governance, and de novo formation consulting services to banks.
      From 2002 to 2005, Mr. Ponicki was Executive Vice President of Business
      Banking at Cole Taylor
Bank.
  23
  Daniel
      J. Rasmussen (43)
                  
                  Mr.
      Rasmussen has served as Senior Vice President, General Counsel and
      Secretary of CIB Marine since April 2005. He was Vice President and Senior
      Attorney of CIB Marine from 1999 to 2005.Michael
      L. Rechkemmer (59)
                  
                  Mr.
      Rechkemmer has been Executive Vice President of CIB Marine since July 1999
      and Chief Operations Officer since April 2000. He was interim President
      and CEO of CIB Marine’s former Chicago banking subsidiary, CIB Chicago
      from March 2004 to November 2004.Patrick
      J. Straka (42)
                  
                  Mr.
      Straka has served as Senior Vice President, Chief Investment Officer and
      Economist of CIB Marine since February 1999. He was Vice President,
      Investment Officer and General Auditor of CIB Marine from 1995 to February
      1999.
  PART
II
 
 ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 
 Although
there is currently no active trading market for shares of CIB Marine’s common
stock, the common stock is quoted on the Pink Sheets under the trading symbol
“CIBH.PK.” Pink Sheet quotations do not reflect retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. The following
table sets forth the high and low sales prices for CIB Marine common stock for
the past two years as quoted on the Pink Sheets.
 
 OTCBB Bid QuotationsFiscal Quarter Ended
                    
                    High
                    
                    
                    LowMarch
      31, 2007
                    
                    $
                    5.07
                    
                    
                    $
                    4.60June
      30, 2007
                    
                    
                    4.67
                    
                    
                    
                    3.35September
      30, 2007
                    
                    
                    4.10
                    
                    
                    
                    2.45December
      31, 2007
                    
                    
                    3.20
                    
                    
                    
                    1.05March
      31, 2008
                    
                    
                    3.35
                    
                    
                    
                    1.20June
      30, 2008
                    
                    
                    2.95
                    
                    
                    
                    1.35September
      30, 2008
                    
                    
                    1.35
                    
                    
                    
                    0.25December
      31, 2008
                    
                    
                    0.50
                    
                    
                    
                    0.01
 
 As of
March 31, 2009, there were approximately 1,234 holders of record of CIB Marine
common stock.
 
 CIB
Marine has not paid cash dividends on its common stock during the last two
fiscal years. As a result of recent losses, CIB Marine does not currently have
any intentions to pay a cash dividend. Further, CIB Marine is restricted by its
regulators from paying cash dividends. Also, as a result of the Agreement
entered into with its regulator, CIB Marine has agreed to defer all interest
payments on its junior subordinated debentures subsequent to December 31, 2003.
According to the terms of its junior subordinated debt agreements, during such
deferral period, CIB Marine may not pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment on its stock.
Restrictions on CIB Marine’s ability to pay dividends and the ability of its
subsidiaries to transfer funds to it for the payment of dividends are discussed
under, Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations and also Item 8, Note 13-Stockholders’ Equity in Part II
of this Form 10-K. CIB Marine will periodically evaluate its financial position
to determine whether to pay cash dividends in the future.
 
 CIB
Marine did not sell any of its securities within the past three years which were
not registered under the Securities Act of 1933, as amended, or repurchase any
of its securities during the fourth quarter of 2008.
 
 24


ITEM
6. SELECTED FINANCIAL DATA





The
following table sets forth CIB Marine’s selected consolidated financial data
excluding companies held for disposal. The following information should be read
in conjunction with Item 8-Financial Statements and Supplementary Data and Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations presented in Part II of this Form 10-K.





At
      or for the Year Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands, except share and per share data)Selected
      Statements of Operations DataInterest
      and dividend income
                
                $
                56,141
                
                
                $
                62,694
                
                
                $
                61,509
                
                
                $
                59,849
                
                
                $
                69,979Interest
      expense
                
                
                34,501
                
                
                
                40,067
                
                
                
                38,242
                
                
                
                34,795
                
                
                
                37,287Net
      interest income
                
                
                21,640
                
                
                
                22,627
                
                
                
                23,267
                
                
                
                25,054
                
                
                
                32,692Provision
      for (reversal of) credit losses
                
                
                22,063
                
                
                
                6,413
                
                
                
                (4,384
                )
                
                
                (8,669
                )
                
                
                17,432Net
      interest income (loss) after provision for credit losses
                
                
                (423
                )
                
                
                16,214
                
                
                
                27,651
                
                
                
                33,723
                
                
                
                15,260Noninterest
      income(1)
                
                
                6,158
                
                
                
                3,050
                
                
                
                4,542
                
                
                
                2,933
                
                
                
                3,678Noninterest
      expense
                
                
                41,648
                
                
                
                34,472
                
                
                
                42,131
                
                
                
                51,008
                
                
                
                52,729Loss
      from continuing operations before income taxes
                
                
                (35,913
                )
                
                
                (15,208
                )
                
                
                (9,938
                )
                
                
                (14,352
                )
                
                
                (33,791
                )Income
      tax expense (benefit)
                
                
                320
                
                
                
                3
                
                
                
                (99
                )
                
                
                (1,208
                )
                
                
                (5,240
                )Net
      loss from continuing operations
                
                $
                (36,233
                )
                
                $
                (15,211
                )
                
                $
                (9,839
                )
                
                $
                (13,144
                )
                
                $
                (28,551
                )Common
      Share DataBasic-loss
      from continuing operations
                
                $
                (1.98
                )
                
                $
                (0.83
                )
                
                $
                (0.54
                )
                
                $
                (0.72
                )
                
                $
                (1.56
                )Diluted-loss
      from continuing operations
                
                $
                (1.98
                )
                
                $
                (0.83
                )
                
                $
                (0.54
                )
                
                $
                (0.72
                )
                
                $
                (1.56
                )Dividends
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Book
      value per share
                
                $
                0.81
                
                
                $
                3.29
                
                
                $
                3.91
                
                
                $
                4.32
                
                
                $
                5.093Weighted
      average shares outstanding-basic
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,245,884Weighted
      average shares outstanding-diluted
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,245,884Financial
      Condition DataTotal
      assets excluding assets of companies held for disposal
                
                $
                905,408
                
                
                $
                1,003,936
                
                
                $
                993,472
                
                
                $
                1,132,515
                
                
                $
                1,371,043Loans
      excluding loans of companies held for disposal
                
                
                555,207
                
                
                
                595,259
                
                
                
                522,624
                
                
                
                515,544
                
                
                
                746,615Allowance
      for loan losses
                
                
                (19,242
                )
                
                
                (20,706
                )
                
                
                (20,906
                )
                
                
                (24,882
                )
                
                
                (29,551
                )Securities
                
                
                280,452
                
                
                
                316,321
                
                
                
                345,602
                
                
                
                493,409
                
                
                
                379,024Deposits
                
                
                694,632
                
                
                
                745,590
                
                
                
                739,784
                
                
                
                867,700
                
                
                
                1,178,488Deposits
      of branches held for sale
                
                
                —
                
                
                
                —
                
                
                
                55,365
                
                
                
                66,991
                
                
                
                —Borrowings,
      including junior subordinated debentures and guaranteed trust preferred
      securities
                
                
                151,663
                
                
                
                159,473
                
                
                
                91,510
                
                
                
                94,108
                
                
                
                87,916Stockholders’
      equity
                
                
                14,802
                
                
                
                60,306
                
                
                
                71,613
                
                
                
                79,182
                
                
                
                92,892Financial
      Ratios and Other DataPerformance
      Ratios:Net
      interest margin (2)
                
                
                2.19
                %
                
                
                2.39
                %
                
                
                2.29
                %
                
                
                2.06
                %
                
                
                2.21
                %Net
      interest spread (3)
                
                
                1.64
                
                
                
                1.57
                
                
                
                1.59
                
                
                
                1.57
                
                
                
                1.91Noninterest
      income to average assets (4)
                
                
                0.61
                
                
                
                0.31
                
                
                
                0.43
                
                
                
                0.20
                
                
                
                0.24Noninterest
      expense to average assets
                
                
                4.15
                
                
                
                3.54
                
                
                
                4.01
                
                
                
                4.05
                
                
                
                3.49Efficiency
      ratio (5)
                
                
                149.82
                
                
                
                134.25
                
                
                
                151.50
                
                
                
                184.60
                
                
                
                144.98Loss
      on average assets (6)
                
                
                (3.61
                )
                
                
                (1.56
                )
                
                
                (0.94
                )
                
                
                (1.04
                )
                
                
                (1.89
                )Loss
      on average equity (7)
                
                
                (84.32
                )
                
                
                (22.21
                )
                
                
                (13.56
                )
                
                
                (15.23
                )
                
                
                (33.02
                )Asset
      Quality Ratios:Nonaccrual
      loans restructured loans and loans 90 days or more past due and still
      accruing to total loans (8)
                
                
                2.90
                %
                
                
                3.18
                %
                
                
                4.24
                %
                
                
                8.17
                %
                
                
                8.41
                %Nonperforming
      assets and loans 90 days or more past due and still accruing to total
      asset (8)
                
                
                1.89
                
                
                
                2.02
                
                
                
                2.24
                
                
                
                3.98
                
                
                
                4.79Allowance
      for loan losses to total loans
                
                
                3.47
                
                
                
                3.48
                
                
                
                4.00
                
                
                
                4.83
                
                
                
                3.96Allowance
      for loan losses to nonaccrual loans, restructured loans and loans 90 days
      or more past due and still accruing (8)
                
                
                119.43
                
                
                
                109.37
                
                
                
                94.37
                
                
                
                59.06
                
                
                
                47.08Net
      charge-offs (recoveries) to average loans
                
                
                3.90
                
                
                
                1.14
                
                
                
                (0.08
                )
                
                
                (0.67
                )
                
                
                4.06Capital
      Ratios:Total
      equity to total assets
                
                
                1.63
                %
                
                
                6.01
                %
                
                
                7.21
                %
                
                
                6.99
                %
                
                
                6.78
                %Total
      risk-based capital ratio
                
                
                10.04
                
                
                
                17.26
                
                
                
                20.95
                
                
                
                21.54
                
                
                
                17.53Tier
      1 risk-based capital ratio
                
                
                5.02
                
                
                
                10.62
                
                
                
                14.32
                
                
                
                15.45
                
                
                
                13.16Leverage
      capital ratio
                
                
                3.58
                
                
                
                7.92
                
                
                
                9.51
                
                
                
                9.20
                
                
                
                9.08Other
      Data:Number
      of employees (full-time equivalent)
                
                
                197
                
                
                
                258
                
                
                
                301
                
                
                
                359
                
                
                
                482Number
      of banking facilities
                
                
                18
                
                
                
                25
                
                
                
                30
                
                
                
                37
                
                
                
                41





(1)
            Noninterest
      income from continuing operations includes pretax gains on investment
      securities of $0.4 million for the year ended December 31, 2005. There
      were no pretax gains on investment securities in 2008, 2007, 2006 and
      2004.


(2)
            Net
      interest margin is the ratio of net interest income, on a tax-equivalent
      basis, to average interest-earning assets. In the future, CIB Marine does
      not expect to realize all the tax benefits associated with tax-exempt
      assets due to substantial losses it has incurred and for all years
      presented no U.S. federal or state loss carryback potential remains.
      Accordingly, interest income on tax-exempt earning assets has not been
      adjusted to reflect the tax-equivalent basis. If 2008, 2007, 2006, 2005
      and 2004 had been shown on a tax-equivalent basis of 35%; the net interest
      margin would have been 2.20%, 2.43%, 2.34%, 2.13% and 2.29%,
      respectively.


(3)
            Net
      interest rate spread is the yield on average interest-earning assets less
      the rate on average interest-bearing
  liabilities.


(4)
            Noninterest
      income to average assets excludes gains and losses on
      securities.


(5)
            The
      efficiency ratio is noninterest expense divided by the sum of net interest
      income, on a tax-equivalent basis, plus noninterest income, excluding
      gains and losses on securities.


(6)
            Loss
      on average assets is net loss divided by average total
    assets.


(7)
            Loss
      on average equity is net loss divided by average common
      equity.


(8)
            Excludes
      loans held for sale from nonaccrual loans, nonperforming assets and 90
      days or more past due and still accruing
loans.


25





ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





CRITICAL
ACCOUNTING POLICIES





The
financial condition and results of operations presented in the consolidated
financial statements, accompanying notes to the consolidated financial
statements, selected financial data appearing elsewhere within this report, and
management’s discussion and analysis are dependent upon CIB Marine’s accounting
policies. The selection and application of these accounting policies involve
judgments about matters that affect the amounts reported in the financial
statements and accompanying notes.





Presented
below are discussions of those accounting policies that management believes are
the most important (“Critical Accounting Policies”) to the portrayal and
understanding of CIB Marine’s financial condition and results of operations.
These Critical Accounting Policies require management’s most difficult,
subjective and complex judgments about matters that are inherently uncertain.
These estimates are based on information available as of the date of the
financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates or judgments. Certain policies
inherently have a greater reliance on the use of estimates and as such have a
greater possibility of producing results that could be materially different than
originally reported. See also Item 8, Note 1-Summary of Significant Accounting
Policies In Part II of this Form 10-K.





Allowance
for Loan Losses





CIB
Marine monitors and maintains an allowance for loan losses to absorb an estimate
of probable losses inherent in the loan portfolio. CIB Marine maintains policies
and procedures that address the systems of controls over the following areas of
the allowance: the systematic methodology used to determine the appropriate
level of the allowance to provide assurances they are maintained in accordance
with generally accepted accounting principles (“GAAP”); the accounting policies
for loan charge-offs and recoveries; the assessment and measurement of
impairment in the loan portfolio; and the loan grading system.





CIB
Marine evaluates certain commercial loans individually for impairment as
required by Statement of Financial Accounting Standard (“SFAS”) No. 114, Accounting by Creditors for
Impairment of a Loan,and SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. Loans evaluated individually for
impairment include nonaccrual loans, loans past due 90 days or more and still
accruing, restructured loans and other loans identified by management as being
impaired. The evaluations are based upon discounted expected cash flows from the
loan or collateral valuations and all other known relevant information. If the
evaluation shows that a loan is individually impaired, then a specific reserve
is established for the amount of impairment. Loans, including all residential
real estate, home equity and consumer loans which are not evaluated individually
are assessed for impairment under SFAS No. 5, Accounting for Contingencies(“SFAS 5”) with groups of loans that have similar
characteristics.





For loans
which are not individually evaluated, CIB Marine makes estimates of losses for
groups of loans as required by SFAS 5. Loans are grouped by similar
characteristics, including the type of loan, the assigned loan grade and the
general collateral type. A loss rate reflecting the expected losses inherent in
a group of loans is derived based upon estimates of expected default and loss
rates for the group of loans in part based upon CIB Marine’s loss history and
related migration analysis. The resulting estimate of losses for groups of loans
are adjusted for relevant environmental factors and other conditions, including:
borrower and industry concentrations; levels and trends in delinquencies,
charge-offs and recoveries; changes in underwriting standards and risk
selection; level of experience and ability of lending management; national and
local economic conditions; and off-balance sheet positions.





The
amount of estimated impairment for individually evaluated loans and the estimate
of losses for groups of loans are added together for a total estimate of loan
losses. The estimate of losses for groups of loans includes an assessment of a
range of likely loss outcomes and the most likely outcome is used. This total
estimate of loan losses is compared to the allowance for loan losses of CIB
Marine as of the evaluation date. If the estimate of losses is greater than the
allowance, an additional provision to the allowance would be made. If the
estimate of losses is less than the allowance, the allowance would be reduced.
CIB Marine recognizes the inherent imprecision in estimates of losses due to
various uncertainties and variability related to the factors used to estimate
loan losses. If different assumptions or conditions were to prevail and it is
determined that the allowance is not adequate to absorb the new estimate of
probable losses, an additional provision for loan losses would be made, which
amount may be material to the consolidated financial
statements.


26


Income
Taxes





CIB
Marine recognizes expense for federal and state income taxes currently payable
as well as for deferred federal and state taxes for estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets, as well as loss
carryforwards and tax credit carryforwards. Realization of deferred tax assets
is dependent upon CIB Marine generating sufficient taxable income in either the
carryforward or carryback periods to cover net operating losses generated by the
reversal of temporary differences. A valuation allowance is provided by way of a
charge to income tax expense if it is determined that it is not more likely than
not that some portion or all of the deferred tax asset will be realized. If
different assumptions and conditions were to prevail, the valuation allowance
may not be adequate to absorb unrealized deferred taxes and the amount of income
taxes payable may need to be adjusted by way of a charge or credit to expense.
Furthermore, income tax returns are subject to audit by the IRS, state taxing
authorities, and foreign government taxing authorities. Income tax expense for
current and prior periods is subject to adjustment based upon the outcome of
such audits. CIB Marine believes it has adequately accrued for all probable
income taxes payable and provided valuation allowances for deferred tax assets
where it has been determined to be not more likely than not that such assets are
realizable. Accrual of income taxes payable and valuation allowances against
deferred tax assets are estimates subject to change based upon the outcome of
future events.





CIB
Marine has entered into tax allocation agreements with its subsidiary entities
included in the consolidated U.S. federal and unitary and combined state income
tax returns, including U.S. operations of companies held for sale or disposal.
These agreements govern the timing and amount of income tax payments required by
the various entities.





Due to
the significant losses incurred in 2006 through 2008, management has determined
that it is not more likely than not that the entire net deferred tax asset of
$101.3 million at December 31, 2008, which includes the entire net deferred tax
asset of companies held for sale or disposal of $3.9 million, will be realized.
Therefore, a valuation allowance for the entire amount has been established,
including net deferred tax assets of companies held for sale or
disposal.





INTRODUCTION





The
following is a discussion and analysis of CIB Marine’s consolidated financial
condition as of December 31, 2008 and 2007, and its changes in financial
condition and results of operations for the three years ended December 31, 2008,
2007 and 2006. References in the discussion below to “CIB Marine” include CIB
Marine’s subsidiaries unless otherwise specified. This discussion and analysis
should be read in conjunction with the consolidated financial statements and
notes contained in Part II, Item 8 of this Form 10-K.





OVERVIEW





During
2008, CIB Marine continued to focus on the comprehensive capital plan outlined
in its 2007 Form 10-K. The primary goal of the capital plan was to bring the
TruPS interest payments current as soon as practicable. In addition to the
execution of the capital plan, management continued its efforts to improve the
efficiency of CIB Marine by focusing on increasing revenue through the addition
of commercial bankers in its subsidiary banks’ markets, continuing cost savings
initiatives started in 2007, and maintaining a high level of customer service
while actively seeking new business opportunities. These activities included the
sale of the branches, deposits, and most of the loans for Citrus Bank,
NA.





Net loss
increased to $34.4 million in 2008 compared to a net loss of $13.8 million in
2007 and $9.3 million in 2006. Total assets declined to $0.9 billion compared to
$1.0 billion at December 31, 2007. This largely reflected the sale of assets and
deposits of Citrus Bank, NA during 2008. The continuing losses of CIB Marine
have resulted in decreases in consolidated capital ratios at December 31, 2008.
Total Equity to Assets at year end 2008 was 1.63% compared to 6.01% at December
31, 2007.


27


In light
of the current operating environment and net losses in each of the six years
ended December 31, 2008, CIB Marine and the Banks have continued to work closely
with their respective regulators. CIB Marine remains under the Agreement with
its regulator, the Reserve Bank, which continues to impose certain restrictions
and reporting requirements including, but not limited to:





·
            Restrictions
      on dividend payments and redemption of shares of CIB Marine stock without
      regulatory approval;


·
            Adoption
      of a comprehensive plan to improve
earnings;


·
            Development
      of a plan to correct and prevent violations of banking laws and
      regulations related to affiliate
transactions.





In March
2009 Marine Bank stipulated to a C&D which was signed by the FDIC and the
WDFI in early April 2009, and is expected to become effective in the near
future. The C&D primarily resulted from the high level of nonperforming
assets of Marine Bank and the resulting impact on its financial condition. The
C&D requires Marine Bank to take certain corrective actions focusing on
reducing exposure to non-performing loans, charging off all loans classified as
loss, imposes restrictions on lending to credits with existing non-performing
loans, and accruing interest on certain delinquent loans in addition to charging
off previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.





Notwithstanding
CIB Marine’s efforts to raise new equity and a capital infusion through the
renegotiation of the TruPS, federal or bank regulators could take enforcement
action, which could include placing CIB Marine and/or the Banks into
receivership. During 2008 the CIB Marine parent company contributed $5.0 million
of capital to the Banks and, subsequent to year end, contributed an additional
$2.0 million of capital to the Banks. In addition, bank regulators could
continue to increase minimum capital levels at the Banks. The circumstances
described in Part II, Item 8, Note 13-Stockholders’ Equity and in Part I, Item
1A-Risk Factors of this Form 10-K, combined with the continued net losses and in
consideration of existing regulatory matters,, raise substantial doubt
concerning the ability of CIB Marine to continue as a going
concern.





RESULTS
OF OPERATIONS





The
following discussion relates to continuing operations unless otherwise
noted.





Net
Loss





CIB
Marine’s net loss increased $20.6 million from a net loss of $13.8 million in
2007 to a net loss of $34.4 million in 2008. Loss from continuing operations
increased $21.0 million from $15.2 million in 2007 to $36.2 million in 2008. Net
income from discontinued operations increased $0.4 million from $1.4 million to
$1.8 million during the same respective periods mainly due to a partial reversal
of a tax exposure item related to a subsidiary CIB Marine sold in 2004. See the
income tax discussion for further information on this exposure
item.





The $21.0
million increase in net loss from continuing operations was primarily due to a
$15.7 million increase in the provision for credit losses and a $7.2 million
increase in noninterest expense. These amounts were partially offset by a $3.1
million increase in noninterest income resulting primarily from the gain
recognized on the sale of the deposits of CIB Marine’s Florida banking
subsidiary. The change in the provision for credit losses was driven by an
increase in net charge-offs during 2008 as compared to 2007 and an increase in
the provision for the fixed-rate home equity pools and the construction and
development loans. The $7.2 million increase in noninterest expense was the
result of a $3.4 million settlement expense related to the Lewis litigation and
a $2.8 million increase in write down and losses on assets during 2008 compared
to 2007. The increase in write down and losses on assets was mainly due to the
charge-off of CIB Marine’s investment in four statutory trusts during the fourth
quarter of 2008. See “Other Assets” discussion for further information. See Item
3-Legal Proceedings in Part I of this Form 10-K for further information
regarding the litigation settlement. Professional services increased $1.5
million primarily reflecting legal and accounting expense related to specific
transactions, lawsuits and efforts related to the capital
plan.


28


CIB
Marine’s net loss increased $4.5 million from a net loss of $9.3 million in 2006
to a net loss of $13.8 million in 2007. Loss from continuing operations
increased $5.4 million from $9.8 million in 2006 to $15.2 million in 2007. Net
income from discontinued operations increased $0.9 million from $0.6 million to
$1.4 million during the same respective periods mainly due to a partial reversal
of a tax exposure item related to a sold subsidiary. See the income tax
discussion for further information on this exposure item.





The $5.4
million increase in net loss from continuing operations from 2006 to 2007 was
primarily due to a $10.8 million change in the provision for credit losses from
a net recovery of $4.4 million in 2006 as compared to a provision of $6.4
million in 2007, and a $1.5 million decrease in net gain on sale of branches.
The change in the provision for credit losses was driven by net charge-offs
during 2007 as compared to net recoveries in 2006 and an increase in the
provision for the fixed rate home equity pools CIB Marine purchased in 2006 and
the first quarter of 2007. The decreases in net income resulting from the
provision and branch sales were partially offset by a $7.7 million decrease in
noninterest expense. The 2006 noninterest expense included a $1.8 million
settlement expense related to the Hadley litigation and $1.1 million impairment
on securities. Additionally, compensation expense decreased $2.3 million in 2007
compared to 2006 due to management initiatives and the closing and sales of
branches, and professional services decreased $1.1 million during the same
period primarily due to reduced legal fees resulting from the settlement of
litigation.





Net
Interest Income





Net
interest income is the most significant component of CIB Marine’s earnings. Net
interest income is the difference between interest earned on interest-earning
assets and interest paid on deposits and other borrowed funds. Net interest
margin is this difference expressed as a percentage of average interest-earning
assets. The amount of CIB Marine’s net interest income is affected by several
factors, including interest rates and the volume and relative mix of
interest-earning assets and interest-bearing liabilities. Although CIB Marine
can control certain of these factors, others, such as the general level of
credit demand, fiscal policy and Federal Reserve Board monetary policy, are
beyond CIB Marine’s control.





The
following table sets forth information regarding average balances, interest
income, or interest expense, and the average rates earned or paid for each of
CIB Marine’s major asset, liability and stockholders’ equity categories.
Interest income on tax-exempt securities has not been adjusted to reflect the
tax equivalent basis, since CIB Marine does not expect to realize all of the tax
benefits associated with these securities due to substantial losses incurred.
There were no tax-exempt loans in 2008, 2007 or 2006. See Item 8, Note 21-Income
Taxes in Part II of this Form 10-K for additional information.


29




Year
      Ended December 31,2008
                                                                                                                          
                                                                                                                          
                                                                                                                          2007
                                                                                                                          
                                                                                                                          
                                                                                                                          2006Average
                                                                                                                            Balance
                                                                                                                          
                                                                                                                          
                                                                                                                          Interest
                                                                                                                            Earned/Paid
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                            Yield/Cost
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                            Balance
                                                                                                                          
                                                                                                                          
                                                                                                                          Interest
                                                                                                                            Earned/Paid
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                            Yield/Cost
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                            Balance
                                                                                                                          
                                                                                                                          
                                                                                                                          Interest
                                                                                                                            Earned/Paid
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                            Yield/Cost(Dollars
      in thousands)AssetsInterest-earning
      assets:Securities:Taxable
                                                                                                                          
                                                                                                                          $
                                                                                                                          322,143
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          16,158
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.02
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          302,541
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          14,755
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.88
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          406,560
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          18,512
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.55
                                                                                                                          %Tax-exempt
      (1)
                                                                                                                          
                                                                                                                          
                                                                                                                          785
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          41
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.22
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,569
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          81
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.16
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3,520
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          161
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.57Total
      securities
                                                                                                                          
                                                                                                                          
                                                                                                                          322,928
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          16,199
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.02
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          304,110
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          14,836
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.88
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          410,080
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          18,673
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.55Loans
      held for sale
                                                                                                                          
                                                                                                                          
                                                                                                                          1,406
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          19
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.35
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          61
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8.20
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          25
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8.00Loans
      (2)(3):Commercial
                                                                                                                          
                                                                                                                          
                                                                                                                          77,938
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4,503
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.78
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          62,004
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4,683
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.55
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          50,234
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3,873
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.71Commercial
      real estate
                                                                                                                          
                                                                                                                          
                                                                                                                          402,029
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          25,307
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.29
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          408,064
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          30,558
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.49
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          418,907
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          30,790
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.35Consumer
                                                                                                                          
                                                                                                                          
                                                                                                                          126,506
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8,801
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.96
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          112,491
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          9,386
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8.34
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          56,017
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3,871
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.91Total
      loans
                                                                                                                          
                                                                                                                          
                                                                                                                          606,473
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          38,611
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.37
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          582,559
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          44,627
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.66
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          525,158
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          38,534
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7.34Reverse
      repurchase securities and federal funds sold
                                                                                                                          
                                                                                                                          
                                                                                                                          57,090
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,312
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.30
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          58,802
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3,226
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.49
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          79,731
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4,300
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.39Total
      interest-earning assets (1)
                                                                                                                          
                                                                                                                          
                                                                                                                          987,897
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          56,141
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.68
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          945,532
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          62,694
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.63
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,014,994
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          61,509
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.06Noninterest-earning
      assets:Cash
      and due from banks
                                                                                                                          
                                                                                                                          
                                                                                                                          15,918
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          17,415
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          22,886Premises
      and equipment (4)
                                                                                                                          
                                                                                                                          
                                                                                                                          7,590
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10,087
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          12,572Allowance
      for loan losses
                                                                                                                          
                                                                                                                          
                                                                                                                          (21,426
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (19,919
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (22,968
                                                                                                                          )Receivables
      from sale of stock
                                                                                                                          
                                                                                                                          
                                                                                                                          (68
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (127
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (176
                                                                                                                          )Accrued
      interest receivable and other assets
                                                                                                                          
                                                                                                                          
                                                                                                                          14,759
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          20,485
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          23,677Total
      noninterest- earning assets
                                                                                                                          
                                                                                                                          
                                                                                                                          16,773
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          27,941
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          35,991Total
      assets
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,004,670
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          973,473
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,050,985Liabilities
      and Stockholders’ EquityInterest-bearing
      liabilities:Deposits:Interest-bearing
      demand deposits
                                                                                                                          
                                                                                                                          $
                                                                                                                          36,981
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          266
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          0.72
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          36,132
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          363
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.00
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          43,001
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          425
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          0.99
                                                                                                                          %Money
      market
                                                                                                                          
                                                                                                                          
                                                                                                                          143,149
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3,276
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.29
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          170,966
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7,018
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.10
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          194,290
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7,723
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.97Other
      savings deposits
                                                                                                                          
                                                                                                                          
                                                                                                                          12,112
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          99
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          0.82
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          15,224
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          151
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          0.99
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          21,839
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          219
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.00Time
      deposits (5)
                                                                                                                          
                                                                                                                          
                                                                                                                          473,707
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          19,102
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.03
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          466,151
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          22,163
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.75
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          507,013
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          20,880
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.12Total
      interest-bearing deposits(4)
                                                                                                                          
                                                                                                                          
                                                                                                                          665,949
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          22,743
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.42
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          688,473
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          29,695
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.31
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          766,143
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          29,247
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.82Borrowings-short-term
                                                                                                                          
                                                                                                                          
                                                                                                                          108,054
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2,097
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.94
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          39,328
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,698
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.32
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          22,915
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,008
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.40Borrowings-long-term
                                                                                                                          
                                                                                                                          
                                                                                                                          17,738
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          774
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.36
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2,542
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          118
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.64
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4,834
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          245
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.07Junior
      subordinated debentures
                                                                                                                          
                                                                                                                          
                                                                                                                          61,857
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8,887
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          14.37
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          61,857
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8,556
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          13.83
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          61,857
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7,742
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          12.52Total
      borrowed funds
                                                                                                                          
                                                                                                                          
                                                                                                                          187,649
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          11,758
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6.27
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          103,727
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10,372
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10.00
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          89,606
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8,995
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10.04Total
      interest-bearing liabilities
                                                                                                                          
                                                                                                                          
                                                                                                                          853,598
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          34,501
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.04
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          792,200
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          40,067
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          5.06
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          855,749
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          38,242
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.47Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits(4)
                                                                                                                          
                                                                                                                          
                                                                                                                          65,374
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          75,670
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          91,668Accrued
      interest and other liabilities
                                                                                                                          
                                                                                                                          
                                                                                                                          42,725
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          37,119
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          30,988Total
      noninterest- bearing liabilities
                                                                                                                          
                                                                                                                          
                                                                                                                          108,099
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          112,789
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          122,656Total
      liabilities
                                                                                                                          
                                                                                                                          $
                                                                                                                          961,697
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          904,989
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          978,405Stockholders’
      equity
                                                                                                                          
                                                                                                                          
                                                                                                                          42,973
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          68,484
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          72,580Total
      liabilities and stockholders’ equity
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,004,670
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          973,473
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,050,985Net
      interest income and net interest spread (1)(6)
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          21,640
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.64
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          22,627
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.57
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          23,267
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.59
                                                                                                                          %Net
      interest-earning assets
                                                                                                                          
                                                                                                                          $
                                                                                                                          134,299
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          153,332
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          159,245Net
      interest margin (1)(7)
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.19
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.39
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.29
                                                                                                                          %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                                                                                                          
                                                                                                                          
                                                                                                                          1.16
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.19
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.19








(1)
            In
      the future, CIB Marine does not expect to realize all of the tax benefits
      associated with tax-exempt assets due to substantial losses it has
      incurred, and at December 31, 2008, 2007 and 2006 no U.S. federal or state
      loss carryback potential remains. Accordingly, 2008, 2007 and 2006 are not
      presented on a tax-equivalent basis. If 2008, 2007 and 2006 had been shown
      on a tax-equivalent basis of 35%, the net interest margin would have been
      2.20%, 2.43% and 2.34%,
respectively.


(2)
            Loan
      balance totals include nonaccrual
loans.


(3)
            Interest
      earned on loans includes amortized loan fees of $0.4 million, $0.6 million
      and $0.6 million for the years ended December 31, 2008, 2007 and 2006,
      respectively.


(4)
            Includes
      fixed assets and deposits of branches held for sale or sold during 2008,
      2007 and 2006.


(5)
            Interest
      rates and amounts include the effects of derivatives entered into for
      interest rate risk management and accounted for as fair value
      hedges.


(6)
            Net
      interest rate spread is the difference between the average rates on
      interest-earning assets and interest-bearing
  liabilities.


(7)
            Net
      interest margin is the ratio of net interest income, on a tax-equivalent
      basis, to average interest-earning
assets.





Net
interest income decreased $1.0 million, or 4.4%, from $22.6 million in 2007 to
$21.6 million in 2008. The decrease was mainly attributable to a greater decline
in interest income versus the decline in interest expense resulting primarily
from declines during the first and fourth quarters 2008 in the federal funds
rate, the Prime Rate and short-term US Dollar LIBOR rates, which are used to
reset interest rates on variable rate loans. This was partially offset by the
net interest income derived from the increased volume of total interest-earning
assets. CIB Marine has various strategies to improve net interest income,
including growing loans extended to local commercial banking relationships and
reducing the costs of deposits, managing investments to improve performance of
the portfolio, using collateralized borrowings such as FHLB advances and
repurchase agreements when they have a relative cost advantage over other bank
funding sources and it is consistent with CIB Marine’s liquidity strategy,
adjusting its deposit interest rates, which often lag key banking indices when
those indices change rapidly, and implementing strategies to reduce the level of
interest accruals related to its junior subordinated debentures (see discussion
of CIB Marine’s capital plan outlined in the “Liquidity and Capital Plan Update”
section in this Part II, Item 7).





Net
interest income decreased $0.6 million, or 2.8%, from $23.2 million in 2006 to
$22.6 million in 2007. The decrease was mainly attributable to the change in
rates paid on liabilities relative to those earned on assets. While the average
yield on interest-earning assets increased 57 basis points in 2007 compared to
2006, the average costs of interest-bearing liabilities increased 59 basis
points.





The
following table presents an analysis of changes in net interest income resulting
from changes in average volumes of interest-earning assets and interest-bearing
liabilities, and average rates earned and paid.


30




Year Ended December 31, 2008 Compared
      to
                                                                            Year Ended December 31, 2007
      (2)
                                                                          
                                                                          
                                                                          Year Ended December 31, 2007 Compared
      to
                                                                            Year Ended December 31, 2006
      (2)Volume
                                                                          
                                                                          
                                                                          Rate
                                                                          
                                                                          
                                                                          Total
                                                                          
                                                                          
                                                                          % Change
                                                                          
                                                                          
                                                                          Volume
                                                                          
                                                                          
                                                                          Rate
                                                                          
                                                                          
                                                                          Total
                                                                          
                                                                          
                                                                          % Change(Dollars
      in thousands)Interest
      IncomeSecurities-taxable
                                                                          
                                                                          $
                                                                          975
                                                                          
                                                                          
                                                                          $
                                                                          428
                                                                          
                                                                          
                                                                          $
                                                                          1,403
                                                                          
                                                                          
                                                                          
                                                                          9.51
                                                                          %
                                                                          
                                                                          $
                                                                          (4,999
                                                                          )
                                                                          
                                                                          $
                                                                          1,242
                                                                          
                                                                          
                                                                          $
                                                                          (3,757
                                                                          )
                                                                          
                                                                          
                                                                          (20.29
                                                                          )%Securities-tax-exempt
      (1)
                                                                          
                                                                          
                                                                          (41
                                                                          )
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          (40
                                                                          )
                                                                          
                                                                          
                                                                          (49.38
                                                                          )
                                                                          
                                                                          
                                                                          (99
                                                                          )
                                                                          
                                                                          
                                                                          19
                                                                          
                                                                          
                                                                          
                                                                          (80
                                                                          )
                                                                          
                                                                          
                                                                          (49.69
                                                                          )Total
      securities
                                                                          
                                                                          
                                                                          934
                                                                          
                                                                          
                                                                          
                                                                          429
                                                                          
                                                                          
                                                                          
                                                                          1,363
                                                                          
                                                                          
                                                                          
                                                                          9.19
                                                                          
                                                                          
                                                                          
                                                                          (5,098
                                                                          )
                                                                          
                                                                          
                                                                          1,261
                                                                          
                                                                          
                                                                          
                                                                          (3,837
                                                                          )
                                                                          
                                                                          
                                                                          (20.55
                                                                          )Loans
      held for sale
                                                                          
                                                                          
                                                                          21
                                                                          
                                                                          
                                                                          
                                                                          (7
                                                                          )
                                                                          
                                                                          
                                                                          14
                                                                          
                                                                          
                                                                          
                                                                          280.00
                                                                          
                                                                          
                                                                          
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          150.00Commercial
                                                                          
                                                                          
                                                                          1,056
                                                                          
                                                                          
                                                                          
                                                                          (1,236
                                                                          )
                                                                          
                                                                          
                                                                          (180
                                                                          )
                                                                          
                                                                          
                                                                          (3.84
                                                                          )
                                                                          
                                                                          
                                                                          890
                                                                          
                                                                          
                                                                          
                                                                          (80
                                                                          )
                                                                          
                                                                          
                                                                          810
                                                                          
                                                                          
                                                                          
                                                                          20.91Commercial
      real estate
                                                                          
                                                                          
                                                                          (446
                                                                          )
                                                                          
                                                                          
                                                                          (4,805
                                                                          )
                                                                          
                                                                          
                                                                          (5,251
                                                                          )
                                                                          
                                                                          
                                                                          (17.18
                                                                          )
                                                                          
                                                                          
                                                                          (806
                                                                          )
                                                                          
                                                                          
                                                                          574
                                                                          
                                                                          
                                                                          
                                                                          (232
                                                                          )
                                                                          
                                                                          
                                                                          (0.75
                                                                          )Consumer
                                                                          
                                                                          
                                                                          1,086
                                                                          
                                                                          
                                                                          
                                                                          (1,671
                                                                          )
                                                                          
                                                                          
                                                                          (585
                                                                          )
                                                                          
                                                                          
                                                                          (6.23
                                                                          )
                                                                          
                                                                          
                                                                          4,574
                                                                          
                                                                          
                                                                          
                                                                          941
                                                                          
                                                                          
                                                                          
                                                                          5,515
                                                                          
                                                                          
                                                                          
                                                                          142.47Total
      loans (including fees)
                                                                          
                                                                          
                                                                          1,696
                                                                          
                                                                          
                                                                          
                                                                          (7,712
                                                                          )
                                                                          
                                                                          
                                                                          (6,016
                                                                          )
                                                                          
                                                                          
                                                                          (13.48
                                                                          )
                                                                          
                                                                          
                                                                          4,658
                                                                          
                                                                          
                                                                          
                                                                          1,435
                                                                          
                                                                          
                                                                          
                                                                          6,093
                                                                          
                                                                          
                                                                          
                                                                          15.81Reverse
      repurchase securities and federal funds sold
                                                                          
                                                                          
                                                                          (91
                                                                          )
                                                                          
                                                                          
                                                                          (1,823
                                                                          )
                                                                          
                                                                          
                                                                          (1,914
                                                                          )
                                                                          
                                                                          
                                                                          (59.33
                                                                          )
                                                                          
                                                                          
                                                                          (1,147
                                                                          )
                                                                          
                                                                          
                                                                          73
                                                                          
                                                                          
                                                                          
                                                                          (1,074
                                                                          )
                                                                          
                                                                          
                                                                          (24.98
                                                                          )Total
      interest income (1)
                                                                          
                                                                          
                                                                          2,560
                                                                          
                                                                          
                                                                          
                                                                          (9,113
                                                                          )
                                                                          
                                                                          
                                                                          (6,553
                                                                          )
                                                                          
                                                                          
                                                                          (10.45
                                                                          )
                                                                          
                                                                          
                                                                          (1,584
                                                                          )
                                                                          
                                                                          
                                                                          2,769
                                                                          
                                                                          
                                                                          
                                                                          1,185
                                                                          
                                                                          
                                                                          
                                                                          1.93Interest
      ExpenseInterest-bearing
      demand deposits
                                                                          
                                                                          
                                                                          8
                                                                          
                                                                          
                                                                          
                                                                          (105
                                                                          )
                                                                          
                                                                          
                                                                          (97
                                                                          )
                                                                          
                                                                          
                                                                          (26.72
                                                                          )
                                                                          
                                                                          
                                                                          (69
                                                                          )
                                                                          
                                                                          
                                                                          7
                                                                          
                                                                          
                                                                          
                                                                          (62
                                                                          )
                                                                          
                                                                          
                                                                          (14.59
                                                                          )Money
      market
                                                                          
                                                                          
                                                                          (1,006
                                                                          )
                                                                          
                                                                          
                                                                          (2,736
                                                                          )
                                                                          
                                                                          
                                                                          (3,742
                                                                          )
                                                                          
                                                                          
                                                                          (53.32
                                                                          )
                                                                          
                                                                          
                                                                          (951
                                                                          )
                                                                          
                                                                          
                                                                          246
                                                                          
                                                                          
                                                                          
                                                                          (705
                                                                          )
                                                                          
                                                                          
                                                                          (9.13
                                                                          )Other
      savings deposits
                                                                          
                                                                          
                                                                          (27
                                                                          )
                                                                          
                                                                          
                                                                          (25
                                                                          )
                                                                          
                                                                          
                                                                          (52
                                                                          )
                                                                          
                                                                          
                                                                          (34.44
                                                                          )
                                                                          
                                                                          
                                                                          (66
                                                                          )
                                                                          
                                                                          
                                                                          (2
                                                                          )
                                                                          
                                                                          
                                                                          (68
                                                                          )
                                                                          
                                                                          
                                                                          (31.05
                                                                          )Time
      deposits
                                                                          
                                                                          
                                                                          355
                                                                          
                                                                          
                                                                          
                                                                          (3,416
                                                                          )
                                                                          
                                                                          
                                                                          (3,061
                                                                          )
                                                                          
                                                                          
                                                                          (13.81
                                                                          )
                                                                          
                                                                          
                                                                          (1,772
                                                                          )
                                                                          
                                                                          
                                                                          3,055
                                                                          
                                                                          
                                                                          
                                                                          1,283
                                                                          
                                                                          
                                                                          
                                                                          6.14Total
      deposits
                                                                          
                                                                          
                                                                          (670
                                                                          )
                                                                          
                                                                          
                                                                          (6,282
                                                                          )
                                                                          
                                                                          
                                                                          (6,952
                                                                          )
                                                                          
                                                                          
                                                                          (23.41
                                                                          )
                                                                          
                                                                          
                                                                          (2,858
                                                                          )
                                                                          
                                                                          
                                                                          3,306
                                                                          
                                                                          
                                                                          
                                                                          448
                                                                          
                                                                          
                                                                          
                                                                          1.53Borrowings-short-term
                                                                          
                                                                          
                                                                          1,726
                                                                          
                                                                          
                                                                          
                                                                          (1,327
                                                                          )
                                                                          
                                                                          
                                                                          399
                                                                          
                                                                          
                                                                          
                                                                          23.50
                                                                          
                                                                          
                                                                          
                                                                          709
                                                                          
                                                                          
                                                                          
                                                                          (19
                                                                          )
                                                                          
                                                                          
                                                                          690
                                                                          
                                                                          
                                                                          
                                                                          68.45Borrowings-long-term
                                                                          
                                                                          
                                                                          663
                                                                          
                                                                          
                                                                          
                                                                          (7
                                                                          )
                                                                          
                                                                          
                                                                          656
                                                                          
                                                                          
                                                                          
                                                                          555.93
                                                                          
                                                                          
                                                                          
                                                                          (108
                                                                          )
                                                                          
                                                                          
                                                                          (19
                                                                          )
                                                                          
                                                                          
                                                                          (127
                                                                          )
                                                                          
                                                                          
                                                                          (51.84
                                                                          )Junior
      subordinated debentures
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          331
                                                                          
                                                                          
                                                                          
                                                                          331
                                                                          
                                                                          
                                                                          
                                                                          3.87
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          814
                                                                          
                                                                          
                                                                          
                                                                          814
                                                                          
                                                                          
                                                                          
                                                                          10.51Total
      borrowed funds
                                                                          
                                                                          
                                                                          2,389
                                                                          
                                                                          
                                                                          
                                                                          (1,003
                                                                          )
                                                                          
                                                                          
                                                                          1,386
                                                                          
                                                                          
                                                                          
                                                                          13.36
                                                                          
                                                                          
                                                                          
                                                                          601
                                                                          
                                                                          
                                                                          
                                                                          776
                                                                          
                                                                          
                                                                          
                                                                          1,377
                                                                          
                                                                          
                                                                          
                                                                          15.31Total
      interest expense
                                                                          
                                                                          
                                                                          1,719
                                                                          
                                                                          
                                                                          
                                                                          (7,285
                                                                          )
                                                                          
                                                                          
                                                                          (5,566
                                                                          )
                                                                          
                                                                          
                                                                          (13.89
                                                                          )
                                                                          
                                                                          
                                                                          (2,257
                                                                          )
                                                                          
                                                                          
                                                                          4,082
                                                                          
                                                                          
                                                                          
                                                                          1,825
                                                                          
                                                                          
                                                                          
                                                                          4.77Net
      interest income (1)
                                                                          
                                                                          $
                                                                          841
                                                                          
                                                                          
                                                                          $
                                                                          (1,828
                                                                          )
                                                                          
                                                                          $
                                                                          (987
                                                                          )
                                                                          
                                                                          
                                                                          (4.36
                                                                          )%
                                                                          
                                                                          $
                                                                          673
                                                                          
                                                                          
                                                                          $
                                                                          (1,313
                                                                          )
                                                                          
                                                                          $
                                                                          (640
                                                                          )
                                                                          
                                                                          
                                                                          (2.75
                                                                          )%





(1)
            In
      the future, CIB Marine does not expect to realize all of the tax benefits
      associated with tax-exempt assets due to substantial losses it has
      incurred, and at December 31, 2008, 2007 and 2006 no U.S. federal or state
      loss carryback potential remains. Accordingly, 2008, 2007 and 2006 are not
      presented on a tax-equivalent
basis.


(2)
            Variances
      which were not specifically attributable to volume or rate have been
      allocated proportionally between volume and rate using absolute values as
      a basis for the allocation. Nonaccruing loans were included in the average
      balances used in determining
yields.





Interest
Income





Total
interest income decreased $6.6 million, or 10.5%, from $62.7 million in 2007 to
$56.1 million in 2008. The decrease was the result of a 95 basis point decrease
in the average yields earned on interest-earning assets, partially offset by a
$42.4 million increase in average balances on interest-earning assets. The
largest decrease was in interest income on loans which decreased by $6.0
million, or (13.5%), from $44.6 million during 2007 to $38.6 million during
2008. In addition, interest income on federal funds sold decreased by $1.9
million primarily due primarily to a decline in the average yields of federal
funds sold. The decrease in interest income on loans and federal funds sold was
partially offset by a $1.4 million increase in interest income on securities due
to an $18.8 million increase in average balances outstanding in 2008 compared to
2007 and a 14 basis point increase in average yields on securities.





Total
interest income increased $1.2 million, or 1.9%, from $61.5 million in 2006 to
$62.7 million in 2007. The increase was the result of a 57 basis point increase
in the average yields earned on interest-earning assets, partially offset by a
$69.5 million decline in average balances on interest-earning assets. The
largest increase was in interest income on loans which increased by $6.1
million, or 15.8%, from $38.5 million during 2006 to $44.6 million during 2007.
The increase in loan interest income was primarily due to a $57.4 million
increase in the average balance resulting from the purchase of two pools of
fixed rate second lien home equity loans during the second quarter of 2006 and
the first quarter of 2007. Additionally, the average yield on loans increased 32
basis points due to the rising rate environment and the purchase of the home
equity pools. The pools which were purchased in June 2006 and February 2007 had
a weighted average yield of 9.5% and 10.1%, respectively. See the loan
discussion for further information on the 2007 purchase. The increase in
interest income on loans was partially offset by a $3.8 million decrease in
interest income on securities due mainly to a decrease of $106.0 million in
average balances outstanding in 2007 compared to 2006. The decrease was mainly
due to repayments and sales of U. S. government agency and mortgage backed
securities. In accordance with its liquidity risk management strategies, CIB
Marine used a portion of these proceeds to settle deposits sold as part of the
branch sales and to purchase higher yielding assets.


31





Interest
Expense





Total
interest expense decreased $5.6 million, or 13.9%, from $40.1 million in 2007 to
$34.5 million in 2008. The decrease was the result of a 102 basis point decrease
in the average rate paid on interest-bearing liabilities, partially offset by a
$61.4 million increase in the average balances of these liabilities. Interest
expense on deposits, the largest component of interest-bearing liabilities,
decreased $7.0 million, or (23.4%), from $29.7 million in 2007 to $22.7 million
in 2008, due to a 89 basis point decline in average deposit costs incurred
during a falling rate environment and a $22.6 million decrease in average
deposit balances. Additionally, interest expense from borrowings increased $1.4
million during 2008 compared to 2007 primarily due the increase in the average
balances of short and long term borrowings used to offset the decline in average
deposits balances and the compounding effect of interest payment deferrals and
higher yields on the junior subordinated debentures. CIB Marine has continued to
defer the payments of interest on its junior subordinated debentures. Interest
accrues on each of the deferred payments at the coupon rate of the debentures,
creating a compounding effect for the interest expense of the debentures. This
causes interest expense for the debentures to increase each year and become an
increasing percentage of total interest expense and total average
interest-bearing liabilities. For 2008, the interest expense for the debentures
was $8.9 million, or 25.8% of total interest expense and 0.9% of total average
earning assets; for 2007, the interest expense for the debentures was $8.6
million, or 21.4% of total interest expense and 0.9% of total average earning
assets; and for 2006 the interest expense for the debentures was $7.7 million,
or 20.2% of total interest expense and 0.8% of total average earning
assets.





Total
interest expense increased $1.9 million, or 4.8%, from $38.2 million in 2006 to
$40.1 million in 2007. The increase was the result of a 59 basis point increase
in the average rate paid on interest-bearing liabilities, partially offset by a
$63.5 million decrease in the average balances of these liabilities. Interest
expense on deposits, the largest component of interest-bearing liabilities,
increased $0.5 million, or 1.5%, from $29.2 million in 2006 to $29.7 million in
2007, due to a 49 basis point increase in average deposit costs incurred during
a rising rate environment, partially offset by a $77.8 million reduction in
average deposit balances. Additionally, interest expense from borrowings
increased $1.4 million during 2007 compared to 2006 primarily due the
compounding effect of interest payment deferrals and higher yields on the junior
subordinated debentures.





Net
Interest Margin/Net Interest Spread





CIB
Marine’s net interest margin, which is the ratio of net interest income to
average interest-earning assets, decreased by 20 basis points during 2008
compared to 2007 and its net interest spread, which is the difference between
the rate earned on average interest-earning assets and the rate paid on average
interest-bearing liabilities, increased by 7 basis points during the same
period. The net interest margin decrease was primarily due to the increased
reliance on interest bearing liabilities to fund the interest earning assets and
the decline in the average yield on interest earning assets funded by
non-interest bearing liabilities and capital.





CIB
Marine’s net interest margin increased by 10 basis points during 2007 compared
to 2006 and its net interest spread decreased by 2 basis points during the same
period. The increase in the net interest margin was primarily due to rising
yields on assets funded by noninterest-bearing funding sources.





Provision
for Credit Losses





The
provision for credit losses represents charges made to earnings in order to
maintain an adequate allowance for loan losses and losses on unfunded
commitments and standby letters of credit. The provision for credit losses
increased $15.7 million from $6.4 million for the year ended December 31, 2007
to $22.1 million for the year ended December 31, 2008.





The
increase in the provision during 2008 as compared to 2007 was primarily due to
an increase in net charge-offs and deterioration in the credit quality of
certain segments of the loan portfolio. The increase in charge-offs was
predominately in commercial real estate construction and purchased home equity
loans.





During
2008, the provision for credit losses allocated to the purchased home equity
pools was $11.3 million compared to $6.2 million during 2007. The $6.2 million
provision allocated to these two pools in 2007 was primarily due to the purchase
of the second pool of home equity loans in February 2007 and a sharp
deterioration in credit quality beginning in the second quarter of 2007; while
the $11.3 million provision recorded in 2008 related to deterioration in the
credit quality of these pools and the decision by CIB Marine to change its
policy to charge-off 100% of the outstanding principal balance of each loan in
the pool when the loan is classified as 90 days past due on the servicer report
received during the period. During 2008, $12.4 million of these loans were
charged-off compared to $2.0 million during 2007. At December 31, 2008 and 2007,
the remaining balance of these two purchased pools was $52.2 million and $73.0
million, respectively, with an allocated allowance of $4.5 million and $5.3
million, respectively.


32





During
2008, real estate markets continued to show signs of stress and deterioration,
contributing to increased charge-offs and provisions. In particular,
deterioration in the credit quality of construction and development loans
resulted in provisions of $11.0 million for this type of loan in 2008. A
substantial portion of these provisions related to residential construction and
development loans in the Florida and Arizona markets.





The
provision for credit losses was $6.4 million during 2007, compared to net
recoveries of $4.4 million during 2006. The change in the provision was
primarily due to an increase in the cumulative total of commercial, commercial
real estate and commercial real estate construction loans during 2007 compared
to a decrease in the cumulative total of these loans during 2006; a $1.8 million
decrease in nonaccrual loans during 2007 compared to an $8.4 million decrease in
these loans during 2006; and net charge-offs compared to net recoveries during
the same respective periods. Additionally, during 2007, CIB Marine increased its
provision related to home equity loans to account for the purchase of a $48.2
million closed end pool of fixed rate second lien home equity loans in February
2007 and to account for the deterioration in this pool and a similar $47.8
million pool it purchased in June 2006.





At
December 31, 2007, CIB Marine had a $73.0 million remaining principal balance on
the $96.0 million closed-end second lien home equity loan pools it purchased in
June 2006 and February 2007. The quality of the loan pools deteriorated in part
due to the deterioration in the housing markets and the sudden and significant
tightening of credit standards and reduction in credit availability in the
mortgage finance markets beginning in the third quarter of 2007. The ratio of
total loans past due 30 days or more, including nonaccrual loans, to outstanding
principal balances of these two pools was 1.7% and 5.4% at December 31, 2006 and
2007, respectively. Due to the deterioration and the purchase of the $48.2
million pool in February 2007, the provision for credit losses related to these
pools increased from $1.1 million in 2006 to $6.2 million in 2007.





Due
primarily to the rapid decline in economic conditions during the first quarter
of 2009, CIB Marine recognized net charge-offs of $3.5 million and provisions
for loan losses of $2.9 million during the quarter related to its purchased home
equity loan pools.





Noninterest
Income





Noninterest
income increased $3.1 million, or 101.9%, from $3.1 million for the year ended
December 31, 2007 to $6.2 million for the year ended December 31, 2008. The
increase was mainly due to gain on sale of branches. During 2008, CIB Marine
recognized a $4.3 million gain on the sale of all of the branches and
substantially all of the loans and deposits of its Florida banking subsidiary.
This compares to a $1.1 million gain recognized in 2007 on the sale of two
branches owned by Marine Bank.





Noninterest
income decreased $1.5 million, or 32.8%, from $4.5 million in 2006 to $3.0
million in 2007, mainly due to net gains recognized on a greater number of
branch sales during 2006 than in 2007. During 2007, CIB Marine sold two branches
at a net pretax gain of $1.1 million while during the same period of 2006, CIB
Marine sold six branches at a combined pretax gain of $2.7 million.





Noninterest
Expense





Total
noninterest expense increased $7.2 million, or 20.8%, from $34.4 million in
2007, to $41.6 million in 2008. The increase was primarily the result of the
following:





·
            Professional
      services increased $1.5 million, or 44.2%, during 2008 compared to 2007,
      primarily due to increased legal fees related to loan collection and
      workout-related services, as well as services related to the capital
      plan.


·
            Data
      processing increased $1.0 million during 2008 compared to 2007. During the
      fourth quarter of 2007 CIB Marine began outsourcing its data processing,
      which was previously performed
in-house.


·
            Foreclosed
      property expense increased $0.3 million during 2008 compared to 2007
      mainly due to two commercial properties that were foreclosed upon related
      to one borrowing relationship located in Illinois. The properties were
      acquired in the third quarter of
2007.


33


·
            A
      $3.4 million settlement expense was recognized in 2008 related to the
      Lewis litigation. See Item 3-Legal Proceedings in Part I of this Form 10-K
      for further information regarding this
  litigation.


·
            Write
      down and losses on assets increased $2.8 million mainly due to the
      charge-off of CIB Marine’s investment in four statutory trusts during the
      fourth quarter of 2008. See “Other Assets” discussion for further
      information.


·
            During
      2008, CIB Marine management determined that certain of the securities it
      held were other-than-temporarily impaired and accordingly recognized a
      $1.8 million impairment loss. See Securities for further information
      regarding such adjustments.


·
            FDIC
      and state assessment increased $0.4 million during 2008 compared to 2007
      mainly due to increased FDIC insurance
premiums.


·
            The
      increases in the noninterest expense items listed above were offset by
      decreases in compensation and employee benefits, equipment, occupancy and
      premises of approximately $3.5 million in 2008. The number of full-time
      equivalent employees declined to 197 at December 31, 2008 from 258 at
      December 31, 2007. These decreases were mainly due to management cost
      savings initiatives, branch sales and
closures.





Total
noninterest expense decreased $7.7 million, or 18.2%, from $42.1 million in
2006, to $34.4 million in 2007. The decrease was primarily the result of the
following:





•
            Compensation
      and employee benefits expense decreased $2.3 million or 11.3% from $20.5
      million in 2006 to $18.2 million in 2007. The decrease is primarily due to
      the sale and closure of certain bank branches during 2006 and 2007. The
      total number of full-time equivalent employees of companies included in
      continuing operations, decreased from 301 at December 31, 2006 to 258 at
      December 31, 2007.


•
            Impairment
      loss on securities was $1.1 million for the year ended December 31, 2006
      compared to none for the year ended December 31, 2007. During 2007, but
      prior to the issuance of its 2006 consolidated financial statements, CIB
      Marine elected to sell certain of its available for sale securities. As a
      result of this decision, CIB Marine determined it would not be holding
      these certain securities for a period of time sufficient to recover the
      carrying value at December 31, 2006. Accordingly, CIB Marine realized a
      $1.1 million other-than-temporary impairment loss on these certain
      securities during 2006. These other-than-temporary impairment losses were
      due to changes in general market interest rates and the decision to the
      sell the securities and not due to credit or liquidity risks or events.
      The strategy included purchasing higher yielding government securities
      having a positive effect earnings in the subsequent periods. There were no
      such impairment losses during 2007.


•
            Professional
      services decreased $1.1 million mainly due to reduced legal expenses
      resulting from the settlement of certain litigation in
    2006.


•
            Other
      expense decreased $3.4 million from $9.3 million for the year ended
      December 31, 2006 to $5.9 million for the year ended December 31, 2007
      mainly due to a $1.8 million contingent liability recognized in the first
      quarter of 2006, decreased regulatory assessments and cost savings
      resulting from management initiatives and the closure and sale of certain
      bank branches. The contingent liability expense related to the settlement
      of the Hadley litigation in the first quarter of
  2007.





Income
Taxes





The 2006
through 2008 financial statements recognize no tax benefit on the consolidated
net operating losses for continuing operations due to significant federal and
state net operating loss carryforwards on which the realization of related tax
benefits is not more likely than not. The continuing operations income tax
benefits for 2008 through 2006 consisted primarily of the allocation of taxes in
accordance with tax sharing agreements with companies included in discontinued
operations that would have been payable had it not been for the losses from
continuing operations included in CIB Marine’s consolidated
returns.


34


In June
2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law. FIN
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. CIB Marine adopted FIN 48 on January
1, 2007. The initial FIN 48 adjustment related to CIB Marine’s investment in an
Illinois real estate investment trust (“REIT”) owned by its former Illinois
banking subsidiary, which was sold in 2004. As of December 31, 2006, CIB Marine
maintained a $1.9 million liability related to its exposure. The cumulative
effect of adopting FIN 48 was a $1.0 million increase in liabilities of
companies held for disposal and a $1.0 million decrease to the January 1, 2007
retained earnings balance. During 2007 CIB Marine incorrectly determined that
the statute of limitations expired with respect to a portion of this exposure.
As a result of this event, CIB Marine reversed $1.3 million of the tax liability
through a credit to discontinued operations tax expense while also recording a
$0.3 million charge to its discontinued operations tax expense for interest and
penalties related to the remaining REIT tax exposure. During the third quarter
of 2008, CIB Marine learned that the statute of limitations had in fact not
expired and increased its REIT tax exposure by $1.7 million, including interest
and penalties through that date. In December 2008, the Illinois Department of
Revenue accepted a $0.5 million payment in full settlement of the issue and CIB
Marine reversed $3.0 million of the tax liability through a credit to
discontinued operations tax expense.





CIB
Marine files income tax returns in the U. S. federal and various state
jurisdictions. CIB Marine is no longer subject to income tax examinations by U.
S. federal tax authorities for years before 2004, and state tax authorities for
years before 2000.





FINANCIAL
CONDITION





Overview





On August
15, 2008, CIB Marine completed the sale of the branches, deposits and most of
the loans of its Florida banking subsidiary, Citrus Bank, at book value plus a
deposit premium, for a combination of cash and common stock of the parent
company of the purchaser. The consideration received was in the form of cash and
equity shares of the purchaser. These equity shares had a market value of $1.0
million on the date of purchase and $0.8 million at December 31, 2008. The sale
included $86.7 million of deposits and $41.0 million in assets, including $38.6
million in loans, $2.1 million in net premises and equipment, $0.6 million in
Reserve Bank stock and $0.3 million in other liabilities. See the “Liquidity and
Capital Plan Update” discussion below for further information.





During
2008, CIB Marine experienced a decline in the fair value of its securities
portfolio due to the distressed financial markets and deterioration in the
housing and banking sectors. As a result of this decline and losses incurred in
2008, CIB Marine’s capital decreased from $60.3 million at December 31, 2007 to
$14.8 million at December 31, 2008. While each of CIB Marine’s subsidiary banks
were classified as “well capitalized” at December 31, 2008, as defined by
federal banking regulations, CIB Marine’s Tier 1 leverage ratio fell below the
“minimum capital” threshold applicable under regulatory capital guidelines. As
further discussed in the “Liquidity and Capital Plan Update” section below, CIB
Marine is continuing to pursue efforts to restructure its TruPS obligations.
Also, as noted in the Subsequent Events section below, in early April, 2009, the
FDIC and the WDFI signed a C&D for Marine Bank. Among other things the
C&D requires an increase in capital at Marine Bank, which has been completed
through a contribution of capital from the CIB Marine parent company. It should
also be noted that, notwithstanding maintenance of capital at this higher level,
FDIC regulations require that the bank be described as “adequately capitalized”
as long as the C&D remains in effect.





As of
April 10, 2009, the initial voting deadline established in the Consent
Solicitation (the “Consent Solicitation”), CIB Marine was notified that a
sufficient number of negative votes were cast by the applicable holders of two
series of TruPS to prevent approval of the Plan of Restructuring (the “Plan of
Restructuring”). Based upon conversations that CIB Marine and its investment
banking firm have had with certain of the TruPS holders, including certain
holders who have initially voted against the Consent Solicitation, CIB Marine
has elected to extend the voting deadline until May 11, 2009 in order to give it
more time to consider amending the terms of the Consent Solicitation to address
such holders’ concerns, as well as to consider other available
options.





CIB is
not able to pay the accrued interest currently due on its debentures and is no
longer permitted to defer interest payments thereon and is therefore in default
on the TruPS. If the Plan of Restructuring is ultimately not approved, CIB
Marine will be unable to cure this default. While CIB Marine is not aware of any
precedent of a default by a bank holding company on trust preferred securities,
management believes any such default will have a material adverse effect on CIB
Marine’s continuing operations with serious adverse consequences on CIB Marine
shareholders and TruPS holders. If CIB Marine is able to restructure its TruPS,
it anticipates the restructuring will permit it to return to “well-capitalized”
status.


35


Loans
Held for Sale





Loans
held for sale were $4.8 million at December 31, 2008, which consisted of $0.6
million in residential mortgage loans and $4.2 million in commercial real estate
construction loans. Following the sale of Citrus Bank, the remaining loans of
Citrus Bank were merged into CIB Marine. Of those remaining loans, $4.2 million
have been transferred to loans held for sale during the third quarter of 2008.
Prior to the transfer, CIB Marine management determined certain of these loans
were impaired and accordingly, charged-off $2.0 million to the allowance for
loan loss. CIB Marine continues to liquidate these loans to increase its cash
balances. At December 31, 2008, loans held for sale with a carrying value of
$2.0 million and $1.7 million, respectively, were classified as nonaccrual and
90 days or more past due and still accruing.





Securities





CIB
Marine seeks to manage its investment portfolio in a manner that promotes the
achievement of its liquidity goals, optimizes after-tax net income, provides
collateral to secure borrowings, assists CIB Marine in meeting various
regulatory requirements, and is consistent with its market risk policies. CIB
Marine manages the maturity structure of the investment portfolio to provide a
stream of cash flows to complement liquidity risk management, market risk
management and to promote long-term earnings.





The
carrying value and yield of CIB Marine’s securities are set forth in the
following table.





As
      of December 31, (1)2008
                
                
                2007
                
                
                2006Amount
                
                
                Yield
      to
                  Maturity
                
                
                Amount
                
                
                Yield
      to
                  Maturity
                
                
                Amount
                
                
                Yield
      to
                  Maturity(Dollars
      in thousands)U.S.
      government agencies
                
                $
                44,835
                
                
                
                4.62
                %
                
                $
                63,104
                
                
                
                4.78
                %
                
                $
                101,321
                
                
                
                4.83
                %Obligations
      of states and political subdivisions
                
                
                30,236
                
                
                
                5.26
                
                
                
                31,031
                
                
                
                5.26
                
                
                
                32,067
                
                
                
                5.10Other
      notes and bonds
                
                
                9,012
                
                
                
                2.65
                
                
                
                9,098
                
                
                
                5.96
                
                
                
                350
                
                
                
                6.66Asset-backed
      securities
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,192
                
                
                
                5.65Corporate
      commercial paper
                
                
                4,800
                
                
                
                1.25
                
                
                
                —
                
                
                
                —
                
                
                
                4,384
                
                
                
                5.40Mortgage-backed
      securities (agencies)
                
                
                107,194
                
                
                
                5.37
                
                
                
                111,276
                
                
                
                4.93
                
                
                
                159,362
                
                
                
                4.87Mortgage-backed
      securities (non-agencies)
                
                
                93,428
                
                
                
                5.76
                
                
                
                100,430
                
                
                
                5.43
                
                
                
                35,492
                
                
                
                5.13Total
      securities before market value adjustment
                
                
                289,505
                
                
                
                5.22
                %
                
                
                314,939
                
                
                
                5.12
                %
                
                
                335,168
                
                
                
                4.93
                %Other
      equities
                
                
                955
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Available
      for sale market value adjustment
                
                
                (10,008
                )
                
                
                
                
                
                
                1,382
                
                
                
                
                
                
                
                (1,880
                )Total
      securities available for sale
                
                $
                280,452
                
                
                
                
                
                
                $
                316,321
                
                
                
                
                
                
                $
                333,288





(1)
            In
      the future, CIB Marine does not expect to realize all of the tax benefits
      associated with tax-exempt assets due to substantial losses it has
      incurred. Accordingly, 2008, 2007 and 2006 are not presented on a
      tax-equivalent basis.





Total
securities outstanding at December 31, 2008 were $280.5 million, a decrease of
$35.8 million, or 11.3%, from $316.3 million at December 31, 2007. The decrease
was mainly due to prepayments, repayments and maturities from the existing
portfolio, the proceeds of which were used to fund a decrease in deposits, as
well as the decline in the market value of the securities.





At
December 31, 2008, 15.5% of the portfolio consisted of U.S. government agency
securities, compared to 20.0% at December 31, 2007, and at December 31, 2008,
69.3% of the portfolio consisted of mortgage-backed securities compared to 67.2%
at December 31, 2007. Obligations of states and political subdivisions
represented 10.4% of the portfolio at December 31, 2008, compared to 9.9% at
December 31, 2007. The ratio of total securities to total assets was 30.9% and
31.5% at December 31, 2008 and 2007, respectively.


36





Securities
available for sale with a carrying value of $222.3 million and $212.4 million at
December 31, 2008 and December 31, 2007, respectively, were pledged for current
outstanding or continently available deposits and borrowings with public
entities, Federal Home Loan Bank (“FHLB”) advances, repurchase agreements,
federal funds purchased, borrowings from the federal reserve discount window,
and for other purposes as required.





Where the
fair value of a security is less than its cost at December 31, 2008, CIB Marine
has the ability and intent to hold the investment for a sufficient period of
time, up to and including maturity, for a forecasted recovery of fair value up
to (or beyond) the cost of the investment and it does not consider it probable
that it will be unable to collect all amounts due according to the contractual
terms of the debt security; except: (1) for one mortgage-backed security
(corporate) an other-than-temporary impairment was recorded at September 30,
2008, the cost basis for the security was reduced from $1.4 million to the
securities fair value of $0.9 million, for a loss of $0.5 million during the
third quarter of 2008; (2) for the same mortgage-backed security (corporate) an
additional other-than-temporary impairment was recorded at December 31, 2008,
the cost basis for the security was further reduced from $0.9 million to the
securities fair value of $0.5 million at year end, for a loss of $0.4 million
during the fourth quarter of 2008; and (3) for another mortgage-backed security
(corporate) an other-than-temporary impairment was recorded at December 31,
2008, the cost basis for the security was reduced from $2.8 million to the
securities fair value of $1.9 million, for a loss of $0.9 million during the
fourth quarter of 2008. Based on management’s estimates at December 31, 2008, a
substantial portion of the write-down in these securities with
other-than-temporary impairment is attributable to the decline in their fair
values due to deteriorating credit and liquidity conditions rather than the
estimate of credit losses to be experienced in the securities. However, given
the level of stresses in the capital markets, housing market and financial
industry and given the deteriorating economic conditions, there is an increased
chance for further credit deterioration to the extent that additional
other-than-temporary impairment may occur in the future.





For more
information regarding securities and other-than-temporary impairment see Item 8,
Note 3-Securities.





The
following table presents the maturities and weighted average yields of
securities as of December 31, 2008.





December
      31, 20081
      Year and Less
                                          
                                          
                                          1
      to 5 Years
                                          
                                          
                                          5
      to 10 Years
                                          
                                          
                                          Over
      10 Years
                                          
                                          
                                          TotalBalance
                                          
                                          
                                          Yield
      to
                                            Maturity
                                          
                                          
                                          Balance
                                          
                                          
                                          Yield
      to
                                            Maturity
                                          
                                          
                                          Balance
                                          
                                          
                                          Yield
      to
                                            Maturity
                                          
                                          
                                          Balance
                                          
                                          
                                          Yield
      to
                                            Maturity
                                          
                                          
                                          Balance
                                          
                                          
                                          Yield
      to
                                            Maturity(Dollars
      in thousands)U.S.
      government agencies
                                          
                                          $
                                          22,773
                                          
                                          
                                          
                                          4.47
                                          %
                                          
                                          $
                                          22,062
                                          
                                          
                                          
                                          4.78
                                          %
                                          
                                          $
                                          —
                                          
                                          
                                          
                                          —
                                          %
                                          
                                          $
                                          —
                                          
                                          
                                          
                                          —
                                          %
                                          
                                          $
                                          44,835
                                          
                                          
                                          
                                          4.62
                                          %Obligations
      of states and political subdivisions
                                          
                                          
                                          75
                                          
                                          
                                          
                                          4.86
                                          
                                          
                                          
                                          1,448
                                          
                                          
                                          
                                          5.24
                                          
                                          
                                          
                                          15,151
                                          
                                          
                                          
                                          5.06
                                          
                                          
                                          
                                          13,562
                                          
                                          
                                          
                                          5.50
                                          
                                          
                                          
                                          30,236
                                          
                                          
                                          
                                          5.26Other
      notes and bonds
                                          
                                          
                                          200
                                          
                                          
                                          
                                          3.25
                                          
                                          
                                          
                                          150
                                          
                                          
                                          
                                          2.84
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          8,662
                                          
                                          
                                          
                                          2.63
                                          
                                          
                                          
                                          9,012
                                          
                                          
                                          
                                          2.65Commercial
      paper
                                          
                                          
                                          4,800
                                          
                                          
                                          
                                          1.25
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          4,800
                                          
                                          
                                          
                                          1.25Mortgage-backed
      securities
                                          
                                          
                                          5
                                          
                                          
                                          
                                          6.11
                                          
                                          
                                          
                                          1,542
                                          
                                          
                                          
                                          4.09
                                          
                                          
                                          
                                          39,102
                                          
                                          
                                          
                                          5.05
                                          
                                          
                                          
                                          159,973
                                          
                                          
                                          
                                          5.69
                                          
                                          
                                          
                                          200,622
                                          
                                          
                                          
                                          5.55Total
      securities before market value adjustment
                                          
                                          $
                                          27,853
                                          
                                          
                                          
                                          3.91
                                          %
                                          
                                          $
                                          25,202
                                          
                                          
                                          
                                          4.75
                                          %
                                          
                                          $
                                          54,253
                                          
                                          
                                          
                                          5.05
                                          %
                                          
                                          $
                                          182,197
                                          
                                          
                                          
                                          5.53
                                          %
                                          
                                          $
                                          289,505
                                          
                                          
                                          
                                          5.22
                                          %Other
      Equities
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          955Available
      for sale market value adjustment
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (10,008
                                          )Total
      securities
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          280,452


Loans





General.CIB Marine offers a
broad range of loan products, including commercial loans, commercial real estate
loans, commercial and residential real estate construction loans, residential
real estate loans, and various types of consumer loans. CIB Marine’s
underwriting standards, as contained within its loan policy, are based on the
general assumption that the primary source of repayment should be the regular
operating cash flows and the secondary source should be the liquidation and
disposition of collateral. Under the current policies of CIB Marine, exceptions
to this policy are permitted with the approval of the Executive Loan Committee,
the Chief Credit Officer or certain credit administration officers to the level
of credit authority. Exceptions to the policy have, in the past, been approved
by the loan committees of individual banks.


37





Loans,
net of the allowance for loan losses, were $536.0 million at December 31, 2008,
a decrease of $38.6 million, or 6.7%, from $574.6 million at December 31, 2007,
and represented 59.1% and 57.1% of CIB Marine’s total assets at December 31,
2008 and 2007, respectively. The decrease was mainly due to the sale of CIB
Marine’s Florida banking subsidiary, Citrus Bank, during 2008 which sold loans
totaling $38.6 million. Excluding the loans sold due to the Citrus Bank sale,
the decrease was also due to a decrease in commercial real estate construction
loans of $50.6 million and $3.1 million in home equity loans. The decreases were
offset by increases in commercial loans of $18.0 million, commercial real estate
loans of $25.7 million and residential real estate loans of $8.4
million.





CIB
Marine has no plans to acquire any further home equity portfolios. In the course
of business, CIB Marine may acquire home equity or other consumer loans from
other lenders, but only on a loan-by-loan basis where CIB Marine reserves the
right to decline individual loans that do not meet its standards. In addition,
CIB Marine, as a community bank in the markets it serves, will make commercial
real estate loans either acting as a lead lender or participating with other
banks. However, it applies a standard credit process to all commercial lending
to effectively manage credit risk throughout its markets.





The
following table sets forth a summary of CIB Marine’s loan portfolio by category
for each of the periods indicated. The data for each category is presented in
terms of total dollars outstanding and as a percentage of the total loans
outstanding.




December 31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2005
                                                        
                                                        
                                                        2004Balance
                                                        
                                                        
                                                        %
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        %
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        %
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        %
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        %(Dollars
      in thousands)Commercial
                                                        
                                                        $
                                                        75,289
                                                        
                                                        
                                                        
                                                        13.6
                                                        %
                                                        
                                                        $
                                                        63,046
                                                        
                                                        
                                                        
                                                        10.6
                                                        %
                                                        
                                                        $
                                                        49,777
                                                        
                                                        
                                                        
                                                        9.5
                                                        %
                                                        
                                                        $
                                                        69,048
                                                        
                                                        
                                                        
                                                        13.4
                                                        %
                                                        
                                                        $
                                                        193,574
                                                        
                                                        
                                                        
                                                        25.9
                                                        %Commercial
      real estate
                                                        
                                                        
                                                        258,881
                                                        
                                                        
                                                        
                                                        46.8
                                                        
                                                        
                                                        
                                                        258,265
                                                        
                                                        
                                                        
                                                        43.5
                                                        
                                                        
                                                        
                                                        282,233
                                                        
                                                        
                                                        
                                                        54.0
                                                        
                                                        
                                                        
                                                        323,384
                                                        
                                                        
                                                        
                                                        62.6
                                                        
                                                        
                                                        
                                                        404,503
                                                        
                                                        
                                                        
                                                        54.1Commercial
      real estate construction
                                                        
                                                        
                                                        86,909
                                                        
                                                        
                                                        
                                                        15.7
                                                        
                                                        
                                                        
                                                        139,663
                                                        
                                                        
                                                        
                                                        23.5
                                                        
                                                        
                                                        
                                                        111,040
                                                        
                                                        
                                                        
                                                        21.3
                                                        
                                                        
                                                        
                                                        89,313
                                                        
                                                        
                                                        
                                                        17.3
                                                        
                                                        
                                                        
                                                        109,676
                                                        
                                                        
                                                        
                                                        14.7Residential
      real estate
                                                        
                                                        
                                                        26,110
                                                        
                                                        
                                                        
                                                        4.7
                                                        
                                                        
                                                        
                                                        20,938
                                                        
                                                        
                                                        
                                                        3.5
                                                        
                                                        
                                                        
                                                        19,125
                                                        
                                                        
                                                        
                                                        3.7
                                                        
                                                        
                                                        
                                                        19,925
                                                        
                                                        
                                                        
                                                        3.9
                                                        
                                                        
                                                        
                                                        31,027
                                                        
                                                        
                                                        
                                                        4.1Home
      equity loans
                                                        
                                                        
                                                        103,253
                                                        
                                                        
                                                        
                                                        18.7
                                                        
                                                        
                                                        
                                                        108,486
                                                        
                                                        
                                                        
                                                        18.3
                                                        
                                                        
                                                        
                                                        57,990
                                                        
                                                        
                                                        
                                                        11.1
                                                        
                                                        
                                                        
                                                        12,603
                                                        
                                                        
                                                        
                                                        2.4
                                                        
                                                        
                                                        
                                                        7,701
                                                        
                                                        
                                                        
                                                        1.0Consumer
      loans
                                                        
                                                        
                                                        2,990
                                                        
                                                        
                                                        
                                                        0.5
                                                        
                                                        
                                                        
                                                        3,241
                                                        
                                                        
                                                        
                                                        0.6
                                                        
                                                        
                                                        
                                                        2,363
                                                        
                                                        
                                                        
                                                        0.4
                                                        
                                                        
                                                        
                                                        2,179
                                                        
                                                        
                                                        
                                                        0.4
                                                        
                                                        
                                                        
                                                        2,124
                                                        
                                                        
                                                        
                                                        0.3Receivables
      from sale of stock
                                                        
                                                        
                                                        (51
                                                        )
                                                        
                                                        
                                                        (0.0
                                                        )
                                                        
                                                        
                                                        (121
                                                        )
                                                        
                                                        
                                                        (0.0
                                                        )
                                                        
                                                        
                                                        (151
                                                        )
                                                        
                                                        
                                                        (0.0
                                                        )
                                                        
                                                        
                                                        (202
                                                        )
                                                        
                                                        
                                                        (0.0
                                                        )
                                                        
                                                        
                                                        (946
                                                        )
                                                        
                                                        
                                                        (0.1
                                                        )Gross
      loans
                                                        
                                                        
                                                        553,381
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        593,518
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        522,377
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        516,250
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        747,659
                                                        
                                                        
                                                        
                                                        100.0
                                                        %Deferred
      loan fees
                                                        
                                                        
                                                        1,826
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,741
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        247
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (706
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (1,044
                                                        )Total
      loans
                                                        
                                                        
                                                        555,207
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        595,259
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        522,624
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        515,544
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        746,615Allowance
      for loan losses
                                                        
                                                        
                                                        (19,242
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (20,706
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (20,906
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (24,882
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (29,551
                                                        )Net
      loans
                                                        
                                                        $
                                                        535,965
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        574,553
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        501,718
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        490,662
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        717,064




Commercial Loans.At December
31, 2008, commercial loans totaled $75.3 million and represented 13.6% of gross
loans, an increase of $12.2 million, or 19.4%, from the prior year-end.
Commercial loans consist of loans to small and medium-sized businesses in a wide
variety of industries, including wholesalers, manufacturers and business service
companies. CIB Marine provides a broad range of commercial loans, including
lines of credit for working capital purposes, accounts receivable and inventory
financing, and term notes for the acquisition of equipment and for other
purposes. In general, commercial loans are collateralized by inventory, accounts
receivable, equipment, real estate and other commercial assets, and may be
supported by other credit enhancements, such as personal and corporate
guarantees on these borrowings. When warranted by the overall financial
condition of the borrower, loans may also be made on an unsecured basis.
Commercial loans generally have floating interest rates.





Commercial Real Estate Loans.At December 31, 2008, commercial real estate loans totaled $258.9 million
and represented 46.8% of gross loans. Commercial real estate loans are made to
finance commercial properties such as office buildings, multi-family residences,
motels, strip malls, warehouses and other commercial properties for which CIB
Marine primarily holds real property as collateral. CIB Marine may also require
other credit enhancements, such as personal and corporate guarantees, on these
borrowings. Commercial real estate loans are made at both fixed and variable
interest rates. CIB Marine’s underwriting standards generally require that a
commercial real estate loan not exceed 80% of the appraised value of the
property securing the loan.


38


Commercial Real Estate Construction
Loans.At December 31, 2008, commercial real estate construction loans
totaled $86.9 million, a decrease of $52.8 million, or 37.8%, from the prior
year end and represented 15.7% of gross loans. Commercial real estate
construction loans include loans for the construction of office buildings,
multi-family residences, motels, strip malls, warehouses, and other commercial
real estate projects. Prior to approving construction financing CIB Marine
generally requires that permanent financing for the project has been approved by
CIB Marine or a nonaffiliated third party, or there is a significant number of
pre-sold units or pre-leased units (depending on project type) to evidence the
economic viability of the project. These loans are typically secured by the real
estate on which the project is being constructed, and generally require that the
principal amount of the loan be no more than the lesser of 80% of the projects
appraised value upon completion or 100% of the estimated construction costs. CIB
Marine may also require other credit enhancements, such as personal and
corporate guarantees, on these borrowings. Generally, site inspections and
various affidavits and statements are required before a draw on the loan is
disbursed. Real estate construction loans are made at both fixed and variable
interest rates.





Residential Real Estate Loans.At December 31, 2008, residential mortgage loans, not held for sale
totaled $26.1 million and represented 4.7% of gross loans, compared to $20.9
million and 3.5%, respectively, at December 31, 2007.





Home Equity and Consumer Loans.CIB Marine also offers a variety of other types of consumer loans,
including installment, home equity and credit card loans. These consumer loans
totaled $106.2 million at December 31, 2008 and represented 19.2% of gross
loans, compared to $111.7 million and 18.9%, respectively, at December 31, 2007.
During the first quarter of 2007, CIB Marine purchased a $48.2 million closed
end pool of fixed rate second lien home equity loans from Residential Funding
Corporation, a division of General Motors Acceptance Corporation. The purchased
pool included 965 loans with a weighted average yield of 10.0%, term to maturity
of 17.5 years, loan-to-value ratio of 94%, borrower debt service-to-income
ratios of 40%, and FICO score of 709. During the second quarter of 2006, CIB
Marine purchased a $47.8 million pool of fixed rate second lien home equity
loans from Residential Funding Corporation. The purchased pool consisted of 989
loans with a weighted average yield of 9.5%, term to maturity of 17.3 years,
loan-to-value ratio of 91%, borrower debt service-to-income ratios of 39% and
FICO score of 713. At December 31, 2008 and 2007, the remaining balance of these
two purchased pools was $52.2 million and $73.0 million, respectively, with an
allocated allowance of $4.5 million and $5.3 million, respectively.





Receivables from Sale of Stock.CIB Marine’s subsidiary banks have made loans to borrowers to purchase
CIB Marine stock in private placement offerings from CIB Marine, or from other
shareholders. Loans originated by the Banks to purchase CIB Marine stock that
are not sufficiently collateralized by assets other than CIB Marine stock are
accounted for as a reduction of stockholders’ equity unless the loan has been
repaid prior to the issuance of the financial statements. Such loans are
recorded as receivables from sale of stock (a contra-equity account) and totaled
$0.05 million and $0.1 million at December 31, 2008 and December 31, 2007,
respectively.





Loan Maturities.The following
table sets forth the maturity distribution and interest rate sensitivity of
selected loan categories as of December 31, 2008. Maturities are based upon
contractual terms of the underlying loans and amounts exclude assets of
companies held for sale.





December
      31, 20081
      year
                  and less
                
                
                1
      to 5
                  Years
                
                
                Over
                  5 years
                
                
                Total(Dollars
      in thousands)Commercial
                
                $
                32,359
                
                
                $
                39,664
                
                
                $
                3,266
                
                
                $
                75,289Commercial
      real estate
                
                
                40,050
                
                
                
                199,091
                
                
                
                19,740
                
                
                
                258,881Commercial
      real estate construction
                
                
                62,599
                
                
                
                23,990
                
                
                
                320
                
                
                
                86,909Residential
      real estate
                
                
                18,736
                
                
                
                4,775
                
                
                
                2,599
                
                
                
                26,110Home
      equity loans
                
                
                53,633
                
                
                
                14,946
                
                
                
                34,674
                
                
                
                103,253Consumer
      loans
                
                
                1,734
                
                
                
                1,256
                
                
                
                —
                
                
                
                2,990Loans
      to purchase stock
                
                
                (51
                )
                
                
                —
                
                
                
                —
                
                
                
                (51
                )Total
      gross loans
                
                $
                209,060
                
                
                $
                283,722
                
                
                $
                60,599
                
                
                $
                553,381Sensitivity
      to changes in interest ratesFixed
      rates
                
                
                97,158
                
                
                
                200,068
                
                
                
                35,834
                
                
                
                333,060Variable
      rates
                
                
                111,902
                
                
                
                83,654
                
                
                
                24,765
                
                
                
                220,321Total
      gross loans
                
                $
                209,060
                
                
                $
                283,722
                
                
                $
                60,599
                
                
                $
                553,381




39





Credit
Concentrations





At
December 31, 2008 CIB Marine had fifteen secured borrowing relationships (loans
to one borrower or a related group of borrowers) that each individually exceeded
25% of stockholders’ equity compared to one at December 31, 2007. The increase
in the number of concentrations is largely due to a decrease in stockholders’
equity, which resulted in a lower threshold for determining credit
concentrations. At December 31, 2008, the total outstanding commitments on these
borrowing relationships, including lines of credit not fully drawn, ranged from
54% to 109% of equity and 1% to 3% of total loans, and the principal drawn and
outstanding on loans in these borrowing relationships ranged from $1.3 million
to $14.7 million. As of December 31, 2008 one loan for $9.3 million was 30 days
past due. At December 31, 2007 the one relationship, including lines of credit
not fully drawn upon, was 36.9% of equity and 3.7% of total loans and the
principal drawn and outstanding was $6.9 million.





At
December 31, 2008, CIB Marine also had credit relationships within eleven
industries or industry groups with loans outstanding in that industry or
industry group that exceeded 25% of its stockholders’ equity:





INDUSTRY
              
              Outstanding
                Balance
              
              
              %
      of
                Loans
              
              
              %
      of
                Stockholders’
                Equity(Dollars in millions)Commercial
      Real Estate Developers
              
              $
              169.7
              
              
              
              31
              %
              
              
              1,146
              %Residential
      Real Estate Developers
              
              
              86.9
              
              
              
              16
              
              
              
              587Health
      Care Facilities
              
              
              21.5
              
              
              
              4
              
              
              
              145Nursing/Convalescent
      Homes
              
              
              17.2
              
              
              
              3
              
              
              
              116Motel
      and Hotel
              
              
              16.8
              
              
              
              3
              
              
              
              114Manufacturing
              
              
              15.7
              
              
              
              3
              
              
              
              106Finance
      & Insurance
              
              
              11.7
              
              
              
              2
              
              
              
              79Retail
      Trade
              
              
              9.4
              
              
              
              2
              
              
              
              63Other
      Services
              
              
              8.3
              
              
              
              2
              
              
              
              56Transportation
      & Warehousing
              
              
              7.6
              
              
              
              1
              
              
              
              51Arts
      Entertainment & Recreation
              
              
              5.5
              
              
              
              1
              
              
              
              37





Credit
Procedures and Review





In order
to manage credit risk and the growth of the loan portfolio, CIB Marine
developed, implemented and periodically updates various policies and procedures,
including a comprehensive loan policy, and established a signature approval and
committee structure. The loan policy establishes underwriting standards, a loan
approval process, loan officer lending limits, loan pricing guidelines, a credit
rating system, delinquency monitoring procedures, and credit collection
procedures. The loan underwriting, approval and review processes are designed to
protect asset quality by assuring that credit requests are independently
reviewed on at least two different levels, and to promote uniform lending
standards among CIB Marine and its subsidiaries.





Loan Underwriting.The
underwriting standards contained within CIB Marine’s loan policy address various
aspects of the lending function, including an analysis of a borrower’s ability
to repay, collateral requirements, loan-to-value ratios, appraisals and personal
guarantees. CIB Marine’s underwriting standards are based on the assumption that
the principal source of repayment should be the regular operating cash flows of
the borrower and the secondary source should be the liquidation and disposition
of collateral. The extent to which collateral is required for a loan is
determined by the loan policy and management’s assessment of the
creditworthiness of the borrower. The amount and type of collateral required
varies, but may include real estate, marketable securities, deposits held in
financial institutions, accounts receivable, equipment and inventory. CIB Marine
may also require personal and corporate guarantees when deemed necessary.
Collateral values are monitored on a regular basis to ensure that they are
maintained at an adequate level. CIB Marine obtains and updates appraisals on
collateral when management believes they are necessary and as required by
applicable laws or regulations.


40


Loan Approval.The approval
process for a loan depends upon the size of the borrowing relationship.
Depending on the size, new loans and modifications or renewals of existing loans
are approved either under a signature authority matrix or by the Executive Loan
Committee, as created by the Board of Directors. In general, loans are approved
under a sponsor/approver system (signature matrix) under which the Executive
Loan Committee has granted pre-approved limits for individual lenders and credit
department staff. The line personnel sponsor the credit and the credit
department personnel approve the credit up to their assigned authority. The
Executive Loan Committee reviews and approves all loans, renewals or
modifications of existing loans to a borrower, or a related group of borrowers,
which are individually or in the aggregate, including existing credits to such a
borrower, or related group of borrowers, $2.5 million or greater. Since 2004 the
Board has affirmed its commitment to limiting credit relationships. In 2008, CIB
Marine further determined to target a lower exposure of $5.0 million per
relationship except under certain circumstances. In 2008, CIB Marine’s President
and CEO and the Chief Credit Officer of CIB Marine continued to hold veto
authority over any loan. CIB Marine believes that these procedures have
strengthened its underwriting process and provide additional controls to monitor
and evaluate credit concentrations.





Loan Review.CIB Marine’s loan
review function is responsible for assessing the credit quality of the loan
portfolio, establishing and monitoring adherence to underwriting standards and
promptly identifying loans with potential credit exposure. Loan reviews are
conducted on a regular basis at least annually or more frequently if warranted
and included a comprehensive assessment of collateral and debt service ability.
These analyses also include an evaluation of geographic, industry and other
credit risks. In general all loans over $0.25 million are reviewed on an annual
basis or more frequently when management believes additional reviews are
necessary. CIB Marine has engaged outside vendors to perform the loan
reviews.





Loans
with identified weaknesses are monitored on an on-going basis by management and
the applicable subsidiary’s Board of Directors. CIB Marine has in place a loan
grade certification program requiring a periodic assessment and certification by
individual lenders of portfolio risk ratings.





Allowance
for Loan Losses





CIB
Marine monitors and maintains an allowance for loan losses to absorb an estimate
of probable losses inherent in the loan portfolio. The allowance is increased by
the amount of provision for loan losses and recoveries of previously charged-off
loans, and is decreased by the amount of loans charged-off and negative
provisions. The allowance is also increased or decreased for a change in the
credit quality of segments of the portfolio. At December 31, 2008, the allowance
for loan losses was $19.2 million or 3.5% of total loans compared to $20.7
million, or 3.5% of total loans at December 31, 2007. Total charge-offs for 2008
were $25.6 million, while recoveries were $1.9 million compared to loan
charge-offs of $8.2 million and recoveries of $1.6 million in 2007. Although CIB
Marine believes that the allowance for loan losses is adequate to absorb
probable losses on existing loans that may become uncollectible given the
conditions of the housing market, and the economy in general, there can be no
assurance that the allowance will prove sufficient to cover actual loan losses
in the future. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the quality of loans and the
adequacy of the allowance for loan losses and may require CIB Marine to make
additional provisions to the allowance based upon their judgments about
information available to them at the time of their examinations. See Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Regulatory Matters in Part II of this Form 10-K.





The
increase in charge-offs during 2008 compared to 2007 was predominately in
commercial real estate construction and home equity loans. The increases in
commercial real estate construction was largely due to charge-offs related to
three credits, including one that was subsequently transferred to held for sale.
The purchased home equity pools accounted for $10.1 million of the $17.1 million
increase in total net charge-offs. Due to the sustained decline in housing
markets and adverse conditions for housing finance, CIB Marine changed its
policy in the second quarter of 2008 to charge-off 100% of the outstanding
principal of each loan in the home equity pools when it becomes 90 days past
due. This change accelerated charge-offs of the non-performing loans in the
pools.


41


The
following table summarizes changes in the allowance for loan losses for each of
the periods indicated.





Years
      Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Balance
      at beginning of year
                
                $
                20,706
                
                
                $
                20,906
                
                
                $
                24,882
                
                
                $
                29,551
                
                
                $
                54,382Loans
      charged-off:Commercial
                
                
                (1,359
                )
                
                
                (939
                )
                
                
                (64
                )
                
                
                (1,380
                )
                
                
                (31,515
                )Commercial
      real estate:Commercial
      real estate
                
                
                (994
                )
                
                
                (4,985
                )
                
                
                (471
                )
                
                
                (1,945
                )
                
                
                (10,126
                )Commercial
      real estate construction
                
                
                (9,722
                )
                
                
                (27
                )
                
                
                —
                
                
                
                (524
                )
                
                
                (3,665
                )Consumer:Residential
      real estate
                
                
                (807
                )
                
                
                (198
                )
                
                
                (78
                )
                
                
                (49
                )
                
                
                —Home
      equity
                
                
                (12,609
                )
                
                
                (2,015
                )
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
                
                
                (67
                )
                
                
                (28
                )
                
                
                (9
                )
                
                
                (13
                )
                
                
                (73
                )Total
      charged-off
                
                
                (25,558
                )
                
                
                (8,192
                )
                
                
                (622
                )
                
                
                (3,911
                )
                
                
                (45,379
                )Recoveries
      of loans charged-off:Commercial
                
                
                425
                
                
                
                663
                
                
                
                664
                
                
                
                6,017
                
                
                
                1,995Commercial
      real estate:Commercial
      real estate
                
                
                992
                
                
                
                307
                
                
                
                352
                
                
                
                1,769
                
                
                
                1,806Commercial
      real estate construction
                
                
                46
                
                
                
                531
                
                
                
                —
                
                
                
                89
                
                
                
                —Consumer:Residential
      real estate
                
                
                87
                
                
                
                7
                
                
                
                —
                
                
                
                23
                
                
                
                —Home
      equity
                
                
                327
                
                
                
                62
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
                
                
                11
                
                
                
                9
                
                
                
                14
                
                
                
                13
                
                
                
                40Total
      recoveries
                
                
                1,888
                
                
                
                1,579
                
                
                
                1,030
                
                
                
                7,911
                
                
                
                3,841Net
      loans recovered (charged-off)
                
                
                (23,670
                )
                
                
                (6,613
                )
                
                
                408
                
                
                
                4,000
                
                
                
                (41,538
                )Provision
      for (reversal of) loan losses (1)
                
                
                22,277
                
                
                
                6,413
                
                
                
                (4,384
                )
                
                
                (8,669
                )
                
                
                16,707Allowance
      for loan loss sold
                
                
                (581
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Transfer
      from accrual for unfunded standby letters of credit for funded standby
      letters of credit
                
                
                510
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at end of year
                
                $
                19,242
                
                
                $
                20,706
                
                
                $
                20,906
                
                
                $
                24,882
                
                
                $
                29,551RatiosAllowance
      for loan losses to total loans
                
                
                3.47
                %
                
                
                3.48
                %
                
                
                4.00
                %
                
                
                4.83
                %
                
                
                3.96
                %Allowance
      for loan losses to nonaccrual loans, restructured loans and loans 90 days
      or more past due and still accruing (2)
                
                
                119.43
                
                
                
                109.37
                
                
                
                94.37
                
                
                
                59.06
                
                
                
                47.08Net
      charge-offs (recoveries) to average loans:Commercial
                
                
                1.20
                
                
                
                0.45
                
                
                
                (1.19
                )
                
                
                (4.06
                )
                
                
                10.00Commercial
      real estate and commercial real estate construction
                
                
                2.41
                
                
                
                1.02
                
                
                
                0.03
                
                
                
                0.13
                
                
                
                1.72Residential
      real estate, home equity and consumer
                
                
                10.32
                
                
                
                1.92
                
                
                
                0.13
                
                
                
                0.11
                
                
                
                0.10Total
      loans
                
                
                3.90
                
                
                
                1.14
                
                
                
                (0.08
                )
                
                
                (0.67
                )
                
                
                4.06Ratio
      of recoveries to loans charged-off
                
                
                7.39
                
                
                
                19.27
                
                
                
                165.59
                
                
                
                202.28
                
                
                
                8.46Total
      loans
                
                $
                555,207
                
                
                $
                595,259
                
                
                $
                522,624
                
                
                $
                515,544
                
                
                $
                746,615Average
      total loans
                
                
                606,473
                
                
                
                582,559
                
                
                
                525,158
                
                
                
                594,714
                
                
                
                1,023,092





(1)
            The
      provision for loan losses as presented in the consolidated statement of
      operations is net of $0.2 million recovery of accrued unfunded commitments
      and standby letters of credit for the year ended December 31, 2008. See
      “Other Liabilities” later in this section for further
      information.


(2)
            Excludes
      loans held for sale from nonaccrual loans, nonperforming assets and 90
      days or more past due and still accruing
loans.





The
following table sets forth CIB Marine’s allocation of the allowance for loan
losses by type of loan as of the dates indicated. For
comparative purposes all periods presented exclude the assets of companies held
for disposal at the end of period and companies that were sold during the
period.




December 31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004Allowance
                                              Amount
                                            
                                            
                                            % of
                                              Loans to
                                              Total
                                              Loans
                                            
                                            
                                            Allowance
                                              Amount
                                            
                                            
                                            % of
                                              Loans to
                                              Total
                                              Loans
                                            
                                            
                                            Allowance
                                              Amount
                                            
                                            
                                            % of
                                              Loans to
                                              Total
                                              Loans
                                            
                                            
                                            Allowance
                                              Amount
                                            
                                            
                                            % of
                                              Loans to
                                              Total
                                              Loans
                                            
                                            
                                            Allowance
                                              Amount
                                            
                                            
                                            % of
                                              Loans to
                                              Total
                                              Loans(Dollars
      in thousands)Commercial
                                            
                                            $
                                            2,045
                                            
                                            
                                            
                                            13.6
                                            %
                                            
                                            $
                                            2,233
                                            
                                            
                                            
                                            10.6
                                            %
                                            
                                            $
                                            3,024
                                            
                                            
                                            
                                            9.5
                                            %
                                            
                                            $
                                            4,165
                                            
                                            
                                            
                                            13.4
                                            %
                                            
                                            $
                                            10,080
                                            
                                            
                                            
                                            25.9
                                            %Commercial
      real estate
                                            
                                            
                                            4,585
                                            
                                            
                                            
                                            46.8
                                            
                                            
                                            
                                            6,769
                                            
                                            
                                            
                                            43.5
                                            
                                            
                                            
                                            12,859
                                            
                                            
                                            
                                            54.0
                                            
                                            
                                            
                                            17,721
                                            
                                            
                                            
                                            62.6
                                            
                                            
                                            
                                            16,211
                                            
                                            
                                            
                                            54.1Commercial
      real estate construction
                                            
                                            
                                            6,506
                                            
                                            
                                            
                                            15.7
                                            
                                            
                                            
                                            5,134
                                            
                                            
                                            
                                            23.5
                                            
                                            
                                            
                                            2,383
                                            
                                            
                                            
                                            21.3
                                            
                                            
                                            
                                            2,193
                                            
                                            
                                            
                                            17.3
                                            
                                            
                                            
                                            2,258
                                            
                                            
                                            
                                            14.6Residential
      real estate
                                            
                                            
                                            593
                                            
                                            
                                            
                                            4.7
                                            
                                            
                                            
                                            635
                                            
                                            
                                            
                                            3.5
                                            
                                            
                                            
                                            625
                                            
                                            
                                            
                                            3.7
                                            
                                            
                                            
                                            433
                                            
                                            
                                            
                                            3.9
                                            
                                            
                                            
                                            871
                                            
                                            
                                            
                                            4.1Home
      equity loans
                                            
                                            
                                            5,448
                                            
                                            
                                            
                                            18.7
                                            
                                            
                                            
                                            5,862
                                            
                                            
                                            
                                            18.3
                                            
                                            
                                            
                                            1,928
                                            
                                            
                                            
                                            11.1
                                            
                                            
                                            
                                            292
                                            
                                            
                                            
                                            2.4
                                            
                                            
                                            
                                            83
                                            
                                            
                                            
                                            1.0Consumer
      loans
                                            
                                            
                                            65
                                            
                                            
                                            
                                            0.5
                                            
                                            
                                            
                                            73
                                            
                                            
                                            
                                            0.6
                                            
                                            
                                            
                                            87
                                            
                                            
                                            
                                            0.4
                                            
                                            
                                            
                                            78
                                            
                                            
                                            
                                            0.4
                                            
                                            
                                            
                                            48
                                            
                                            
                                            
                                            0.3Total
      allowance
                                            
                                            $
                                            19,242
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            20,706
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            20,906
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            24,882
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            29,551
                                            
                                            
                                            
                                            100.0
                                            %




42


Nonperforming
Assets and Loans 90 Days or More Past Due and Still Accruing





The level
of nonperforming assets is an important element in assessing CIB Marine’s asset
quality and the associated risk in its loan portfolio. Nonperforming assets
include nonaccrual loans, restructured loans and foreclosed property. Loans are
placed on nonaccrual status when CIB Marine determines that it is probable that
principal and interest amounts will not be collected according to the terms of
the loan agreement. A loan is classified as restructured when a concession is
granted to a borrower for economic or legal reasons related to the borrower’s
financial difficulties that would not otherwise be considered. CIB Marine may
restructure the loan by modifying the terms to reduce or defer cash payments
required by the borrower, reduce the interest rate below current market rates
for new debt with similar risk, reduce the face amount of the debt, or reduce
the accrued interest. Foreclosed property represents properties acquired by CIB
Marine as a result of loan defaults by customers.





The
following table summarizes the composition of CIB Marine’s nonperforming assets,
loans 90 days or more past due and still accruing, and related asset quality
ratios as of the dates indicated.





December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Nonperforming
      assetsNonaccrual
      loans:Commercial
                
                $
                1,792
                
                
                $
                1,855
                
                
                $
                3,881
                
                
                $
                6,426
                
                
                $
                25,431Commercial
      real estate
                
                
                890
                
                
                
                2,814
                
                
                
                16,110
                
                
                
                21,148
                
                
                
                23,020Commercial
      real estate construction
                
                
                11,413
                
                
                
                11,378
                
                
                
                142
                
                
                
                1,149
                
                
                
                5,399Residential
      real estate
                
                
                969
                
                
                
                393
                
                
                
                536
                
                
                
                379
                
                
                
                477Home
      equity loans
                
                
                —
                
                
                
                2,416
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
      loans
                
                
                8
                
                
                
                10
                
                
                
                —
                
                
                
                3
                
                
                
                —15,072
                
                
                
                18,866
                
                
                
                20,669
                
                
                
                29,105
                
                
                
                54,327Loans
      held for sale
                
                
                2,025
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      nonaccrual loans
                
                
                17,097
                
                
                
                18,866
                
                
                
                20,669
                
                
                
                29,105
                
                
                
                54,327Foreclosed
      property
                
                
                980
                
                
                
                1,344
                
                
                
                102
                
                
                
                2,931
                
                
                
                2,938Restructured
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,486
                
                
                
                1,536Total
      nonperforming assets
                
                $
                18,077
                
                
                $
                20,210
                
                
                $
                20,771
                
                
                $
                33,522
                
                
                $
                58,801Loans
      90 days or more past due and still accruingCommercial
                
                $
                —
                
                
                $
                —
                
                
                $
                100
                
                
                $
                589
                
                
                $
                1,009Commercial
      real estate
                
                
                1,040
                
                
                
                19
                
                
                
                1,385
                
                
                
                2,962
                
                
                
                5,902Commercial
      real estate construction
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7,991
                
                
                
                —Residential
      real estate
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Home
      equity loans
                
                
                —
                
                
                
                47
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —1,040
                
                
                
                66
                
                
                
                1,485
                
                
                
                11,542
                
                
                
                6,911Loans
      held for sale
                
                
                1,680
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      loans 90 days or more past due and still accruing
                
                $
                2,720
                
                
                $
                66
                
                
                $
                1,485
                
                
                $
                11,542
                
                
                $
                6,911Allowance
      for loan losses
                
                $
                19,242
                
                
                $
                20,706
                
                
                $
                20,906
                
                
                $
                24,882
                
                
                $
                29,551Loans
      at end of period
                
                $
                555,207
                
                
                $
                595,259
                
                
                $
                522,624
                
                
                $
                515,544
                
                
                $
                746,615RatiosNonaccrual
      loans to total loans (2)
                
                
                2.71
                %
                
                
                3.17
                %
                
                
                3.95
                %
                
                
                5.65
                %
                
                
                7.28
                %Foreclosed
      properties to total assets
                
                
                0.11
                
                
                
                0.13
                
                
                
                0.01
                
                
                
                0.26
                
                
                
                0.21Nonperforming
      assets to total assets (2)
                
                
                1.77
                
                
                
                2.01
                
                
                
                2.09
                
                
                
                2.96
                
                
                
                4.29Nonaccrual
      loans, restructured loans and loans 90 days or more past due and still
      accruing to total loans (2)
                
                
                2.90
                
                
                
                3.18
                
                
                
                4.24
                
                
                
                8.17
                
                
                
                8.41Nonperforming
      assets and 90 days or more past due and still accruing loans to total
      assets (2)
                
                
                1.89
                
                
                
                2.02
                
                
                
                2.24
                
                
                
                3.98
                
                
                
                4.79





(1)
            For
      comparative purposes, all periods presented exclude the assets of all
      companies held for disposal at December 31, 2008 and companies that were
      sold during the period.


(2)
            Excludes
      loans held for sale from nonaccrual loans, nonperforming assets and 90
      days or more past due and still accruing
loans.





Excluding
loans held for sale, nonaccrual loans decreased $3.8 million from $18.9 million
at December 31, 2007 to $15.1 million at December 31, 2008 and the ratio of
nonaccrual loans to total loans decreased from 3.17% at December 31, 2007 to
2.71% at December 31, 2008. Foregone interest on nonaccrual loans reduced
interest income by $1.0 million in 2008, $1.5 million in 2007 and $2.0 million
in 2006.


43


At
December 31, 2008, CIB Marine had four borrowing relationships (loans to one
borrower or a group of borrowers) each with nonaccrual loan balances in excess
of $1.0 million that were not classified as held for sale. These four
relationships accounted for $11.1 million, or 73.5%, of nonaccrual loans
excluding those held for sale. At the prior year’s end, the company had seven
relationships with non-accrual balances in excess of $1.0 million and they
accounted for $14.2 million in balances, or 75.1% of nonaccrual loans at that
date. As of December 31, 2008 the four loans consisted of the
following:





·
            Commercial
      real estate land development loan in the amount of $3.3 million to a
      borrower secured by a first mortgage. As of December 31, 2008, $0.7
      million in specific reserves were allocated to this borrowing relationship
      and a charge-off of $1.7 million was taken against a specific
      reserve.


·
            Commercial
      real estate loan in the amount of $3.4 million to a borrower secured by a
      first mortgage on a residential and commercial property. As of December
      31, 2008, $1.3 million of specific reserves were allocated to this
      relationship and no charge-offs have been taken. Additionally, at December
      31, 2008, CIB Marine had an investment in the common and preferred capital
      of a limited liability corporation engaged in the development of
      owner-occupied housing in qualified low-income communities related to this
      commercial real estate borrowing relationship. During 2007, CIB Marine
      deemed its investment was fully impaired and at December 31, 2008 CIB
      Marine’s carrying value of this investment was
  zero.


·
            Commercial
      real estate construction loan in the amount of $1.9 million to a borrower
      secured by partially developed land. As of December 31, 2008, specific
      reserves of $1.0 million were allocated to this borrowing
      relationship.


·
            Commercial
      real estate construction loan in the amount of $2.5 million secured by a
      first mortgage on a residential condominium development. At December 31,
      2008, there were no specific reserves allocated to this
    loan.





While CIB
Marine believes that the value of the collateral securing the above nonaccrual
loans approximates the net book value of the loans, CIB Marine cannot provide
assurances that the value will be maintained or that there will be no further
losses with respect to these loans.




During
2008, CIB Marine began charging off 100% of the outstanding principal of each
loan in the home equity pools when it becomes 90 days past due. As a result of
this policy change, none of the loans in the home equity pools were classified
as nonaccrual at December 31, 2008.




On
December 31, 2007, $2.4 million, or 3.3% of the combined outstanding balance of
the home equity pools purchased in June 2006 and February 2007 were classified
as nonaccrual. Beginning in the third quarter of 2007, the quality of the two
loan pool purchases deteriorated in part due to the deterioration in the housing
markets and the sudden and significant tightening of credit standards and
reduction in credit availability in the mortgage finance markets. At December
31, 2008 the balance of the two pools was $52.2 million and loss reserves
allocated to these two pools totaled $4.5 million; and at December 31, 2007, the
balance of these two home equity pools was $73.0 million and loss reserves
allocated to these two pools totaled $5.3 million.





Foreclosed
properties were $1.0 million and consisted of six properties at December 31,
2008 compared to $1.3 million and six properties at December 31, 2007. During
2008, CIB Marine acquired four properties with a combined value of $0.4 million
and sold four properties at a nominal net gain. All foreclosed properties were
held for sale. One commercial foreclosed property accounted for $0.4 million, or
46.0%, of the balance at December 31, 2008. The property is located in Illinois
and was acquired in 2007 through a deed in lieu of foreclosure.





Loans 90
days or more past due and still accruing interest are loans which are delinquent
with respect to the contractual payment terms of principal and/or interest but
which management believes all contractual principal and interest amounts due
will be collected. Excluding loans held for sale at December 31, 2008, CIB
Marine had one loan totaling $1.0 million that was 90 days or more past due and
still accruing. At December 31, 2007 the like balance was $0.01
million.





Regulatory
Matters





In May
2004, CIB Marine entered into a Written Agreement (“Agreement”) with the Reserve
Bank. The Agreement imposed certain restrictions and reporting requirements on
CIB Marine and required various actions to be taken. The items included, among
others:





·
            Maintenance
      of minimum capital levels;


44


·
            Restrictions
      on dividend payments and redemption of shares of CIB Marine without
      regulatory approval;


·
            Adoption
      of a comprehensive plan to improve
earnings;


·
            Development
      of a plan to correct and prevent violations of banking laws and
      regulations related to affiliate
transactions;


·
            Restrictions
      on distribution of interest or dividends on its trust preferred securities
      without regulatory approval;


·
            Restrictions
      on borrowings and debt, including debt to stockholders, without regulatory
      approval.





The
Agreement will remain in effect until it is stayed, modified, terminated, or
suspended by the Reserve Bank.





In March
2009 Marine Bank stipulated to a C&D which was signed by the FDIC and the
WDFI in early April 2009, and is expected to become effective in the near
future. The C&D primarily resulted from the high level of nonperforming
assets of Marine Bank and the resulting impact on its financial condition. The
C&D requires Marine Bank to take certain corrective actions focusing on
reducing exposure to non-performing loans, charging off all loans classified as
loss, imposes restrictions on lending to credits with existing non-performing
loans, and accruing interest on certain delinquent loans in addition to charging
off previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no material
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.





Companies
Held For Disposal





At
December 31, 2008, assets and liabilities of companies held for disposal consist
entirely of the remaining assets and liabilities of CIB Marine’s wholly owned
subsidiary, CIB Construction, including CIB Construction’s subsidiary Canron.
The gross consolidated assets and liabilities of CIB Construction are reported
separately on the consolidated balance sheets at their estimated liquidation
values less costs to sell. Banking regulations limit the holding period for
assets not considered to be permissible banking activities and which have been
acquired in satisfaction of debt previously contracted to five years, unless
extended. CIB Construction is subject to these restrictions and CIB Marine has
received an extension from the banking regulators to hold Canron until June 30,
2009.





CIB
Construction acquired 84% of the outstanding stock of Canron through loan
collection activities in 2002. In the third quarter of 2003, the Board of
Directors of Canron authorized management to cease operating Canron and commence
a wind down of its affairs, including a voluntary liquidation of its assets. In
August 2005, Canron authorized and began liquidation distributions to its
shareholders, and in December 2006, Canron filed Articles of Dissolution. At
both December 31, 2008 and 2007, CIB Construction’s net carrying value of its
investment in Canron was zero, and accordingly, CIB Construction included in net
income any liquidation distributions it received from Canron. During 2008,
Canron continued to collect both on and off balance sheet receivables and settle
and resolve payables and claims through the voluntary liquidation process. For
the years ended December 31, 2008, 2007 and 2006 CIB Construction had net income
of $0.5 million, $0.1 million and $0.3 million, respectively. These amounts are
included in net income of discontinued operations by CIB Marine.





At
December 31, 2007, assets of companies held for disposal consisted of $1.2
million for CIB Construction and $0.7 million of remaining assets, mainly
mortgage loans, of CIB Marine’s former mortgage banking subsidiary, MSI. CIB
Marine sold substantially all the assets and operations of MSI prior to 2007. In
2008 CIB Marine determined the remaining assets no longer met the criteria of
held for sale and accordingly, transferred the remaining loans to its loan
portfolio. During 2007 and 2006, net income of discontinued operations included
$0.2 million and $0.3 million, respectively, related to MSI.


45





At
December 31, 2007, the major components of liabilities of companies held for
sale at December 31, 2007 were $2.4 million for CIB Construction, and a $1.8
million tax exposure liability. The tax exposure liability related to CIB
Marine’s investment in a REIT owned by its former Illinois banking subsidiary
which was sold in 2004. In 2007, CIB Marine determined that the statute of
limitations had expired with respect to a portion of this exposure and
accordingly that it did not have a tax exposure liability for that portion at
December 31, 2007. During the third quarter of 2008, CIB Marine learned that the
statute of limitations had in fact not expired and increased its REIT tax
exposure by $1.7 million, including interest and penalties through that date. In
December 2008, the Illinois Department of Revenue accepted a $0.5 million
payment in full settlement of the issue and CIB Marine reversed $3.0 million of
the tax liabilities through a credit to discontinued operations tax expense.
Discontinued operations tax expense for 2007 included a $1.1 million credit
related to the partial reversal of the REIT tax liability, net of interest and
penalty expense on the remaining liability. See the income tax discussion for
further information on the REIT tax item.





Other
Assets





The
following table summarizes the composition of CIB Marine’s other
assets:





December 31,2008
                
                
                2007(Dollars
      in thousands)Federal
      Home Loan Bank and Federal Reserve Bank stock, at cost
                
                $
                11,555
                
                
                $
                12,298Prepaid
      expenses
                
                
                950
                
                
                
                1,020Accounts
      receivable
                
                
                124
                
                
                
                179Trust
      preferred securities underwriting fee, net of amortization
                
                
                1,225
                
                
                
                1,280Investment
      in trust common securities
                
                
                —
                
                
                
                3,022Other
      investments
                
                
                1,167
                
                
                
                1,381Income
      tax receivable (1)
                
                
                890
                
                
                
                2,737Other
                
                
                9
                
                
                
                160$
                15,920
                
                
                $
                22,077





1)
            December
      31, 2008 and 2007, respectively, include $0.7 million and $1.2 million of
      net tax receivable from companies held for disposal per tax sharing
      agreements.





CIB
Marine owns 100% of the capital stock of four statutory business trusts
(“Trusts”) which it had formed for the purpose of issuing trust preferred
securities and investing the proceeds thereof in junior subordinated debentures
of CIB Marine. In accordance with GAAP, CIB Marine does not consolidate these
Trusts and accounts for its investment using the equity method. At December 31,
2007 CIB Marine’s carrying value of its investment in these Trusts was $3.0
million and comprised CIB Marine’s $1.9 million initial investment plus $1.1
million in undistributed net income of the Trusts resulting from accrued
interest on the junior subordinated debentures in excess of interest on the
trust preferred securities. During the fourth quarter of 2008, CIB Marine deemed
its entire investment in these Trusts impaired and accordingly, recognized a
$3.2 million impairment loss. This loss is included in write down and losses on
assets. See Item 8, Note 11-Long-Term Borrowings for further information
regarding the Trusts and the junior subordinated debentures.





The major
components of other investments are as follows:





·
            Investments
      in limited partnership interests in various affordable housing
      partnerships, which had a carrying value of $1.1 million and $1.2 million
      at December 31, 2008 and 2007, respectively. Equity loss on these limited
      partnerships, included in noninterest expense, was $0.2 million in both
      2008 and 2007 and $0.4 million in 2006. CIB Marine has engaged in these
      transactions to provide additional qualified investments under the
      Community Reinvestment Act and to receive related income tax credits. The
      partnerships provide affordable housing to low-income residents within CIB
      Marine’s markets and other
locations.


·
            Interest
      in a company operating as a small business investment company under the
      Small Business Investment Act of 1958, as amended. CIB Marine committed to
      a $0.5 million investment in this company and as of December 31, 2008 has
      invested $0.4 million. Beginning in 2006, CIB Marine began receiving
      capital distributions on its investment in this company. At both December
      31, 2008 and 2007, CIB Marine’s carrying value of this investment was $0.1
      million.


46





As
members of the FHLB of Chicago, CIB Marine’s subsidiary banks are required to
maintain minimum amounts of Federal Home Loan Bank of Chicago stock as required
by that institution.





In 2005,
the FHLB Chicago Board disclosed its decision to discontinue redemption of
excess, or voluntary, capital stock. Voluntary stock is stock held by members
beyond the amount required as a condition of membership or to support advance
borrowings. In April 2006, the FHLB Chicago announced plans to facilitate
limited stock redemption requests from its members by issuing bonds. During
2006, the FHLB Chicago issued a limited amount of bonds to facilitate voluntary
capital stock redemptions and CIB Marine sold back $14.3 million or 55.6% of its
holdings. This represented approximately 58.7% of the stock CIB Marine requested
to be redeemed at that time. In October 2007, the FHLB Chicago entered into a
consensual Cease and Desist Order (“C&D”) with its regulator, the Federal
Housing Finance Board (“Finance Board”). The C&D states that the Finance
Board has determined that requiring the FHLB Chicago to take the actions
specified in the C&D will improve the condition and practices of the FHLB
Chicago, stabilize its capital, and provide the FHLB Chicago an opportunity to
address the principal supervisory concerns identified by the Finance Board.
Under the terms of the C&D, capital stock repurchases and redemptions,
including redemptions upon membership withdrawal or other termination, are
prohibited unless the Bank has received approval of the Director of the Office
of Supervision of the Finance Board ("OS Director"). The C&D provides that
the OS Director may approve a written request by the FHLB Chicago for proposed
redemptions or repurchases if the OS Director determines that allowing the
redemption or repurchase would be consistent with maintaining the capital
adequacy of the FHLB Chicago and its continued safe and sound operations. The
C&D also provides that dividend declarations are subject to the prior
written approval of the OS Director and that the FHLB Chicago must submit a
Capital Structure Plan to the Finance Board consistent with the requirements of
the Gramm-Leach-Bliley Act and Finance Board regulations. The FHLB Chicago did
not declare any dividends for the year 2008. As of the year ended in 2008 and
2007, CIB Marine had $11.6 million and $11.5 million in FHLB Chicago stock, of
which $3.4 million and $3.9 million, respectively, was required stock holdings
to maintain the level of borrowings outstanding with the FHLB of
Chicago.





Deposits





Average
total deposits decreased $32.8 million, or 4.3%, from $764.1 million in 2007 to
$731.3 million in 2008. The ratio of total average deposits to average earning
assets was 74.0% in 2008, 80.8% in 2007 and 84.5% in 2006. The decrease was
primarily due to the sale of CIB Marine’s Florida banking subsidiary, Citrus
Bank. Excluding Citrus Bank, average deposits increased from $658.4 million in
2007 to $670.6 million in 2008.





The
following tables set forth the average amount of, and average rate paid on,
deposit categories for the periods indicated.




Year Ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Average
                                        Balance
                                      
                                      
                                      % of Total
                                        Deposits
                                      
                                      
                                      Average
                                        Rate
                                      
                                      
                                      Average
                                        Balance
                                      
                                      
                                      % of Total
                                        Deposits
                                      
                                      
                                      Average
                                        Rate
                                      
                                      
                                      Average
                                        Balance
                                      
                                      
                                      % of Total
                                        Deposits
                                      
                                      
                                      Average
                                        Rate(Dollars
      in thousands)Interest-bearing
      demand
                                      
                                      $
                                      36,981
                                      
                                      
                                      
                                      5.06
                                      %
                                      
                                      
                                      0.72
                                      %
                                      
                                      $
                                      36,132
                                      
                                      
                                      
                                      4.73
                                      %
                                      
                                      
                                      1.00
                                      %
                                      
                                      $
                                      43,001
                                      
                                      
                                      
                                      5.01
                                      %
                                      
                                      
                                      0.99
                                      %Money
      market
                                      
                                      
                                      143,149
                                      
                                      
                                      
                                      19.57
                                      
                                      
                                      
                                      2.29
                                      
                                      
                                      
                                      170,966
                                      
                                      
                                      
                                      22.37
                                      
                                      
                                      
                                      4.10
                                      
                                      
                                      
                                      194,290
                                      
                                      
                                      
                                      22.65
                                      
                                      
                                      
                                      3.97Other
      savings
                                      
                                      
                                      12,112
                                      
                                      
                                      
                                      1.66
                                      
                                      
                                      
                                      0.82
                                      
                                      
                                      
                                      15,224
                                      
                                      
                                      
                                      1.99
                                      
                                      
                                      
                                      0.99
                                      
                                      
                                      
                                      21,839
                                      
                                      
                                      
                                      2.54
                                      
                                      
                                      
                                      1.00Time
      deposits
                                      
                                      
                                      473,707
                                      
                                      
                                      
                                      64.77
                                      
                                      
                                      
                                      4.03
                                      
                                      
                                      
                                      466,151
                                      
                                      
                                      
                                      61.01
                                      
                                      
                                      
                                      4.75
                                      
                                      
                                      
                                      507,013
                                      
                                      
                                      
                                      59.11
                                      
                                      
                                      
                                      4.12Total
      interest-bearing deposits
                                      
                                      
                                      665,949
                                      
                                      
                                      
                                      91.06
                                      
                                      
                                      
                                      3.42
                                      
                                      
                                      
                                      688,473
                                      
                                      
                                      
                                      90.10
                                      
                                      
                                      
                                      4.31
                                      
                                      
                                      
                                      766,143
                                      
                                      
                                      
                                      89.31
                                      
                                      
                                      
                                      3.82Noninterest-bearing
                                      
                                      
                                      65,374
                                      
                                      
                                      
                                      8.94
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      75,670
                                      
                                      
                                      
                                      9.90
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      91,668
                                      
                                      
                                      
                                      10.69
                                      
                                      
                                      
                                      —Total
      deposits
                                      
                                      $
                                      731,323
                                      
                                      
                                      
                                      100.00
                                      %
                                      
                                      
                                      3.11
                                      %
                                      
                                      $
                                      764,143
                                      
                                      
                                      
                                      100.00
                                      %
                                      
                                      
                                      3.89
                                      %
                                      
                                      $
                                      857,811
                                      
                                      
                                      
                                      100.00
                                      %
                                      
                                      
                                      3.41
                                      %




Average
interest-bearing deposits as a percentage of average total deposits were 91.1%
in 2008, 90.1% in 2007 and 89.3% in 2006. Time deposits represent the largest
component of interest-bearing deposit liabilities. The percentage of average
time deposits to average total interest-bearing deposits was 71.1% in 2008,
67.7% in 2007, and 66.2% in 2006. These percentages reflect CIB Marine’s
significant reliance on time deposits as a source of funding. Average money
market accounts decreased $27.8 million or 16.3%, average noninterest-bearing
demand deposits decreased $10.3 million, or 13.6%, and other savings accounts
decreased $3.1 million or 20.4%, while average interest-bearing demand deposits
increased $0.8 million or 2.3% and average time deposits increased $7.6 million,
or 1.6% in 2008 compared to 2007.


47


Total
time deposits of $100,000 or more were $151.1 million, or approximately 31% of
time deposits at December 31, 2008 and $169.0 million or 36% of total time
deposits at December 31, 2007. Brokered time deposits were $36.0 million or 7.4%
of total time deposits at December 31, 2008 and $22.2 million or 4.8% of total
time deposits at December 31, 2007. CIB Marine issues brokered time deposits
periodically to meet short-term funding needs and/or when their related costs
are at or below those being offered on other deposits.





The
following table provides information on the maturity distribution of time
deposits of $100,000 or more.





December 31, 2008(Dollars in thousand)Maturity3
      months or less
                    
                    $
                    48,188Over
      3 through 6 months
                    
                    
                    15,762Over
      6 through 12 months
                    
                    
                    71,655Over
      12 months
                    
                    
                    15,484$
                    151,089





Borrowings





CIB
Marine also uses various types of borrowings to meet liquidity needs and/or fund
asset growth, when the pricing on these borrowings is more favorable than
deposits.





In 2004,
CIB Marine entered into the Agreement with the Reserve Bank. Among other items,
the Agreement requires CIB Marine to obtain Reserve Bank approval before
incurring additional borrowings or debt.





The
following tables set forth information regarding selected categories of
borrowings as of the dates indicated.




Short-Term
      Borrowings
                  
                  Balance
                  
                  
                  At Year end
                    Weighted-
                    Average
                    Rate
                  
                  
                  % of Total
                    Borrowings
                  
                  
                  Daily
                    Average
                    Balances
                  
                  
                  For the Year
                    Weighted-
                    Average
                    Rate
                  
                  
                  Highest
                    Balances at
                    Month End(Dollars
      in thousands)2008Federal
      funds purchased
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  
                  —
                  %
                  
                  $
                  12,744
                  
                  
                  
                  0.20
                  %
                  
                  $
                  4,157Securities
      sold under repurchase agreements
                  
                  
                  19,908
                  
                  
                  
                  0.68
                  
                  
                  
                  13.13
                  
                  
                  
                  16,382
                  
                  
                  
                  1.62
                  
                  
                  
                  27,762Federal
      Home Loan Bank
                  
                  
                  40,000
                  
                  
                  
                  0.55
                  
                  
                  
                  26.37
                  
                  
                  
                  78,312
                  
                  
                  
                  2.29
                  
                  
                  
                  100,150Treasury,
      tax and loan note
                  
                  
                  2,898
                  
                  
                  
                  0.00
                  
                  
                  
                  1.91
                  
                  
                  
                  616
                  
                  
                  
                  1.68
                  
                  
                  
                  2,898Total
      short-term borrowings
                  
                  $
                  62,806
                  
                  
                  
                  0.57
                  %
                  
                  
                  41.41
                  
                  
                  $
                  108,054
                  
                  
                  
                  1.94
                  %2007Federal
      funds purchased
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  
                  —
                  %
                  
                  $
                  2,400
                  
                  
                  
                  5.26
                  %
                  
                  $
                  12,811Securities
      sold under repurchase agreements
                  
                  
                  16,276
                  
                  
                  
                  3.17
                  
                  
                  
                  10.21
                  
                  
                  
                  21,012
                  
                  
                  
                  4.11
                  
                  
                  
                  27,016Federal
      Home Loan Bank
                  
                  
                  67,100
                  
                  
                  
                  3.90
                  
                  
                  
                  42.08
                  
                  
                  
                  15,044
                  
                  
                  
                  4.35
                  
                  
                  
                  67,100Treasury,
      tax and loan note
                  
                  
                  2,240
                  
                  
                  
                  3.59
                  
                  
                  
                  1.40
                  
                  
                  
                  872
                  
                  
                  
                  5.68
                  
                  
                  
                  2,848Total
      short-term borrowings
                  
                  $
                  85,616
                  
                  
                  
                  3.76
                  %
                  
                  
                  53.69
                  %
                  
                  $
                  39,328
                  
                  
                  
                  4.32
                  %2006Federal
      funds purchased
                  
                  $
                  2,057
                  
                  
                  
                  5.31
                  %
                  
                  
                  2.25
                  %
                  
                  $
                  1,683
                  
                  
                  
                  5.18
                  %
                  
                  $
                  3,800Securities
      sold under repurchase agreements
                  
                  
                  21,568
                  
                  
                  
                  4.74
                  
                  
                  
                  23.57
                  
                  
                  
                  17,426
                  
                  
                  
                  4.12
                  
                  
                  
                  21,567Federal
      Home Loan Bank
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,088
                  
                  
                  
                  5.57
                  
                  
                  
                  12,000Treasury,
      tax and loan note
                  
                  
                  4,028
                  
                  
                  
                  5.04
                  
                  
                  
                  4.40
                  
                  
                  
                  718
                  
                  
                  
                  4.47
                  
                  
                  
                  4,028Total
      short-term borrowings
                  
                  $
                  27,653
                  
                  
                  
                  4.83
                  %
                  
                  
                  30.22
                  %
                  
                  $
                  22,915
                  
                  
                  
                  4.40
                  %




Long-Term
Borrowings


As
      of December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Balance
                                    
                                    
                                    Average
                                      Rate
                                    
                                    
                                    %
      of Total
                                      Borrowings
                                    
                                    
                                    Balance
                                    
                                    
                                    Average
                                      Rate
                                    
                                    
                                    %
      of Total
                                      Borrowings
                                    
                                    
                                    Balance
                                    
                                    
                                    Average
                                      Rate
                                    
                                    
                                    %
      of Total
                                      Borrowings(Dollars
      in thousands)Federal
      Home Loan Bank
                                    
                                    $
                                    27,000
                                    
                                    
                                    
                                    4.13
                                    %
                                    
                                    
                                    17.80
                                    %
                                    
                                    $
                                    12,000
                                    
                                    
                                    
                                    4.52
                                    %
                                    
                                    
                                    7.52
                                    %
                                    
                                    $
                                    2,000
                                    
                                    
                                    
                                    5.09
                                    %
                                    
                                    
                                    2.19
                                    %Junior
      subordinated debentures
                                    
                                    
                                    61,857
                                    
                                    
                                    
                                    9,40
                                    
                                    
                                    
                                    40.79
                                    
                                    
                                    
                                    61,857
                                    
                                    
                                    
                                    9,89
                                    
                                    
                                    
                                    38.79
                                    
                                    
                                    
                                    61,857
                                    
                                    
                                    
                                    9.94
                                    
                                    
                                    
                                    67.59Total
      long-term borrowings
                                    
                                    $
                                    88,857
                                    
                                    
                                    
                                    7.80
                                    %
                                    
                                    
                                    58.59
                                    %
                                    
                                    $
                                    73,857
                                    
                                    
                                    
                                    9.02
                                    %
                                    
                                    
                                    46.31
                                    %
                                    
                                    $
                                    63,857
                                    
                                    
                                    
                                    9.78
                                    %
                                    
                                    
                                    69.78
                                    %




48





CIB
Marine utilizes various types of borrowings to meet liquidity needs, fund asset
growth and/or when the pricing of these borrowings is more favorable than
deposits. Total borrowed funds at year end, including junior subordinated
debentures, decreased $7.8 million from $159.5 million at December 31, 2007 to
$151.7 million at December 31, 2008 and represented 16.3% and 17.1%,
respectively, of earning assets. The majority of the decrease occurred in
short-term Federal Home Loan Bank borrowings which decreased $27.1 million from
December 31, 2007 compared to December 31, 2008, while securities sold under
repurchase agreements increased $3.6 million and long-term Federal Home Loan
Bank borrowings increased $15.0 million during the same period.





Junior
Subordinated Debentures and Trust Preferred Securities





CIB
Marine formed four statutory business trusts (“Trusts”) for the purpose of
issuing trust preferred securities and investing the proceeds thereof in junior
subordinated debentures of CIB Marine. The Trusts used the proceeds from issuing
trust preferred securities and the issuance of its common securities to CIB
Marine to purchase the junior subordinated debentures. Interest on the junior
subordinated debentures and distributions on the trust preferred securities are
payable either quarterly or semi-annually in arrears. The trust preferred
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at maturity or their earlier
redemption. The $61.9 million junior subordinated debt, net of CIB Marine’s $1.9
million initial investment in the Trusts, qualify as regulatory capital for CIB
Marine subject to regulatory limitations. At December 31, 2008, approximately
$8.3 million of the $60.0 million qualified as Tier 1 capital and $24.6 million
qualified as Tier 2 capital.





In
September 2002, CIB Marine issued $20.0 million in guaranteed trust preferred
securities at a variable rate of interest based upon the three-month LIBOR plus
3.40%. The interest rate was 4.87% at December 31, 2008. The securities are
mandatorily redeemable upon their maturity on September 27, 2032 and are
callable by the issuer beginning September 30, 2007 at par value. Issuance costs
of $0.5 million were incurred in connection with these securities. These costs
were deferred and are being amortized over thirty years. CIB Marine used the net
proceeds of $19.5 million for general corporate purposes.





In
February 2001, CIB Marine issued $15.0 million in guaranteed trust preferred
securities at a fixed rate of 10.20% per annum. The securities are mandatorily
redeemable upon their maturity on February 22, 2031, and are callable by the
issuer beginning February 22, 2011, at a premium, which declines ratably to par
by February 22, 2021. Issuance costs of $0.5 million were incurred in connection
with these securities. These costs were deferred and are being amortized over
thirty years. CIB Marine used the net proceeds of $14.5 million for general
corporate purposes.





In
September 2000, CIB Marine issued $15.0 million in guaranteed trust preferred
securities at a fixed rate of 10.60% per annum. The securities are mandatorily
redeemable upon their maturity on September 7, 2030, and are callable by the
issuer beginning September 7, 2010, at a premium, which declines ratably to par
by September 7, 2020. Issuance costs of $0.5 million were incurred in connection
with these securities. These costs were deferred and are being amortized over
thirty years. CIB Marine used the net proceeds of $14.5 million for general
corporate purposes.





In March
2000, CIB Marine issued $10.0 million in guaranteed trust preferred securities
at a fixed rate of 10.88% per annum. The securities are mandatorily redeemable
upon their maturity on March 8, 2030, and are callable by the issuer beginning
March 8, 2010, at a premium, which declines ratably to par by March 8, 2020.
Issuance costs of $0.3 million were incurred in connection with these
securities. These costs were deferred and are being amortized over thirty years.
CIB Marine used the net proceeds of $9.7 million for general corporate
purposes.





Pursuant
to its Agreement with the Reserve Bank, CIB Marine is not permitted to pay any
interest on the trust preferred securities without prior approval of the Reserve
Bank. See Regulatory Matters, above, for further discussion. CIB Marine has the
right, at any time, as long as there are no continuing events of default, to
defer payments of interest on the junior subordinated debentures for consecutive
periods not exceeding twenty consecutive quarters, but not beyond the stated
maturity of the junior subordinated debentures. CIB Marine elected to defer all
interest payments starting in 2004. Throughout the deferral period, interest on
the debentures continues to accrue. In addition, interest also accrues on all
interest that was not paid when due, compounded quarterly or semi-annually.
During the deferral period, CIB Marine may not pay any dividends or
distributions on, or redeem, purchase, or acquire, or make liquidation payment
on its stock, or make any payment on principal, interest or premium, or redeem
any similar debt securities of CIB Marine, subject to limitations. During 2008
CIB Marine continued to defer interest payments on its $61.9 million junior
subordinated debentures and as a result the Trusts deferred distributions on
their $60.0 million trust preferred securities (“TruPS”). CIB Marine had accrued
interest payable on its junior subordinated debentures of $39.1 million and
$30.3 million at December 31, 2008 and December 31, 2007,
respectively.


49





The
maximum deferral period for interest payments on the junior subordinated
debentures and consequently the deferral period for the distributions on the
TurPS ended in the first quarter of 2009. CIB Marine did not implement a
strategy for refinancing or becoming current on these payments before that time,
so the holders of the TruPS are entitled to a number of remedies, including
accelerating the entire indebtedness on the junior subordinated debentures. CIB
Marine is pursuing a capital plan which includes a strategy for becoming current
on these obligations as soon as practicable. On March 16, 2009 CIB Marine issued
a formal Consent Solicitation to the TruPS holders seeking their consent to a
Plan of Restructuring that would. convert the indebtedness on the junior
subordinated debentures into CIB Marine preferred stock, thus reducing the
ongoing interest expense burden and eliminating any consequences of default on
the securities. As of April 10, 2009, the initial voting deadline established in
the Consent Solicitation, CIB Marine was notified that a sufficient number of
negative votes were cast by the applicable holders of two series of TruPS to
prevent approval of the Plan of Restructuring. Based upon conversations that CIB
Marine and its investment banking firm have had with certain of the TruPS
holders, including certain holders who have initially voted against the Consent
Solicitation, CIB Marine has elected to extend the voting deadline until May 11,
2009 in order to give it more time to consider amending the terms of the Consent
Solicitation to address such holders’ concerns, as well as to consider other
available options.





If CIB
Marine is not able to pay the accrued interest currently due on its debentures
and is no longer permitted to defer interest payments thereon and is therefore
in default on the TruPS. If the Plan of Restructuring is ultimately not
approved, CIB Marine will be unable to cure this default. While CIB Marine is
not aware of any precedent of a default by a bank holding company on trust
preferred securities, management believes any such default will have a material
adverse effect on CIB Marine’s continuing operations which will have serious
adverse consequences to its shareholders and the TruPS holders.





See the
“Liquidity and Capital Plan Update” discussion below for further information on
CIB Marine’s capital plan.





Other
Liabilities





December 31,2008
                
                
                2007(Dollars in thousands)Accounts
      payable
                
                $
                179
                
                
                $
                117Accrual
      for unfunded commitments and standby letters of credit
                
                
                —
                
                
                
                725Accrued
      real estate taxes
                
                
                147
                
                
                
                158Accrued
      compensation and employee benefits
                
                
                681
                
                
                
                782Accrued
      professional fees
                
                
                490
                
                
                
                448Accrued
      other expenses
                
                
                448
                
                
                
                731Other
      liabilities
                
                
                278
                
                
                
                258$
                2,223
                
                
                $
                3,219





Other
liabilities decreased $1.0 million from $3.2 million at December 31, 2007 to
$2.2 million at December 31, 2008. The decrease was mainly due to a $0.7 million
reversal of the accrual for unfunded commitment and standby letters of credit
during 2008.





At
December 31, 2007, CIB Marine had a $0.7 million accrual for unfunded
commitments and standby letters of credit related to one standby letter of
credit which it had participated in with other banks. During 2008, this standby
letter of credit matured and was converted to a note. As a result of this
funding, during 2008 $0.5 million of the accrual for unfunded commitments and
standby letters of credit was transferred to the allowance for loan loss. The
remaining $0.2 million was reversed through a credit to provision for credit
losses.


50





Off-Balance
Sheet Arrangements





During
the ordinary course of business, CIB Marine engages in financial transactions
that are not recorded on its consolidated balance sheets, are recorded in
amounts that are different than their full principal or notional amount, or are
subsidiaries of CIB Marine that are presented on an equity basis rather than
consolidated. Such transactions serve a variety of purposes including management
of CIB Marine’s interest rate risk, liquidity and credit concentration risks,
optimization of capital utilization, and meeting the needs of its
customers.





Commitments:





As a
financial services provider, CIB Marine routinely enters into commitments to
extend credit, including loan commitments, lines of credit, and standby and
commercial letters of credit. While these contractual obligations may represent
future cash requirements of CIB Marine, some of these commitments to extend
credit may expire without being drawn upon. Such commitments are subject to the
same credit policies and approval process as other loans made by CIB Marine. See
Item 8, Note 17-Financial Instruments with Off-Balance Sheet Risk in Part II of
this Form 10-K for additional information.





Derivative Financial
Instruments:





CIB
Marine utilizes derivatives primarily in its asset/liability management
activities to modify the existing market risk characteristics of certain assets
and liabilities. During 2008, CIB Marine’s derivatives were predominately
interest rate swaps. An interest rate swap agreement involves the exchange of
fixed and floating rate interest payment obligations based on the underlying
notional principal amounts. The amounts subject to market and credit risks are
the streams of interest payments under the agreements and not the notional
principal amounts, which are used only to express the volume of the
transactions. The fair value of each derivative instrument, however, is recorded
on the balance sheet as an asset or liability. CIB Marine’s credit risk on a
swap agreement is limited to nonperformance of the counterparty’s obligations
under the terms of the swap agreement. CIB Marine deals exclusively with
counterparties that have high credit ratings, and based on management’s
assessments, all counterparties were expected to meet any outstanding
obligations as of December 31, 2008. For additional information regarding CIB
Marine’s interest rate swaps at December 31, 2008, including the off-balance
sheet notional amount and fair value which is the carrying value, see Item 8,
Note 17-Financial Instruments with Off-Balance Sheet Risks and Note 22-Fair
Value of Financial Instruments in Part II of this Form 10-K.





Trust
Preferred Securities:





At
December 31, 2008, CIB Marine owned 100% of the common securities of the Trusts,
see Item 8, Note 8-Other Assets of this Form 10-K for further information on
these Trusts. CIB Marine also issued $61.9 million in junior subordinated
debentures to the Trusts, which are outstanding at December 31, 2008. The Trusts
have a total of $60.0 million in preferred securities outstanding which were
issued to non-affiliated investors. See Item 7-Junior Subordinated Debentures
and Guaranteed Trust Preferred Securities discussion and Item 8, Note
12-Long-Term Borrowings in Part II of this Form 10-K for further
information.





Residential
Mortgage Recourse Obligations:





CIB
Marine has contracted with residential mortgage loan investors to repurchase or
make the investor whole on losses incurred on residential mortgage loans
purchased from CIB Marine and which were not in compliance or otherwise
represented a material breach of agreement between CIB Marine and the investor.
The amount of unsettled repurchase and make-whole obligations as of December 31,
2007 and 2008 was $0.1 million. At December 31, 2007 and 2008, liabilities of
companies held for sale included a $0.1 million contingent liability related to
these obligations.


51





Contractual
obligations





The
following table summarizes CIB Marine’s more significant contractual obligations
at December 31, 2008. Excluded from the following table are a number of
obligations to be settled in cash. These excluded items are reflected in the
Company’s consolidated balance sheet and include deposits with no stated
maturity, trade payables, accrued interest payable and derivative payables that
do not require physical delivery of the underlying instrument. The table does
not include interest.





Total
                    
                    
                    Less than 1 year
                    
                    
                    1-2 years
                    
                    
                    2-3 years
                    
                    
                    3-4 years
                    
                    
                    4-5 years
                    
                    
                    More
                      than 5
                      yearsCertificate
      of deposit and other time deposit obligations
                    
                    $
                    489,172
                    
                    
                    $
                    417,955
                    
                    
                    $
                    30,924
                    
                    
                    $
                    25,298
                    
                    
                    $
                    6,627
                    
                    
                    $
                    8,231
                    
                    
                    $
                    137Long-term
      debt
                    
                    
                    27,000
                    
                    
                    
                    9,000
                    
                    
                    
                    8,000
                    
                    
                    
                    5,000
                    
                    
                    
                    5,000
                    
                    
                    
                    —
                    
                    
                    
                    —Junior
      subordinated debentures
                    
                    
                    61,857
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    61,857Operating
      leases
                    
                    
                    2,226
                    
                    
                    
                    913
                    
                    
                    
                    550
                    
                    
                    
                    358
                    
                    
                    
                    294
                    
                    
                    
                    111
                    
                    
                    
                    —Total
                    
                    $
                    580,255
                    
                    
                    $
                    427,868
                    
                    
                    $
                    39,474
                    
                    
                    $
                    30,656
                    
                    
                    $
                    11,921
                    
                    
                    $
                    8,342
                    
                    
                    $
                    61,994





Liquidity
and Capital Plan Update





The
objective of liquidity risk management at the Banks is to ensure that they have
adequate funding capacity for commitments to extend credit, deposit account
withdrawals, maturities of borrowings and other obligations in a timely manner.
Liquidity positions of the Banks are actively managed by estimating, measuring
and monitoring their sources and uses of funds. The Banks’ funding requirements
are primarily met by the inflow from deposits, loan repayments and investment
debt service payments and maturities. Each of the Banks also makes use of
noncore funding sources in a manner consistent with their liquidity, funding and
market risk policies. Noncore funding sources are used to meet funding needs
and/or when the pricing and continued availability of these sources presents
lower-cost funding opportunities. Short-term noncore funding sources utilized by
the Banks include federal funds purchased, securities sold under agreements to
repurchase, short-term borrowings from the FHLB and short-term brokered and
negotiable time deposits. The Banks have also established significant loans and
investment security-secured borrowing lines with the FRB and has maintained
secured borrowing lines with nonaffiliated banks. Long-term funding sources,
other than core deposits, include long-term time deposits and long-term
borrowings from the FHLB. Additional sources of liquidity include cash and cash
equivalents, federal funds sold, sale of loans held for sale and the sale of
securities.





During
2008, the availability of federal funds purchased for the Banks with
correspondent banks continued to be contingent on pledges of fixed income
securities. Additionally, pursuant to the aforementioned Agreement between CIB
Marine and the Reserve Bank, the CIB Marine parent company, excluding its
subsidiaries must obtain Reserve Bank approval before incurring additional
borrowing or debt.





The
following discussion should be read in conjunction with the consolidated
statement of cash flows contained in the consolidated financial statements
contained in Part II, Item 8 and Part I, Item 1A-Risk Factors of this Form
10-K.





CIB
Marine’s primary sources of funds for the twelve months ended December 31, 2008
were $35.7 million increase in deposits (excluding deposits sold in the Citrus
Bank transaction), $15.0 million net increase in long-term borrowings and debt
service and redemption payments resulting in a $24.5 million net decrease in the
investment portfolio.





Net loss
from continuing operations of $36.2 million, liabilities sold in excess of
assets sold of $42.7 million in connection with the Citrus Bank sale, a $25.3
million net increase in loans and a $22.8 million net decrease in short-term
borrowings were CIB Marine’s primary uses of funds for the twelve months ended
December 31, 2008.





CIB
Marine had liquid assets from continuing operations of $57.2 million and $74.8
million at December 31, 2008 and 2007, respectively.


52





CIB
Marine was able to meet its liquidity needs during 2008. Beginning in 2004, CIB
Marine deferred interest payments on its $61.9 million of junior subordinated
debentures and as a result distributions were deferred on $60.0 million of trust
preferred securities. The obligations under the TruPS are solely the obligations
of the CIB Marine parent company and not obligations of the Banks. Under the
terms of the TruPS, the deferral period may last up to five years. These
deferral periods extended to the first quarter of 2009, at which point CIB
Marine became obligated to pay all of the accrued interest on such securities or
be in default. The end of the deferral period for Trust IV was February 22,
2009. On March 25, 2009, the default date for Trust IV as provided under the
debentures, CIB Marine failed to make the required payment of interest to the
holders of Trust IV. Trusts I, III, and V reached the end of their deferral
periods during March 2009, with default dates to occur during April 2009. CIB
Marine does not have the cash available to make these interest payments prior to
the default dates. At December 31, 2008, the accrued and unpaid interest on the
junior subordinated debentures totaled $39.1 million. During 2008, CIB Marine
continued to defer interest payments on its junior subordinated debentures and,
as a result, had adequate funding capacity to meet its other obligations. As a
result of CIB Marine’s inability to make these payments and continued losses,
and in consideration of existing regulatory matters, there is substantial doubt
about the Company’s ability to continue as a going concern.





As of
December 31, 2008, the CIB Marine parent company had $13.2 million in total cash
and cash equivalents. In addition, the CIB Marine parent company also holds
$15.2 million in loans that it is attempting to collect and an additional $3.8
million in loans held for sale. According to the Bank Holding Company Act of
1956, as amended (the “BHCA”), “a bank holding company shall serve as a source
of financial and managerial strength to its subsidiary banks and shall not
conduct its operations in an unsafe or unsound manner.” Pursuant to this mandate
CIB Marine has continued to monitor the capital strength and liquidity of the
Banks. During 2008, CIB Marine provided $5.0 million in capital to Marine Bank
to support the bank in maintaining a “well-capitalized” position. In addition,
CIB Marine provided another $2.0 million in capital to Marine Bank in March
2009. Any other use of this cash to pay interest or principal on the TruPS is
subject to approval by the Reserve Bank. Only cash available at the CIB Marine
parent company may be used to pay debts or expenses of the CIB Marine parent
company, including interest or principal on the TruPS.





Limitations
imposed by the state regulators currently prohibit the Banks from providing a
dividend to CIB Marine without the prior written approval of the state
regulators, and currently prohibit CIB Marine from paying a dividend without the
prior non-objection of the Reserve Bank. At December 31, 2008, the CIB Marine
parent company’s liquid assets, including amounts deposited with the Banks,
totaled $13.2 million, down from $25.7 million at the end of 2007, due primarily
to $5.0 million in capital contributions made to the Banks. In addition, CIB
Marine may not issue new debt or renew existing debt without the prior
non-objection of the Reserve Bank. At the moment there is no other source of
repayment of the TruPS, which began to default in March 2009. Absent the
positive consent of the TruPS holders to a Plan of Restructuring proposed by CIB
Marine on March 16, 2009, CIB Marine will default on the remaining junior
subordinated debentures underlying the TruPS. See Part I, Item 1A-Risk Factors
of this Form 10-K for further information.





As
reported in Part II, Item 7 of its 2007 Form 10-K, CIB Marine management has
been developing and implementing a comprehensive capital plan to pursue the
goals of bringing the interest payments on the debentures current as soon as
possible, maintaining “well-capitalized” capital ratios at the Banks, and
improving the efficiency of CIB Marine through revenue growth and expense
management. All of these goals were targeted to provide the greatest value
possible to shareholders of CIB Marine.





During
2008, management pursued efforts on each of the options outlined in its capital
plan. On August 15, 2008, CIB Marine completed the sale of the branches,
deposits and most of the loans of Citrus Bank, its Florida banking subsidiary,
to a third party. Following the sale, the remaining assets, liabilities, and
capital of Citrus Bank were merged into CIB Marine. Most of these assets were in
the form of approximately $18.5 million of retained loans. CIB Marine continues
to attempt to liquidate these loans to increase cash balances at the CIB Marine
parent company.





In
addition, CIB Marine management applied to its Wisconsin and Illinois bank
regulators for permission to transfer capital (in excess of amounts necessary to
remain in compliance with regulatory “well-capitalized” guidelines) from Marine
Bank and CIB Bank, respectively, to CIB Marine. CIB Marine intended to use that
cash to pay accrued and unpaid interest on its trust preferred securities. In
July and August 2008, respectively, these requests were denied.





In May
2007, CIB Marine engaged Stifel Nicolaus & Company (“Stifel”) to assist
management in identifying and contacting other bank holding companies regarding
a possible merger or business combination involving CIB Marine. The effort to
identify potential partners has been extensive over the past twenty months. CIB
Marine is not presently engaged in any active negotiations with any potential
transaction partners and has focused its efforts on restructuring its
outstanding TruPS obligations, as described in greater detail below. CIB Marine
has continued its engagement of Stifel, to assist it in evaluating all strategic
options, including a sale of the company.


53





On March
16, 2009, CIB Marine submitted a Consent Solicitation to holders of the existing
TruPS to restructure the existing obligations. Pursuant to the proposed Plan of
Restructuring the approximately $100.9 million of indebtedness under the
debentures currently held by the Trusts would be replaced with approximately
$94.9 million aggregate liquidation preference of newly-issued CIB Marine 7%
Fixed Rate Perpetual Noncumulative Preferred Stock (“Company
Preferred”).





CIB
Marine proposed the Plan of Restructuring for the following
reasons:





·
              To
      prevent CIB Marine from defaulting on its outstanding debentures and to
      provide it with a more stable capital
structure;


·
              To
      replace the debentures with the Company Preferred to eliminate $100.9
      million of indebtedness from CIB Marine’s balance sheet and significantly
      improve its regulatory capital
position;


·
              To
      substitute noncumulative 7% dividends (on the Company Preferred) for
      higher-rate cumulative interest in order to improve CIB Marine’s operating
      results.





By
eliminating the consequences of default and improving its balance sheet,
regulatory capital position and operating results, CIB Marine hopes to position
itself to seek a business combination transaction on terms that could be more
advantageous to CIB Marine and result in greater value for both the holders of
the TruPS, as well as CIB Marine’s common shareholders.





As of
April 10, 2009, the initial voting deadline established in the Consent
Solicitation, CIB Marine was notified that a sufficient number of negative votes
were cast by the applicable holders of two series of TruPS to prevent approval
of the Plan of Restructuring. Based upon conversations that CIB Marine and its
investment banking firm have had with certain of the TruPS holders, including
certain holders who have initially voted against the Consent Solicitation, CIB
Marine has elected to extend the voting deadline until May 11, 2009 in order to
give it more time to consider amending the terms of the Consent Solicitation to
address such holders’ concerns, as well as to consider other available options
to it. If the Plan of Restructuring is ultimately not approved, CIB Marine will
be unable to cure its default on the TruPS. The status of the TruPS combined
with the continued net losses, and in consideration of existing regulatory
matters, raise substantial doubt about the ability of CIB Marine to continue as
a going concern.





In
addition, CIB Marine continues to focus on the safety and soundness of the
Banks. It should be noted that as of December 31, 2008, the capital ratios of
the Banks were all at “well-capitalized” levels under prompt corrective action
provisions. In addition, liquidity remains strong at both Banks with contingency
plans in place to further ensure the safety of depository customers. As noted
above, CIB Marine has provided its Banks with $5.0 million of capital during
2008 and an additional $2.0 million in the first quarter of 2009. This is
consistent with CIB Marine’s goal of supporting strong capital and liquidity
positions at the Banks and is in keeping with its source of strength obligations
under the BHCA.





In March
2009 Marine Bank stipulated to a C&D which was signed by the FDIC and the
WDFI in early April 2009, and is expected to become effective in the near
future. The C&D primarily resulted from the high level of nonperforming
assets of Marine Bank and the resulting impact on its financial condition. The
C&D requires Marine Bank to take certain corrective actions focusing on
reducing exposure to non-performing loans, charging off all loans classified as
loss, imposes restrictions on lending to credits with existing non-performing
loans, and accruing interest on certain delinquent loans in addition to charging
off previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.


54





CIB
Marine continues efforts to identify potential business combination partners and
to restructure its obligations under the debentures. The financial information
in Part I of this Form 10-K does not consider any adjustments that may be
necessary should CIB Marine not be able to meet its obligations as they come
due.





Capital





CIB
Marine and the Banks are subject to various regulatory capital guidelines. In
general, these guidelines define the various components of core capital and
assign risk weights to various categories of assets. The risk-based capital
guidelines require financial institutions to maintain minimum levels of capital
as a percentage of risk weighted assets. The risk-based capital information for
CIB Marine is contained in the following table:





December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Risk-weighted
      assets
                
                $
                656,304
                
                
                $
                743,970
                
                
                $
                674,565Average
      assets(1)
                
                $
                920,519
                
                
                $
                997,708
                
                
                $
                1,015,809Capital
      componentsStockholders’
      equity
                
                $
                14,802
                
                
                $
                60,306
                
                
                $
                71,613Restricted
      core capital:Junior
      subordinated debentures net of investment in trust
                
                
                60,000
                
                
                
                60,000
                
                
                
                60,000Total
      restricted core capital elements
                
                
                60,000
                
                
                
                60,000
                
                
                
                60,000Disallowed
      amounts
                
                
                (51,730
                )
                
                
                (39,898
                )
                
                
                (36,129
                )Maximum
      allowable in tier 1 capital
                
                
                8,270
                
                
                
                20,102
                
                
                
                23,871Nonfinancial
      equity items
                
                
                —
                
                
                
                —
                
                
                
                (34
                )Less:
      disallowed intangibles
                
                
                —
                
                
                
                —
                
                
                
                (746
                )Add:
      unrealized (income) loss on securities
                
                
                10,008
                
                
                
                (1,382
                )
                
                
                1,880Less:
      unrealized loss on equities
                
                
                (138
                )
                
                
                —
                
                
                
                —Tier
      1 capital
                
                
                32,942
                
                
                
                79,026
                
                
                
                96,584Allowable
      allowance for loan losses
                
                
                8,340
                
                
                
                9,449
                
                
                
                8,595Subordinated
      debentures net of investment in trust (not included in Tier 1 capital
      )
                
                
                51,730
                
                
                
                39,898
                
                
                
                36,129Tier
      2 capital
                
                
                60,070
                
                
                
                49,347
                
                
                
                44,724Allowable
      Tier 2 Capital (2)
                
                
                32,942
                
                
                
                49,347
                
                
                
                44,724Total
      risk-based capital
                
                $
                65,884
                
                
                $
                128,373
                
                
                $
                141,308





Actual
                  
                  
                  Minimum Required To be
                    Adequately CapitalizedAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(Dollars in thousands)December
      31, 2008Total
      capital to risk weighted assets
                  
                  $
                  65,884
                  
                  
                  
                  10.04
                  %
                  
                  $
                  52,504
                  
                  
                  
                  8.00
                  %Tier
      1 capital to risk weighted assets
                  
                  
                  32,942
                  
                  
                  
                  5.02
                  
                  
                  
                  26,252
                  
                  
                  
                  4.00Tier
      1 leverage to average assets
                  
                  
                  32,942
                  
                  
                  
                  3.58
                  
                  
                  
                  36,821
                  
                  
                  
                  4.00December
      31, 2007Total
      capital to risk weighted assets
                  
                  $
                  128,373
                  
                  
                  
                  17.26
                  %
                  
                  $
                  59,518
                  
                  
                  
                  8.00
                  %Tier
      1 capital to risk weighted assets
                  
                  
                  79,026
                  
                  
                  
                  10.62
                  
                  
                  
                  29,759
                  
                  
                  
                  4.00Tier
      1 leverage to average assets
                  
                  
                  79,026
                  
                  
                  
                  7.92
                  
                  
                  
                  39,908
                  
                  
                  
                  4.00December
      31, 2006Total
      capital to risk-weighted assets
                  
                  $
                  141,308
                  
                  
                  
                  20.95
                  %
                  
                  $
                  53,965
                  
                  
                  
                  8.00
                  %Tier
      1 capital to risk-weighted assets
                  
                  
                  96,584
                  
                  
                  
                  14.32
                  
                  
                  
                  26,983
                  
                  
                  
                  4.00Tier
      1 leverage to average assets
                  
                  
                  96,584
                  
                  
                  
                  9.51
                  
                  
                  
                  40,632
                  
                  
                  
                  4.00





(1)
              Average
      assets as calculated in accordance with 12 C.F.R. Part 325 of the FDIC
      rules and regulations which requires a quarter to date average and allows
      for current period adjustments of goodwill and other intangible
      assets.(2)
              Allowable
      Tier 2 capital can not exceed 100% of Tier 1
capital.


55





At both
December 31, 2008 and 2007, CIB Marine was subject to the Agreement it entered
into with the Reserve Bank in the second quarter of 2004. Among other items, the
Agreement requires CIB Marine to maintain a sufficient capital position for the
consolidated organization including the current and future capital requirements
of each of the Banks, nonbank subsidiaries and the consolidated organization. As
of December 31, 2008, CIB Marine’s Tier 1 leverage ratio had declined from 7.92%
at December 31, 2007 to 3.58% and was below the 4.0% required by the Agreement.
The decline reflects the continued operating losses of CIB Marine during 2008.
Depending on the extent of continuing losses incurred by CIB Marine in future
periods, as well as the overall size of its balance sheet, further
other-than-temporary impairment adjustments to its securities portfolio and
potential loan recoveries, CIB Marine’s capital ratios could decline further.
CIB Marine’s ability to increase its capital and meet the requirements of the
Agreement is dependent upon the successful execution of its capital plan
outlined in the “Liquidity and Capital Plan Update” section above.





CIB
Marine’s stockholders’ equity was $14.8 million or 1.6% of total assets at
December 31, 2008 compared to $60.3 million or 6.0% of total assets at December
31, 2007. The decrease during 2008 was primarily due to a net loss of $34.4
million and an $11.4 million increase in accumulated other comprehensive loss.
The increase in the other comprehensive loss resulted mainly from unrealized
losses on other notes and bonds and mortgage-backed securities, due to the
general deterioration in the mortgage lending and related industries, as well as
the declining interest rate environment.





The
debentures issued by CIB Marine prior to 2003, subject to limitations, qualify
as Tier 1 equity capital for regulatory capital purposes. See the “Junior
Subordinated Debentures and Trust Preferred Securities” discussion above for
further information on these borrowings. The FRB adopted a rule limiting the
restricted core capital elements, including junior subordinated debentures, net
of investment in the trusts, to 25% of all core capital elements, net of
goodwill less any associated deferred tax liability.





New
Accounting Pronouncements





The
expected impact of accounting policies recently issued or proposed but not yet
required to be adopted are discussed below. To the extent the adoption of new
accounting standards materially affected CIB Marine’s financial condition,
results of operations, or liquidity, the impacts were discussed in the
applicable section of this financial review and the notes to the consolidated
financial statements.





Fair
Value Measurements





In
February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff
Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). FSP 157-2 defers the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008 for all nonfinancial assets and
liabilities that are recognized or disclosed in the financial statements at fair
value on a nonrecurring basis only. These include nonfinancial assets and
liabilities not measured at fair value on an ongoing basis but subject to fair
value adjustments in certain circumstances (for example, assets that have been
deemed to be impaired). CIB Marine has elected to defer the adoption of SFAS 157
with respect to nonrecurring, nonfinancial assets and liabilities as permitted
by FSP 157-2.





CIB
Marine’s nonfinancial assets and liabilities that meet the deferral criteria set
forth in FSP No. 157-2 include foreclosed properties and assets and liabilities
of companies held for disposal, namely CIB Construction. The adoption of SFAS
157 for these nonfinancial assets and liabilities on January 1, 2009 did not
have a material impact on CIB Marine’s consolidated financial
statements.




In April
2009, the FASB issued FSP FAS 115-2, FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, providing additional guidance for an
other-than-temporary impairment analysis under existing U.S. generally accepted
accounting principles (“GAAP”) in determining whether the holder is likely to
realize some portion of the unrealized loss on an impaired security. An
investment is impaired if the fair value of the investment is less than its
cost; and FSP 157-4,
Determining When a Market is
Not Active and a Transaction is Not Distressed, providing additional
guidance on determining whether a market for a financial assets is not active
and a transaction is not distressed for fair value measurements under FASB
Statement No. 157, Fair Value Measurements. The implementation date is for
reporting periods ending after June 15, 2009, with early implementation
permitted for periods ending after March 15, 2009. CIB Marine anticipates
adopting the changes no later than the required implementation
date.


Consolidations





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 requires companies with noncontrolling interests to disclose
such interests clearly as a portion of equity but separate from the parent’s
equity. The noncontrolling interest’s portion of net income must also be clearly
presented on the Income Statement. SFAS 160 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
adoption of SFAS 160 is not expected to have a material effect on CIB Marine’s
consolidated financial statements.


56





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (revised
2007) (“SFAS 141(R)”). SFAS 141(R) applies the acquisition method of
accounting for business combinations established in SFAS 141 to all acquisitions
where the acquirer gains a controlling interest, regardless of whether
consideration was exchanged. Consistent with SFAS 141, SFAS 141(R) requires
the acquirer to value the assets and liabilities of the acquiree at fair value
and record goodwill on bargain purchases, with the main difference being the
application to all acquisitions where control is achieved. SFAS 141(R) is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS 141(R) is not expected to have a
material effect on CIB Marine’s consolidated financial statements.





Hedging
Activities





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). An amendment of
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), SFAS 161
applies to all derivative instruments and provides financial statement users
with increased qualitative, quantitative, and credit-risk disclosures. It
requires enhanced disclosures about how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is to be applied
prospectively for interim periods and fiscal years beginning after
November 15, 2008, with early adoption permitted. The adoption of SFAS 161
is not expected to have a material effect on CIB Marine’s consolidated financial
statements.





Generally
Accepted Accounting Principles





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). This statement makes the
hierarchy explicitly and directly applicable to preparers of financial
statements, a step that recognizes preparers’ responsibilities for selecting the
accounting principles for their financial statements. SFAS 162 provides for
slight modifications to the current hierarchy in place by adding FASB Staff
Positions, Statement 133 Implementation Issues, and EITF D-Topics to it.
SFAS 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board (“PCAOB”) amendments to AU
Section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The amendments to AU Section 411 will be approved in
conjunction with new Auditing Standard 6, which was issued by the PCAOB in
January of 2008, but has yet to be approved by the SEC. CIB Marine will adopt
SFAS 162 when required.





Share
Based Payment Awards





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1 (“FSP EITF 03-6-1”),
Determining Whether
Instruments Granted in Share-Based Transactions Are Participating
Securities (“FSP EITF 03-6-1”). The FASB determined in FSP EITF
03-6-1 that all outstanding unvested share-based payment awards with rights to
nonforfeitable dividends are considered participating securities. Because they
are considered participating securities, FSP EITF 03-6-1 requires companies
to apply the two-class method of computing basic and diluted EPS. This FSP is
effective for fiscal years beginning after December 15, 2008. The adoption
of FSP EITF 03-6-1 is not expected to have a material effect on CIB
Marine’s consolidated financial statements.


57





Impact
of Inflation and Changing Prices





CIB
Marine’s consolidated financial statements and notes contained in Part II, Item
8 of this Form 10-K have been prepared in accordance with GAAP, which requires
the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of CIB Marine’s operations. Unlike most industrial
companies, nearly all of CIB Marine’s assets and liabilities are monetary in
nature. As a result, interest rates and changes therein have a greater impact on
CIB Marine’s performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.





SUBSEQUENT
EVENTS





During
the first quarter of 2009 the Reserve Bank imposed certain risk controls on
Marine Bank. The controls restrict Marine Bank from having any daylight
overdrafts, change the Discount Window eligibility from Primary Credit to
Secondary Credit, reduce the collateral margins for pledged collateral and limit
the terms and raise the cost of Discount Window borrowings should Marine Bank
have any in the future. As a result of these controls, Marine Bank has planned
to utilize contingency liquidity resources when needed to support adequate cash
holdings in its account with the Reserve Bank, to reduce the chance of any
interruptions of service as a result of the restrictions.





Due
primarily to the rapid decline in economic conditions during the first quarter
of 2009, CIB Marine recognized net charge-offs of $3.5 million and provisions
for loan losses of $2.9 million during the quarter related to its purchased home
equity loan pools.





During
the first quarter of 2009, several of CIB Marine’s investment holdings have been
downgraded by at least one or more nationally recognized statistical rating
agency to below investment grade. Specifically, two mortgage-backed securities
(non-agency) were downgraded, including: (1) downgrade to B from AAA for one
security with a current face value of $3.8 million and an unrealized loss of
$0.7 million and (2) downgrade to BB from AAA for one security with a current
face value of $4.1 million and an unrealized loss of $0.4 million. In addition,
four pooled trust preferred securities have been downgraded, including: (i)
PreTSL 23 class C-FP was downgraded from A to CCC, (ii) PreTSL 26 class B1 was
downgraded from AA to CCC, (3) PreTSL 27 class A1 was downgraded from AAA to
BBB, and (4) PreTSL 28 class A1 was downgraded from AAA to BBB. The current face
values of these pooled trust preferred securities were $0.8 million, $4.0
million, $2.0 million and $2.0 million, respectively, and their unrealized
losses were $0.6 million, $3.0 million, $0.9 million and $0.9 million,
respectively. One municipal security with a par value of $3.5 million and an
unrealized loss of $0.4 million has been downgraded to BB. Based upon updated
evaluations of the securities, the securities with downgrades as noted in this
paragraph are not other-than-temporarily impaired. For more information see Item
8, Note 3-Securitiesof this Form
10-K.





During
the first quarter of 2009, the CIB Marine parent company contributed $2.0
million to Marine Bank to support the bank’s capital.





During
the first quarter of 2009, a subsidiary bank of CIB Marine sold $12.8 million in
par value of Government Agency securities for a gain of $0.6 million. The
proceeds were used to reduce the liabilities of the subsidiary
bank.





On March
16, 2009, CIB Marine submitted a Consent Solicitation to holders of its existing
TruPS to restructure its obligations under those instruments. Pursuant to the
proposed Plan of Restructuring, the approximately $100.9 million of current
indebtedness (including accrued interest of $39.1 million) under the debentures
held by the Trusts would be replaced with approximately $94.9 million aggregate
liquidation preference of newly-issued CIB Marine 7% Fixed Rate Perpetual
Noncumulative Preferred Stock (“Company Preferred”).


58





CIB
Marine proposed the Plan of Restructuring for the following
reasons:





·
              To
      prevent the default of CIB Marine’s outstanding debentures scheduled to
      occur between March 25, 2009 and April 30, 2009 and to help provide it
      with a more stable capital
structure;


·
              To
      eliminate $100.9 million of indebtedness from CIB Marine’s balance sheet
      and significantly improve its regulatory capital
  position;


·
              To
      substitute noncumulative 7% dividends (on the Company Preferred) for the
      higher-rate interest on the debentures in order to help improve CIB
      Marine’s future operating
results.





By
preventing or curing the default of the debentures and TruPS, reducing debt, and
improving its equity, regulatory capital position and future operating results,
CIB Marine hoped the approval of the Plan of Restructuring would position the
Company itself to seek a business combination transaction on terms that could be
more advantageous to CIB Marine and result in greater value for both the holders
of the existing TruPS, as well as CIB Marine’s common shareholders.





As of
April 10, 2009, the initial voting deadline established in the Consent
Solicitation, CIB Marine was notified that a sufficient number of negative votes
were cast by the applicable holders of two series of TruPS to prevent approval
of the Plan of Restructuring. Based upon conversations that CIB Marine and its
investment banking firm have had with certain of the TruPS holders, including
certain holders who have initially voted against the Consent Solicitation, CIB
Marine has elected to extend the voting deadline until May 11, 2009 in order to
give it more time to consider amending the terms of the Consent Solicitation and
Plan of Restructuring to address such holders’ concerns, as well as to consider
other available options.





If the
Plan of Restructuring is ultimately not approved, CIB Marine will not be able to
cure its default on the TruPS.





Under
applicable laws, the FDIC, as the Banks’ primary federal regulator and deposit
insurer, and the state regulators, as the Banks’ chartering authorities, have
the ability to impose additional sanctions, restrictions and requirements on the
Banks if they determine, upon examination or otherwise, violations of law or
weaknesses or failures with respect to general standards of safety and
soundness. Applicable law prohibits disclosure of specific examination findings
by an institution, although formal enforcement actions are routinely disclosed
by regulatory authorities. In March 2009 Marine Bank stipulated to a C&D
which was signed by the FDIC and the WDFI in early April 2009, and is expected
to become effective in the near future. The C&D primarily resulted from the
high level of nonperforming assets of Marine Bank and the resulting impact on
its financial condition. The C&D requires Marine Bank to take certain
corrective actions focusing on reducing exposure to non-performing loans,
charging off all loans classified as loss, imposes restrictions on lending to
credits with existing non-performing loans, and accruing interest on certain
delinquent loans in addition to charging off previously accrued interest on
those loans. Key provisions also include a restriction on paying dividends
without regulatory approval, a requirement to maintain a minimum tier 1 leverage
ratio of 10% at Marine Bank, retaining qualified management, revising lending
policies and procedures focused on documentation, maintaining an appropriate
loan review and grading system, and adopting a comprehensive budget. Failure to
adhere to the requirements of the actions mandated by the C&D, once it
becomes effective, can result in more severe restrictions and civil monetary
penalties. The C&D added no additional requirements to the asset quality and
loan review program previously implemented and currently maintained by Marine
Bank. CIB Marine and Marine Bank also remain committed to maintaining adequate
capital levels. Generally, enforcement actions such as the C&D can be lifted
only after subsequent examinations substantiate complete correction of the
underlying issues.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





CIB
Marine’s primary risk exposure is from interest rate risk. Net interest income
and the estimated market value of CIB Marine’s assets and liabilities are
vulnerable to changes in interest rates. Other risks exist to a lesser degree,
including equity price risk. Commodity price and foreign currency exchange rate
risk does not normally arise in the course of CIB Marine’s
business.


59





CIB
Marine’s Board of Directors has overall responsibility for its interest rate
risk management policies. CIB Marine sets policy limits for interest rate risk
to be assumed in the normal course of business. CIB Marine’s market risk policy
has the general objective of maintaining a low level of earnings volatility due
to interest rate risk and to protect CIB Marine from the impact that changes in
interest rates have on net interest income. CIB Marine uses gap analysis and
earnings simulations to measure interest rate risk.





CIB
Marine’s Asset-Liability Management Committee monitors, at least quarterly, the
interest rate risk measurements for compliance with policy limits. If the
derived interest rate risk measurements are outside of the policy limits,
management may implement a variety of strategies to reduce the risk. CIB Marine
strives to use the most effective instruments for implementing its interest rate
risk management strategies, considering the costs, liquidity impact and capital
requirements of the various alternatives. The implementation strategies usually
involve targeting specific market risk characteristics for new marketable
securities and new funding liabilities, and may also include the use of
derivative instruments and the altering of the market risk characteristics of
groups of interest rate sensitive assets such as the repositioning of marketable
securities.





The gap
analysis as of December 31, 2008, is shown in the following table and represents
the contractual reprice risk positions of CIB Marine. The gap analysis does not
fully represent basis, yield curve or option risk. The table shows interest rate
sensitive assets and liabilities and the difference between them within each
time interval. In this analysis the contractual repricing interest rate
sensitivity position is balanced when an equal amount of interest-earning assets
and interest-bearing liabilities reprice during a given time interval. Excess
interest rate sensitive assets or liabilities repricing in a given time period
results in the interest sensitivity gap shown in the table. A positive or
asset-sensitive gap indicates that more interest-earning assets than
interest-bearing liabilities will reprice in a given time period, while a
negative or liability-sensitive gap indicates that more interest-bearing
liabilities than interest-earning assets will reprice in a given time
period.





Repricing
Interest Rate Sensitivity Analysis





December, 31, 20080-3 Months
                        
                        
                        4-6 Months
                        
                        
                        7-12 Months
                        
                        
                        2-5 Years
                        
                        
                        Over 5 Years
                        
                        
                        Total(Dollars in thousands)Interest-earning
      assets:Loans
                        
                        $
                        251,105
                        
                        
                        $
                        53,769
                        
                        
                        $
                        73,085
                        
                        
                        $
                        174,672
                        
                        
                        $
                        2,576
                        
                        
                        $
                        555,207Loans
      held for sale
                        
                        
                        4,777
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,777Securities
                        
                        
                        37,409
                        
                        
                        
                        28,068
                        
                        
                        
                        48,651
                        
                        
                        
                        130,068
                        
                        
                        
                        36,256
                        
                        
                        
                        280,452Reverse
      repurchase securities and federal funds sold
                        
                        
                        29,377
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        29,377Total
      interest-earning assets
                        
                        
                        322,668
                        
                        
                        
                        81,837
                        
                        
                        
                        121,736
                        
                        
                        
                        304,740
                        
                        
                        
                        38,832
                        
                        
                        
                        869,813Interest-bearing
      liabilities:Time
      deposits
                        
                        
                        102,004
                        
                        
                        
                        73,713
                        
                        
                        
                        249,578
                        
                        
                        
                        63,749
                        
                        
                        
                        128
                        
                        
                        
                        489,172Savings
      and interest-bearing demand deposits
                        
                        
                        157,400
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        157,400Short-term
      borrowings
                        
                        
                        60,806
                        
                        
                        
                        2,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        62,806Long-term
      borrowings
                        
                        
                        —
                        
                        
                        
                        6,000
                        
                        
                        
                        3,000
                        
                        
                        
                        18,000
                        
                        
                        
                        —
                        
                        
                        
                        27,000Junior
      subordinated debentures
                        
                        
                        20,619
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        41,238
                        
                        
                        
                        —
                        
                        
                        
                        61,857Total
      interest-bearing liabilities
                        
                        
                        340,829
                        
                        
                        
                        81,713
                        
                        
                        
                        252,578
                        
                        
                        
                        122,987
                        
                        
                        
                        128
                        
                        
                        
                        798,235Interest
      sensitivity gap (by period)
                        
                        $
                        (18,161
                        )
                        
                        $
                        124
                        
                        
                        $
                        (130,842
                        )
                        
                        $
                        181,753
                        
                        
                        $
                        38,704
                        
                        
                        $
                        71,578Interest
      sensitivity gap (cumulative)
                        
                        
                        (18,161
                        )
                        
                        
                        (18,037
                        )
                        
                        
                        (148,879
                        )
                        
                        
                        32,874
                        
                        
                        
                        71,578
                        
                        
                        
                        71,578Cumulative
      gap as a % of totalassets
                        
                        
                        (2.00
                        )%
                        
                        
                        (1.99
                        )%
                        
                        
                        (16.43
                        )%
                        
                        
                        3.63
                        %
                        
                        
                        7.90
                        %





The
financial instruments are shown to reprice at the earlier of their principal
repayment date due to maturity, amortization, or prepayment in a stable rate
environment or their next contractual reprice. In the gap analysis, non-maturing
interest-earning assets and interest-bearing liabilities are shown to reprice at
the next contractual reprice date and the Collateralized Mortgage Obligations
and the Real Estate Mortgage Investment Conduits that are a part of the
investment securities are shown to reprice in those periods in which they are
expected to repay.





The table
indicates that CIB Marine has a negative cumulative gap at one year and a
positive cumulative gap at the end of five years and after. The primary reason
for a positive cumulative gap at 60 months and over is that neither
non-interest-bearing deposits nor capital are interest-bearing and hence are not
included in the gap analysis. A positive gap would indicate that an increase in
interest rates will generally have a positive effect on the net interest income,
and a decrease in interest rates will generally have a negative effect on net
interest income. A negative gap would indicate that a decrease in interest rates
will generally have a positive effect on the net interest income, and an
increase in interest rates will generally have a negative effect on net interest
income.


60





While
this repricing interest rate sensitivity analysis is a widely used measure of
interest rate risk and may be used as an indication of interest margin
direction, it does not fully reflect the effects given to interest rate risks
other than reprice risk, such as option, basis and yield curve risks. For these
reasons, CIB Marine also performs interest rate sensitivity analyses using
earnings simulation models. These analyses measure the estimated percentage
change in net interest income due to changes in interest rates. CIB Marine
derives results for selected hypothetical changes in interest rates over a
selected period of time, usually one year.





The
following table illustrates the expected percentage change in net interest
income over a one year period due to an immediate change in the short-term U.S.
prime rate of interest and by the same amount and direction parallel shifts in
the related U.S. Treasury and U.S. Dollar LIBOR Swap yield curves as of December
31, 2008 and 2007.





Basis Point Changes+200
                
                
                
                +100
                
                
                
                -100
                
                
                
                -200Net
      interest income change over one yearDecember
      31, 2008
                
                
                (9.21
                )%
                
                
                (3.88
                )%
                
                
                (0.35
                )%
                
                
                (1.46
                )%December
      31, 2007
                
                
                (7.35
                )%
                
                
                (4.09
                )%
                
                
                (0.42
                )%
                
                
                (2.96
                )%





The
analysis reveals that on a relative basis CIB Marine is more liability sensitive
for the one year horizon at both December 31, 2008 and 2007. This means that in
a rising interest rate environment, interest expense would increase by more than
interest income over a one year horizon than in a declining interest rate
environment. The analysis also reveals that the relationship between basis point
changes in interest rates and net interest income changes is not a linear
relationship; the primary reason for this is the option and basis risks inherent
in the assets and liabilities of CIB Marine. The primary form of option risk
prevalent is prepayment risks in the loan and mortgage backed security assets,
and the primary form of basis risk inherent is differences in the timing and
magnitude of changes to U.S. prime rates of interest and interest rates paid on
non-maturing deposit accounts.





CIB
Marine monitors the models on an ongoing basis to ensure the assumptions most
accurately reflect the current conditions. The balance sheet financial
instruments included in the gap and simulation models include loans, investment
securities, federal funds sold, time deposits, saving deposits, interest-bearing
demand deposits, federal funds purchased, securities sold under agreements to
repurchase and other borrowings. Some of the options accounted for in the
simulation analysis include call options in U.S. Government Sponsored Enterprise
issued investment securities, embedded call options in U.S. Government Sponsored
Enterprise issued Collateralized Mortgage Obligations, Real Estate Mortgage
Investment Conduits, fixed rate loans, loans with rate floors and put options in
various borrowings.





The
interest rate sensitivity analysis for December 31, 2007 included $10.0 million
of receive fixed/pay floating interest rate swaps used to hedge time deposits of
similar terms and $5.6 million of pay fixed/receive floating interest rate swaps
used to hedge fixed rate loans of similar terms. There were no interest rate
swaps outstanding at December 31, 2008. Some of the features of the financial
instruments included in the model that are not reflected fully in the
quantitative market risk disclosure information include call options in
municipal bonds and U.S. Government Sponsored Enterprise issued structured
notes.





The
following assumptions were used in the earnings simulation model:





·
              The
      balance sheet size was assumed to remain
  constant;


·
              All
      maturing assets and liabilities were invested or deposited into similar
      financial or derivative
instruments;


·
              Spreads
      to the benchmark interest rates for pricing new volume to replace maturing
      or paying older volumes were similar to spreads currently inherent in
      those financial instruments, except for marketable securities which
      reflects current market
spreads;


·
              The
      interest rates of financial instruments with like terms were assumed to
      change by the same number of basis points except that the timing,
      magnitude, and direction of change of interest rates paid on non-maturing
      savings and interest-bearing demand deposits were assumed to change in a
      way similar to that experienced in the past, which is less than perfectly
      correlated with the other interest rate changes. Current anticipated
      pricing strategies for non-maturing deposits were also
      utilized.


61





The
simulations of earnings do not incorporate any management actions that might
change the response of net interest income to interest rate changes. Therefore,
they may not reflect actual results.





Equity
price risk exists as the result of various holdings of equity securities whose
market value changes with changes in the market. Equity holdings include those
traded on various exchanges and those that are not, the latter of which have
limited liquidity. CIB Marine does not actively hedge its equity positions with
derivatives to mitigate the risk of price movements in equity securities. Total
equity security holdings of CIB Marine at December 31, 2008 and 2007,
respectively, includes $0.9 million and $0.1 million of private and public
nonaffiliated firms, $1.1 million and $1.2 million in low income housing tax
credit limited partnerships, zero and $0.6 million of Federal Reserve Bank of
Atlanta stock, and $11.6 million and $11.7 million of FHLB
stock.


62





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Report of Independent
Registered Public Accounting Firm





The Board
of Directors


CIB
Marine Bancshares, Inc.:





We have
audited the accompanying consolidated balance sheets of CIB Marine Bancshares,
Inc. and its subsidiaries (the Company) as of December 31, 2008 and 2007, and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31,
2008. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CIB Marine Bancshares, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U. S. generally accepted accounting
principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company's
inability to meet its obligations with regard to the trust preferred securities,
in addition to its continued net losses, and in consideration of ongoing
regulatory matters raise substantial doubt about its ability to continue as a
going concern. Management’s plans with regard to these matters are also
described in note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





KPMG
      LLPMilwaukee,
      WisconsinApril
      15, 2009


63


CIB
MARINE BANCSHARES, INC.





Consolidated
Balance Sheets





December 31,2008
                
                
                2007(Dollars in thousands,except share data)AssetsCash
      and cash equivalents:Cash
      and due from banks
                
                $
                27,854
                
                
                $
                22,649Reverse
      repurchase securities
                
                
                27,682
                
                
                
                51,692Federal
      funds sold
                
                
                1,695
                
                
                
                500Total
      cash and cash equivalents
                
                
                57,231
                
                
                
                74,841Loans
      held for sale
                
                
                4,777
                
                
                
                —Securities,
      at fair value
                
                
                280,452
                
                
                
                316,321Loans
                
                
                555,207
                
                
                
                595,259Allowance
      for loan losses
                
                
                (19,242
                )
                
                
                (20,706
                )Net
      loans
                
                
                535,965
                
                
                
                574,553Premises
      and equipment, net
                
                
                5,794
                
                
                
                8,961Accrued
      interest receivable
                
                
                4,289
                
                
                
                5,839Foreclosed
      properties
                
                
                980
                
                
                
                1,344Assets
      of companies held for disposal
                
                
                988
                
                
                
                1,851Other
      assets
                
                
                15,920
                
                
                
                22,077Total
      assets
                
                $
                906,396
                
                
                $
                1,005,787Liabilities
      and Stockholders’ EquityDeposits:Noninterest-bearing
      demand
                
                $
                48,060
                
                
                $
                73,519Interest-bearing
      demand
                
                
                34,308
                
                
                
                36,832Savings
                
                
                123,092
                
                
                
                171,338Time
                
                
                489,172
                
                
                
                463,901Total
      deposits
                
                
                694,632
                
                
                
                745,590Short-term
      borrowings
                
                
                62,806
                
                
                
                85,616Long-term
      borrowings
                
                
                27,000
                
                
                
                12,000Junior
      subordinated debentures
                
                
                61,857
                
                
                
                61,857Accrued
      interest payable
                
                
                41,377
                
                
                
                33,223Liabilities
      of companies held for disposal
                
                
                1,699
                
                
                
                3,976Other
      liabilities
                
                
                2,223
                
                
                
                3,219Total
      liabilities
                
                
                891,594
                
                
                
                945,481Stockholders’
      EquityPreferred
      stock, $1 par value; 5,000,000 shares authorized, none
    issued
                
                
                —
                
                
                
                —Common
      stock, $1 par value; authorized shares, 50,000,000; issued shares,
      18,346,442 in 2008 and 2007; outstanding shares, 18,341,231 in 2008 and
      18,346,442 in 2007
                
                
                18,346
                
                
                
                18,346Capital
      surplus
                
                
                158,613
                
                
                
                158,398Accumulated
      deficit
                
                
                (151,936
                )
                
                
                (117,537
                )Accumulated
      other comprehensive income (loss), net
                
                
                (10,008
                )
                
                
                1,382Receivables
      from sale of stock
                
                
                (51
                )
                
                
                (121
                )Treasury
      stock at cost, 12,663 shares
                
                
                (162
                )
                
                
                (162
                )Total
      stockholders’ equity
                
                
                14,802
                
                
                
                60,306Total
      liabilities and stockholders’ equity
                
                $
                906,396
                
                
                $
                1,005,787





See
accompanying Notes to Consolidated Financial Statements


64


CIB
MARINE BANCSHARES, INC.





Consolidated
Statements of Operations





Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006(Dollars in thousands, except share and per share data)Interest
      and Dividend IncomeLoans
                    
                    $
                    38,611
                    
                    
                    $
                    44,627
                    
                    
                    $
                    38,533Loans
      held for sale
                    
                    
                    19
                    
                    
                    
                    5
                    
                    
                    
                    2Securities:Taxable
                    
                    
                    16,128
                    
                    
                    
                    14,516
                    
                    
                    
                    17,907Tax-exempt
                    
                    
                    41
                    
                    
                    
                    81
                    
                    
                    
                    161Dividends
                    
                    
                    30
                    
                    
                    
                    239
                    
                    
                    
                    605Federal
      funds sold
                    
                    
                    1,312
                    
                    
                    
                    3,226
                    
                    
                    
                    4,301Total
      interest and dividend income
                    
                    
                    56,141
                    
                    
                    
                    62,694
                    
                    
                    
                    61,509Interest
      ExpenseDeposits
                    
                    
                    22,743
                    
                    
                    
                    29,695
                    
                    
                    
                    29,247Short-term
      borrowings
                    
                    
                    2,097
                    
                    
                    
                    1,698
                    
                    
                    
                    1,008Long-term
      borrowings
                    
                    
                    774
                    
                    
                    
                    118
                    
                    
                    
                    245Junior
      subordinated debentures
                    
                    
                    8,887
                    
                    
                    
                    8,556
                    
                    
                    
                    7,742Total
      interest expense
                    
                    
                    34,501
                    
                    
                    
                    40,067
                    
                    
                    
                    38,242Net
      interest income
                    
                    
                    21,640
                    
                    
                    
                    22,627
                    
                    
                    
                    23,267Provision
      for (reversal of) credit losses
                    
                    
                    22,063
                    
                    
                    
                    6,413
                    
                    
                    
                    (4,384
                    )Net
      interest income (loss) after provision for credit losses
                    
                    
                    (423
                    )
                    
                    
                    16,214
                    
                    
                    
                    27,651Noninterest
      IncomeLoan
      fees
                    
                    
                    325
                    
                    
                    
                    421
                    
                    
                    
                    270Deposit
      service charges
                    
                    
                    942
                    
                    
                    
                    963
                    
                    
                    
                    1,041Other
      service fees
                    
                    
                    122
                    
                    
                    
                    119
                    
                    
                    
                    184Other
      income
                    
                    
                    585
                    
                    
                    
                    233
                    
                    
                    
                    320Net
      gain on sale of assets and deposits
                    
                    
                    4,184
                    
                    
                    
                    1,314
                    
                    
                    
                    2,727Total
      noninterest income
                    
                    
                    6,158
                    
                    
                    
                    3,050
                    
                    
                    
                    4,542Noninterest
      ExpenseCompensation
      and employee benefits
                    
                    
                    16,375
                    
                    
                    
                    18,167
                    
                    
                    
                    20,484Equipment
                    
                    
                    1,884
                    
                    
                    
                    3,155
                    
                    
                    
                    3,420Occupancy
      and premises
                    
                    
                    2,700
                    
                    
                    
                    3,134
                    
                    
                    
                    3,332Professional
      services
                    
                    
                    4,828
                    
                    
                    
                    3,348
                    
                    
                    
                    4,484Impairment
      loss on investment securities
                    
                    
                    1,792
                    
                    
                    
                    —
                    
                    
                    
                    1,134Write
      down and losses on assets
                    
                    
                    3,547
                    
                    
                    
                    742
                    
                    
                    
                    —Other
      expense
                    
                    
                    10,522
                    
                    
                    
                    5,926
                    
                    
                    
                    9,277Total
      noninterest expense
                    
                    
                    41,648
                    
                    
                    
                    34,472
                    
                    
                    
                    42,131Loss
      from continuing operations before income taxes
                    
                    
                    (35,913
                    )
                    
                    
                    (15,208
                    )
                    
                    
                    (9,938
                    )Income
      tax expense (benefit)
                    
                    
                    320
                    
                    
                    
                    3
                    
                    
                    
                    (99
                    )Loss
      from continuing operations
                    
                    
                    (36,233
                    )
                    
                    
                    (15,211
                    )
                    
                    
                    (9,839
                    )Discontinued
      operations:Pretax
      income from discontinued operations
                    
                    
                    493
                    
                    
                    
                    417
                    
                    
                    
                    660Income
      tax expense (benefit)
                    
                    
                    (1,341
                    )
                    
                    
                    (1,023
                    )
                    
                    
                    99Income
      from discontinued operations
                    
                    
                    1,834
                    
                    
                    
                    1,440
                    
                    
                    
                    561Net
      Loss
                    
                    $
                    (34,399
                    )
                    
                    $
                    (13,771
                    )
                    
                    $
                    (9,278
                    )Earnings
      (Loss) Per ShareBasic:Loss
      from continuing operations
                    
                    $
                    (1.98
                    )
                    
                    $
                    (0.83
                    )
                    
                    $
                    (0.54
                    )Discontinued
      operations
                    
                    
                    0.10
                    
                    
                    
                    0.08
                    
                    
                    
                    0.03Net
      loss
                    
                    $
                    (1.88
                    )
                    
                    $
                    (0.75
                    )
                    
                    $
                    (0.51
                    )Diluted:Loss
      from continuing operations
                    
                    $
                    (1.98
                    )
                    
                    $
                    (0.83
                    )
                    
                    $
                    (0.54
                    )Discontinued
      operations
                    
                    
                    0.10
                    
                    
                    
                    0.08
                    
                    
                    
                    0.03Net
      loss
                    
                    $
                    (1.88
                    )
                    
                    $
                    (0.75
                    )
                    
                    $
                    (0.51
                    )Weighted
      average shares-basic
                    
                    
                    18,333,779
                    
                    
                    
                    18,333,779
                    
                    
                    
                    18,333,779Weighted
      average shares-diluted
                    
                    
                    18,333,779
                    
                    
                    
                    18,333,779
                    
                    
                    
                    18,333,779





See
accompanying Notes to Consolidated Financial Statements


65


CIB
MARINE BANCSHARES, INC.





Consolidated
Statements of Stockholders’ Equity





Common Stock
                  
                  
                  
                  
                  
                  
                  
                  
                  Accumulated
                    Other
                  
                  
                  Stock
                    Receivables
                    andShares
                  
                  
                  Par
                    Value
                  
                  
                  Capital
                    Surplus
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  Comprehensive
                    Income (Loss)
                  
                  
                  Treasury
                    Stock
                  
                  
                  Total(Dollars in thousands, except share data)Balance,
      December 31, 2005
                  
                  
                  18,346,442
                  
                  
                  $
                  18,346
                  
                  
                  $
                  158,163
                  
                  
                  $
                  (93,528
                  )
                  
                  $
                  (3,435
                  )
                  
                  $
                  (364
                  )
                  
                  $
                  79,182Comprehensive
      loss:Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,278
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,278
                  )Other
      comprehensive income (loss):Impairment
      loss on investment securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,134
                  )
                  
                  
                  —
                  
                  
                  
                  (1,134
                  )Unrealized
      securities holding gains arising during the period, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,689
                  
                  
                  
                  —
                  
                  
                  
                  2,689Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,723
                  )Stock
      option expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  103
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  103Reduction
      of receivables from sale of stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  51
                  
                  
                  
                  51Balance,
      December 31, 2006
                  
                  
                  18,346,442
                  
                  
                  $
                  18,346
                  
                  
                  $
                  158,266
                  
                  
                  $
                  (102,806
                  )
                  
                  $
                  (1,880
                  )
                  
                  $
                  (313
                  )
                  
                  $
                  71,613Cumulative
      effect of adoption of FIN 48
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (960
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (960
                  )Adjusted
      Balance at beginning of period
                  
                  
                  18,346,442
                  
                  
                  $
                  18,346
                  
                  
                  $
                  158,266
                  
                  
                  $
                  (103,766
                  )
                  
                  $
                  (1,880
                  )
                  
                  $
                  (313
                  )
                  
                  $
                  70,653Comprehensive
      loss:Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (13,771
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (13,771
                  )Other
      comprehensive income:Unrealized
      securities holding gains arising during the period, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,262
                  
                  
                  
                  —
                  
                  
                  
                  3,262Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (10,509
                  )Stock
      option expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  132
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  132Reduction
      of receivables from sale of stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  30
                  
                  
                  
                  30Balance,
      December 31, 2007
                  
                  
                  18,346,442
                  
                  
                  $
                  18,346
                  
                  
                  $
                  158,398
                  
                  
                  $
                  (117,537
                  )
                  
                  $
                  1,382
                  
                  
                  $
                  (283
                  )
                  
                  $
                  60,306Comprehensive
      loss:Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (34,399
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (34,399
                  )Other
      comprehensive loss:Unrealized
      securities holding losses arising during the period, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (11,390
                  )
                  
                  
                  —
                  
                  
                  
                  (11,390
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (45,789
                  )Stock
      option expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  215
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  215Reduction
      of receivables from sale of stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  70
                  
                  
                  
                  70Balance,
      December 31, 2008
                  
                  
                  18,346,442
                  
                  
                  $
                  18,346
                  
                  
                  $
                  158,613
                  
                  
                  $
                  (151,936
                  )
                  
                  $
                  (10,008
                  )
                  
                  $
                  (213
                  )
                  
                  $
                  14,802





See
accompanying Notes to Consolidated Financial Statements


66


CIB
MARINE BANCSHARES, INC.





Consolidated
Statements of Cash Flows





Years Ended December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Cash
      Flows from Operating ActivitiesNet
      loss from continuing operations
                
                $
                (36,233
                )
                
                $
                (15,211
                )
                
                $
                (9,839
                )Net
      income from discontinued operations
                
                
                1,834
                
                
                
                1,440
                
                
                
                561(34,399
                )
                
                
                (13,771
                )
                
                
                (9,278
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Deferred
      loan fee amortization
                
                
                (398
                )
                
                
                (639
                )
                
                
                (693
                )Depreciation
      and other amortization
                
                
                294
                
                
                
                1,118
                
                
                
                2,761Provision
      for (reversal of) credit losses
                
                
                22,063
                
                
                
                6,413
                
                
                
                (4,384
                )Originations
      of loans held for sale
                
                
                (4,764
                )
                
                
                (2,600
                )
                
                
                (1,965
                )Proceeds
      from sale of loans held for sale
                
                
                4,031
                
                
                
                2,716
                
                
                
                1,906Net
      gain on sale of assets and deposits
                
                
                (4,184
                )
                
                
                (1,314
                )
                
                
                (2,727
                )Write
      down and losses on assets
                
                
                3,547
                
                
                
                742
                
                
                
                —Impairment
      loss on investment securities
                
                
                1,792
                
                
                
                —
                
                
                
                1,134Decrease
      (increase) in interest receivable and other assets
                
                
                3,582
                
                
                
                2,735
                
                
                
                (2,238
                )Increase
      in interest payable junior subordinated debentures
                
                
                8,832
                
                
                
                8,501
                
                
                
                7,688Increase
      (decrease) in other interest payable and other liabilities
                
                
                (1,822
                )
                
                
                (4,464
                )
                
                
                2,487Operating
      cash flows of discontinued operations
                
                
                (1,192
                )
                
                
                (291
                )
                
                
                (523
                )Net
      cash used in operating activities
                
                
                (2,618
                )
                
                
                (854
                )
                
                
                (5,832
                )Cash
      Flows from Investing ActivitiesMaturities
      of securities available for sale
                
                
                70,591
                
                
                
                107,225
                
                
                
                159,757Purchase
      of securities available for sale
                
                
                (56,125
                )
                
                
                (94,476
                )
                
                
                (100,943
                )Proceeds
      from sales of securities available for sale
                
                
                —
                
                
                
                33,204
                
                
                
                —Proceeds
      from sales of mortgage-backed securities available for
sale
                
                
                —
                
                
                
                48,037
                
                
                
                —Repayments
      of asset and mortgage-backed securities available for sale
                
                
                46,420
                
                
                
                52,567
                
                
                
                81,072Purchase
      of asset and mortgage-backed securities available for sale
                
                
                (36,354
                )
                
                
                (125,567
                )
                
                
                (5,390
                )Net
      decrease in Federal Home Loan Bank Stock
                
                
                185
                
                
                
                45
                
                
                
                14,431Net
      decrease in other investments
                
                
                61
                
                
                
                48
                
                
                
                795Net
      increase in loans
                
                
                (25,267
                )
                
                
                (79,761
                )
                
                
                (5,954
                )Proceeds
      from sale of foreclosed properties
                
                
                777
                
                
                
                10
                
                
                
                2,525Net
      cash received from the sale of branches
                
                
                41,039
                
                
                
                2,278
                
                
                
                3,620Premises
      and equipment disposals
                
                
                82
                
                
                
                1,338
                
                
                
                715Premises
      and equipment expenditures
                
                
                (343
                )
                
                
                (1,155
                )
                
                
                (1,317
                )Investing
      cash flows of discontinued operations
                
                
                (222
                )
                
                
                (1,435
                )
                
                
                1,011Net
      cash provided by (used in) investing activities
                
                
                40,844
                
                
                
                (57,642
                )
                
                
                150,322Cash
      Flows from Financing ActivitiesIncrease
      (decrease) in deposits
                
                
                35,678
                
                
                
                5,574
                
                
                
                (63,713
                )Decrease
      in deposits of branches held for sale
                
                
                —
                
                
                
                (5,700
                )
                
                
                (11,627
                )Deposits
      sold
                
                
                (83,704
                )
                
                
                (49,665
                )
                
                
                (64,329
                )Repayments
      of long-term borrowings
                
                
                —
                
                
                
                (2,000
                )
                
                
                (5,250
                )Proceeds
      from long-term borrowings
                
                
                15,000
                
                
                
                12,000
                
                
                
                —Net
      increase (decrease) in short-term borrowings
                
                
                (22,810
                )
                
                
                57,963
                
                
                
                2,652Net
      decrease in receivables from sale of stock
                
                
                —
                
                
                
                30
                
                
                
                —Net
      cash provided by (used in) financing activities
                
                
                (55,836
                )
                
                
                18,202
                
                
                
                (142,267
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (17,610
                )
                
                
                (40,294
                )
                
                
                2,223Cash
      and cash equivalents, beginning of year
                
                
                74,841
                
                
                
                115,135
                
                
                
                112,912Cash
      and cash equivalents, end of year
                
                $
                57,231
                
                
                $
                74,841
                
                
                $
                115,135Supplemental
      Cash Flow InformationCash
      paid (received) during the year for:Interest
      expense-continuing operations
                
                $
                26,347
                
                
                $
                31,784
                
                
                $
                30,198Income
      taxes-discontinued operations
                
                
                (831
                )
                
                
                —
                
                
                
                2Supplemental
      Disclosures of Noncash ActivitiesTransfers
      of loans to foreclosed properties-continuing operations
                
                $
                405
                
                
                $
                1,273
                
                
                $
                52Transfers
      of loans to loans held for sale
                
                
                4,010
                
                
                
                —
                
                
                
                —Transfer
      deposits to deposits of branches held for sale
                
                
                —
                
                
                
                —
                
                
                
                64,331Available
      for Sale equity stock received from sale of subsidiary
                
                
                955
                
                
                
                —
                
                
                
                —Cumulative
      effect of adoption of FIN 48 (1)
                
                
                —
                
                
                
                960
                
                
                
                —





See
accompanying Notes to Consolidated Financial Statements


67


Notes
to Consolidated Financial Statements





Note
1-Summary of Significant Accounting Policies





Nature
of Operations





CIB
Marine Bancshares, Inc. (“CIB Marine”) is a bank holding company. References to
“CIB Marine” include CIB Marine’s subsidiaries unless otherwise specified. The
primary sources of revenue are providing loans to small and middle-market
business customers and investments in securities. CIB Marine also offers a
competitive range of deposit and other financial products to its customers. Its
offices and, generally, customers are located in the central Illinois,
Milwaukee, Indianapolis, and Phoenix markets. Canron Corporation (“Canron”), an
84% owned subsidiary of CIB Construction, was a steel fabrication and erection
company, which was acquired in 2002 as a result of collection activities. Since
the third quarter of 2003, Canron has been in the process of voluntary
liquidation.





Going
Concern and Regulatory Matters





As
discussed below, CIB Marine has defaulted on the debentures it issued in
conjunction with its Trust Preferred Securities (“TruPS”) offerings. The
Company's inability to meet its obligations with regard to the trust preferred
securities, in addition to its continued net losses, and in consideration
of the regulatory matters discussed below, raise substantial doubt about CIB
Marine’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of liabilities that may result from the
outcome of CIB Marine’s ability to continue as a going concern.





Default
on TruPS Debentures





As
discussed further in note 11, CIB Marine owes approximately $100.9 million
(including accrued interest of $39.1 million) on its junior subordinated
debentures supporting its trust preferred securities, all of which is due and
payable. At December 31, 2008, total assets at the CIB Marine parent company
were $117.1 million, which included $13.2 million of liquid assets. There is no
other source of repayment of the TruPS other than these assets. CIB Marine
defaulted on the first tranche of the TruPS on March 25, 2009 and, absent
additional capital, cash or a successful restructuring of the TruPS, will
default on the remaining three tranches during the second quarter of
2009.





On March
16, 2009, CIB Marine submitted a Consent Solicitation to holders of its existing
TruPS to restructure its obligations under those instruments. Pursuant to the
proposed Plan of Restructuring, the approximately $100.9 million of current
indebtedness under the debentures supporting the TruPS would be replaced with
approximately $94.9 million aggregate liquidation preference of newly-issued CIB
Marine 7% Fixed Rate Perpetual Noncumulative Preferred Stock (“Company
Preferred”).





As of
April 10, 2009, the initial voting deadline established in the Consent
Solicitation, CIB Marine was notified that a sufficient number of negative votes
were cast by the applicable holders of two series of TruPS to prevent approval
of the Plan of Restructuring. Based upon conversations that CIB Marine and its
investment banking firm have had with certain of the TruPS holders, including
certain holders who have initially voted against the Consent Solicitation, CIB
Marine has elected to extend the voting deadline until May 11, 2009 in order to
give it more time to consider amending the terms of the Consent Solicitation and
Plan of Restructuring to address such holders’ concerns, as well as to consider
all of the other options available to it.





If the
Plan of Restructuring is ultimately not approved, CIB Marine will not be able to
pay the entire amount of the accrued interest on its debentures and will be
unable to cure its default on the TruPS. Management believes that its inability
to cure this default will have serious adverse consequences on the shareholders
and TruPS holders who could, in certain circumstances, force or be directed to
force CIB Marine into an involuntary liquidation that would have a material
adverse effect on CIB Marine’s continuing operations.


68





Regulatory
Matters





At
December 31, 2008 CIB Marine was subject to a Written Agreement (“Agreement”) it
entered into with the FRB in the second quarter of 2004. Among other items, the
Agreement requires CIB Marine to maintain a sufficient capital position for the
consolidated organization including the current and future capital requirements
of each of its subsidiary banks, nonbank subsidiaries and the consolidated
organization. As of December 31, 2008, CIB Marine’s Tier 1 leverage ratio had
declined from 7.92% at December 31, 2007 to 3.58%. As a result, CIB Marine’s
Tier 1 leverage ratio fell below the 4.0% “minimum capital” threshold applicable
under the Agreement and the regulatory guidelines of the FRB. The decline
reflects the continued operating losses of CIB Marine during 2008. Depending on
the extent of continuing losses incurred by CIB Marine in future periods, as
well as changes to the overall size of its balance sheet, losses incurred from
further loan losses and other-than-temporary impairment of investment securities
and other unforeseeable events that may adversely affect its assets or capital,
CIB Marine’s capital ratios could decline further. Based on CIB Marine’s current
and projected levels of capital, CIB Marine anticipates that it will not be able
to satisfy the Tier I Core Capital and Total Risk-Based Capital minimum ratios
unless it raises additional capital through the renegotiation of its TruPS. If
CIB Marine cannot restructure its TruPS, its subsidiary Banks could be subject
to further regulatory enforcement action, including, without limitation, the
issuance of cease and desist orders (which may, among other things, further
restrict the Banks’ business activities and potentially placing them into a
conservatorship or receivership. Notwithstanding the renegotiation of the TruPS,
the Federal Reserve could take enforcement action before any such date, which
could include the FDIC or the state regulators placing the Banks into a
conservatorship or receivership. If the Banks are placed into a conservatorship
or receivership, it is highly likely that this would lead to a complete loss of
all value of CIB Marine’s ownership interest in the Banks, and CIB Marine
subsequently may be exposed to significant claims by the FDIC or the state
regulators. In addition, further restrictions could be placed on the Banks if
following a determination that the Banks are undercapitalized, significantly
undercapitalized, or critically undercapitalized, with increasingly greater
restrictions being imposed as the level of undercapitalization
increases.





In March
2009 Marine Bank stipulated to a C&D which was signed by the FDIC and the
WDFI in early April 2009, and is expected to become effective in the near
future. The C&D primarily resulted from the high level of nonperforming
assets of Marine Bank and the resulting impact on its financial condition. The
C&D requires Marine Bank to take certain corrective actions focusing on
reducing exposure to non-performing loans, charging off all loans classified as
loss, imposes restrictions on lending to credits with existing non-performing
loans, and accruing interest on certain delinquent loans in addition to charging
off previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.





Management
Plans





In May
2007, CIB Marine engaged Stifel Nicolaus & Company (“Stifel”) to assist
Management in identifying and contacting other bank holding companies regarding
a possible merger or business combination involving CIB Marine. The effort to
identify potential partners has been extensive over the past twenty months. CIB
Marine is not presently engaged in any active negotiations with any potential
transaction partners and has focused its efforts on restructuring its
outstanding TruPS obligations, as described above. CIB Marine has continued its
engagement of Stifel, to assist it in evaluating all strategic options,
including a sale of the company. The Company is also currently taking steps to
comply with all aspects of the C&D and regularly communicates such progress
to its regulators.





The
accounting and reporting policies of CIB Marine conform to U.S. generally
accepted accounting principles.





Consolidation





The
consolidated financial statements include the accounts of CIB Marine and its
wholly-owned and majority-owned subsidiaries, including companies which are held
for disposal. All significant intercompany balances and transactions have been
eliminated. At both December 31, 2008 and 2007, Canron’s net assets as presented
in the consolidated balance sheets of CIB Marine were zero. Accordingly,
minority interest in Canron is not reflected in the consolidated financial
statements.


69





Use
of Estimates in the Preparation of Financial Statements





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities including the allowance
for loan losses, valuation of investments and impairment, if any, and disclosure
of contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates used in the preparation of
the consolidated financial statements are based on various factors, including
the current interest rate environment value of collateral securing loans and
investments, assessed probabilities of default of obligors in loans and
investment securities recent sales of investments in the marketplace and the
economic conditions both local and national. Changes in these factors can
significantly affect CIB Marine’s net interest income and the value of its
recorded assets and liabilities.





Cash
Flows





For
purposes of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the consolidated balance
sheet captions “Cash and Due from Banks” and “Federal Funds Sold”, all of which
mature within ninety days.





Other
Investments





Investments
in limited partnerships and other equity investments which are not readily
marketable are accounted for using the equity method when CIB Marine’s ownership
is at least 3% in a limited partnership and 20% in a corporation, but not more
than 50%. Investments not accounted for under the equity method are accounted
for using the cost method. All other investments are periodically evaluated for
impairments. If an investment is impaired, a loss is recognized. To determine
whether an investment is impaired, CIB Marine looks to various indicators
including recent transactions, if any, and the investee’s financial condition.
During 2007, CIB Marine recognized $0.7 million of impairment losses on other
investments. No impairment losses on other investments were recognized in 2008
and 2006. If different assumptions or conditions were to prevail, the carrying
value of these investments may need to be further reduced and a loss recorded or
previously recognized losses reversed and a gain recorded. At December 31, 2008
and 2007, other investments totaled $1.2 million and $1.4 million, respectively,
all of which are illiquid.





The
equity method of accounting requires CIB Marine to record its proportionate
share of income or loss as an increase or decrease in its investment and a
corresponding gain or loss in noninterest income. Cash dividends or other
distributions received by CIB Marine are recorded as reductions in the carrying
amount of the investment.





Loans
Held for Sale





Loans
held for sale are carried at the lower of cost or fair value, determined on an
individual basis. When a loan is sold or transferred to held for sale, the
loan’s carrying value is compared to its fair value and any shortfall in value
that is determined to be credit related is recorded as a charge-off, reducing
the allowance for loan losses. Any shortfall in fair value other than credit
related is recorded as a charge to noninterest expense. All subsequent net
declines in fair value of loans held for sale are also recorded to noninterest
expense.





Securities
Available for Sale





Available
for sale securities consist of equity securities, bonds, notes and other debt
securities not classified as held to maturity securities or trading securities.
Available for sale securities are carried at fair value with unrealized net
gains and losses reported in other comprehensive income (loss) in stockholders’
equity. Declines in the fair value of securities available for sale that are
deemed to be other-than-temporary are charged to earnings as a realized loss,
and a new cost basis for the securities is established. In evaluating other-than
temporary impairment for impaired investments, CIB Marine’s management considers
the length of time and extent to which the fair value has been less than cost,
the financial condition and near-term prospects of the issuer, the intent and
ability of CIB Marine to retain its investment for a period of time sufficient
to allow for any anticipated recovery in fair value in the near term and other
factors as detailed in Note 3. Realized securities gains or losses on securities
sales (using specific identification method) and declines in fair value below
the amortized costs judged to be other-than-temporary are included in
noninterest income expense as appropriate.


70





The
amortized cost of securities is adjusted for amortization of premiums and
accretion of discounts over the estimated remaining life of the security. Such
amortization is calculated using the level-yield method, adjusted for
prepayments, and is included in interest income from investments.





Loans,
Allowance for Loan Losses and Provision for Credit Losses





Loans
that management has the intent and ability to hold to maturity for the
foreseeable future are carried at the amount of unpaid principal, increased by
costs to originate loans and premiums paid on purchased loans and reduced by net
deferred fees and an allowance for loan losses. The accrual of interest on loans
is generally discontinued when a loan becomes ninety days or more delinquent in
accordance with the loan’s contractual terms unless the credit is well secured
and in process of collection. Loans are placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered by
management to be doubtful. Unpaid interest that has previously been recorded as
income is written off against interest income when a loan is placed on
nonaccrual. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. Interest payments
received on loans which are on nonaccrual are generally applied to reduce the
loan principal. Loans are returned to accrual status once a borrower has
demonstrated repayment performance on the contractual schedule for a period of
six consecutive months and the expectation is that contractual payments will
continue to be made during the remaining term of the loan.





The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance when management
believes that the collectibility of the principal amount is unlikely and where
loans are sold at less than their outstanding principal balances. During 2008,
CIB Marine changed its charge-off policy related to its purchased home equity
pools. Due to the sustained decline in housing markets and adverse conditions
for housing finance, in the second quarter of 2008 CIB Marine began charging off
100% of the outstanding principal of each loan in the home equity pools when it
becomes 90 days past due. This change accelerated charge-offs of the
non-performing loans in the pools. Recoveries of amounts previously charged-off
are credited to the allowance.





The
provision for loan losses is included in the provision for credit losses in the
statements of operations. Also included in the provision for credit losses is
the expense for probable losses on unfunded loan commitments and standby letters
of credit. Estimated losses on unfunded loan commitments and standby letters of
credit are accrued and included in other liabilities.





Management
periodically reviews the loan portfolio in order to establish an allowance for
loan losses that are probable at the reporting date. The allowance for loan
losses is based on management’s evaluation of individual loans and the entire
loan portfolio, including such factors as the volume and character of loans
outstanding, the relationship of the allowance for loan losses to outstanding
loans, past loan loss experience, the expected loan repayments, estimated value
of any underlying collateral on individual loans and general economic
conditions.





Management
believes that the allowance for loan losses was adequate at December 31, 2008
and 2007. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
the loan portfolio and/or in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review CIB Marine’s allowance for loan losses. Such agencies may
require CIB Marine to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.


71





A loan is
considered impaired when, based on current information and events, it is
probable that CIB Marine will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment records and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value
of the collateral if the loan is collateral dependent. Cash collections on
impaired loans which are individually evaluated are credited to the loan
receivable balance and no interest income is recognized on those loans until the
loan is no longer considered impaired.





Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, CIB Marine does not separately identify individual
consumer and residential loans for impairment.





Loan
origination fees are deferred and certain direct origination costs are
capitalized. The amounts deferred and capitalized as well as premiums on
purchased loans are included in the carrying amount of the loans and amortized
over the estimated life of the loans as an adjustment of the yield of the
related loan. Amortization of deferred loan fees and costs ceases when a loan is
placed on nonaccrual. Fees for loans sold and other loan fees are included in
the net gain or loss recognized on the sale.





Goodwill





Goodwill
resulted from the acquisition of companies or assets. Fair values have been
determined by examining stock prices of publicly traded financial institutions
with similar performance characteristics as the reporting units and discounted
cash flow models. Where market prices are not available and the reporting unit
is held for disposal, third party valuations or anticipated offer values are
used. Goodwill is not amortized, but is evaluated for impairment annually, or
more frequently if events or changes in circumstances indicate that the asset
may be impaired. Prior to 2002, goodwill was amortized on a straight-line basis
over 15 years. As a result of a branch sale in the first quarter of 2007, CIB
Marine has no goodwill at December 31, 2008 and 2007.





Premises
and Equipment





Land is
carried at cost. Premises and equipment are carried at cost less accumulated
depreciation computed primarily using the straight-line method. Maintenance and
repairs are charged to expense as incurred, while renewals and betterments are
capitalized. Estimated useful lives of assets are 39 years for buildings and 3
to 10 years for furniture and equipment. Leasehold improvements included in
premises and equipment is amortized over the shorter of the useful life of the
improvements or the term of the lease. Rent expense on noncancellable leases is
accrued on the straight-line basis over the term of the lease based upon minimum
rents.





Foreclosed
Properties





Foreclosed
properties include other real estate (“ORE”) assets that have been received in
satisfaction of debt. ORE is initially recorded and subsequently carried at the
lower of cost or fair value less estimated selling costs. Any valuation
adjustments required at the date of transfer to ORE are charged to the allowance
for loan losses. Subsequently, operating results from ORE, reductions in value
of the foreclosed property and realized gains and losses on sale are recorded in
noninterest income or noninterest expense as appropriate.





Assets
of Companies Held For Disposal





Assets
held for disposal are carried at the lower of cost or current fair value, less
estimated selling costs. The aggregate assets and liabilities are shown as
separate categories on the consolidated balance sheets. When these assets are
acquired in full or partial satisfaction of a loan, any excess of the related
loan balance over the fair value, less estimated selling cost, is charged as a
loan loss against the allowance for loan losses. Net operating income or loss of
the companies held for disposal and which meet the criteria as discontinued
operations are included in gain or loss from discontinued operations. Once a
decision is made to cease operations and liquidate the company, CIB Marine
discontinues recording any future operating results of the company and records
an impairment value, if any, based on the estimated liquidation value of the
company’s net assets less costs to sell. The impairment loss is recorded as loss
from discontinued operations.


72





Litigation
Costs





CIB
Marine recognizes settlement expenses related to litigation in the period in
which the litigation is settled or if prior to settlement, the period in which
CIB Marine management determines a loss contingency exists and the amount of
such loss can be reasonably estimated. Such expenses are included in noninterest
expense. In 2008 CIB Marine recognized a $3.4 million settlement expense related
to a lawsuit settled during that period, and in 2006 CIB Marine recognized a
$1.8 million loss contingency expense related to a lawsuit settled during the
first quarter of 2007. CIB Marine did not recognize any litigation settlement or
loss contingency expenses in 2007. Legal fees related to the defense of
litigation are recognized as incurred.





Stock-Based
Compensation





Fair
value has been estimated using the Black-Scholes model as defined in SFAS No.
123 (“SFAS 123”). The following assumptions were used in estimating the fair
value for options granted in 2008, 2007 and 2006:





December 31,2008
                  
                  
                  2007
                  
                  
                  2006Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Risk
      free interest rate
                  
                  
                  3.92
                  %
                  
                  
                  3.92
                  %
                  
                  
                  4.63
                  %Expected
      volatility
                  
                  
                  39
                  %
                  
                  
                  39
                  %
                  
                  
                  40
                  %Weighted
      average expected life
                  
                  6.5
      years
                  
                  
                  6.5
      years
                  
                  
                  6.5
      yearsWeighted
      average per share fair value of options
                  
                  $
                  0.27
                  
                  
                  $
                  0.43
                  
                  
                  $
                  0.76





SFAS
123(R)’s Share-Based
Payments (“SFAS 123(R)”) fair value method resulted in $0.2 million and
$0.1 million of compensation expense for 2008 and 2007, respectively. In
accordance with SFAS 123(R), CIB Marine is required to estimate potential
forfeitures of stock grants and adjust compensation expense recorded
accordingly. The estimate of forfeitures will be adjusted over the requisite
service period to the extent that actual forfeitures differ, or are expected to
differ, from such estimates. Changes in estimated forfeitures will be recognized
in the period of change and will also impact the amount of stock compensation
expense to be recorded in future periods. At December 31, 2008, CIB Marine had
$0.4 million of total unrecognized compensation cost related to nonvested stock
options. That cost is expected to be recognized over a weighted-average period
of 2.8 years.





SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow rather than an
operating cash flow as required under previous literature. There were no such
tax benefits in 2008 or 2007.





CIB
Marine records amounts received upon the exercise of options by crediting common
stock and capital surplus. Income tax benefits from the exercise of stock
options result in a decrease in current income taxes payable and, to the extent
not previously recognized as a reduction in income tax expense, an additional
increase in capital surplus.





Receivables
from Sale of Stock





Loans
originated by CIB Marine’s subsidiary banks to purchase CIB Marine stock are
accounted for as a reduction in stockholders’ equity and are reported in a
contra-equity account titled “Receivables From Sale of Stock,” unless the loan
has been repaid prior to the issuance of the financial statements or the loan
has been adequately collateralized, exclusive of the value of CIB Marine stock
pledged as collateral, if any.





Advertising
Expense





Advertising
costs are charged to expense as incurred. Advertising expenses of continuing
operations, included in noninterest expense, totaled $0.6 million, $0.8 million
and $0.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.


73





Income
Taxes





Deferred
income taxes are provided for temporary differences between the amounts reported
for assets and liabilities for financial statement purposes and their tax basis.
Deferred tax assets are recognized for temporary differences that are expected
to be deductible in future years’ tax returns and for operating loss and tax
credit carryforwards. Deferred tax assets are reduced by a valuation allowance
through a charge to income tax expense when, in the opinion of management, it is
deemed more likely than not that some or all of the deferred tax assets will not
be realized. Deferred tax liabilities are recognized for temporary differences
that will be taxable in future years’ tax returns.





CIB
Marine and its subsidiaries file a consolidated federal income tax return and
unitary, combined and separate state tax returns where required. Canron files
its own Canadian and provincial income tax returns. Canron’s Canadian, U.S.
federal, state and provincial income taxes are included in discontinued
operations. CIB Marine has entered into tax allocation agreements with its
subsidiary entities included in the consolidated U.S. federal and unitary or
combined state income tax returns, including U.S. operations of companies held
for sale or disposal. These agreements govern the timing and amount of income
tax payments required by the various entities.





Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through income tax expense
(benefit).





CIB
Marine provides for uncertain tax positions and the related interest and
penalties based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. CIB Marine
recognizes any interest and penalties related to unrecognized tax benefits in
the provision for income tax. At December 31, 2008, CIB Marine management
believes it has appropriately accounted for any unrecognized tax benefits. To
the extent CIB Marine prevails in matters for which a liability for an
unrecognized tax benefit is established or is required to pay amounts in excess
of the liability, the Corporation’s effective tax rate in a given financial
statement period may be effected.





Business
Segments





An
operating segment is defined as a component of an enterprise that engages in
business activities that generate revenue and incur expense. A segment is
further defined as a component whose operating results are reviewed by the chief
operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is
available.





At
December 31, 2008, CIB Marine determined it had one reportable continuing
business segment. CIB Marine, through the bank branch network of its
subsidiaries, provides a broad range of financial services to companies and
individuals in Illinois, Wisconsin, Indiana and Arizona. These services include
commercial and retail lending and accepting deposits. While CIB Marine’s chief
operating decision maker monitors the revenue streams of the various products
and services, operations in all areas are managed, and financial performance is
evaluated, on a corporate-wide basis.





Earnings
Per Common Share





Basic
earnings (loss) per common share are computed by dividing net income (loss) by
the weighted average number of shares outstanding during the periods. Diluted
earnings (loss) per common share is computed by dividing net income or loss by
the weighted average number of common shares adjusted for the dilutive effect of
outstanding stock options. The dilutive effect of outstanding stock options, if
any, is computed using the treasury stock method. Stock options deemed
antidilutive are not included in the earnings per share
calculation.





Derivative
and Hedging Activities





CIB
Marine uses certain derivative financial instruments to help manage its risk or
exposure to changes in interest rates and in conjunction with its mortgage
banking operations. All derivatives are recognized on the balance sheet at their
fair value. On the date a derivative contract is entered into, CIB Marine
designates the derivative as either (1) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (“Fair-Value
Hedge”), (2) a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability
(“Cash-Flow Hedge”), (3) a foreign currency, fair value or cash-flow hedge
(“Foreign-Currency Hedge”), (4) a hedge of a net investment in a foreign
operation, or (5) held for trading (“Trading Instruments”). Changes in the fair
value of a derivative that is highly effective as, and that is designated and
qualifies as, a Fair-Value Hedge, along with the loss or gain on the
corresponding hedged asset or liability (including losses or gains on firm
commitments), are recorded in current period earnings. Changes in the fair value
of a derivative that is highly effective as, and that is designated and
qualifies as, a Cash-Flow Hedge are recorded in other comprehensive income until
earnings are affected by the variability of cash flows (e.g., when periodic
settlements on a variable rate asset or liability are recorded in earnings).
Changes in the fair value of derivative trading instruments are reported in
current period earnings.


74


At the
time the hedging instrument is entered into, CIB Marine formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivatives that are designated as Fair-Value
Hedges, Cash-Flow Hedges, or Foreign-Currency Hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. CIB Marine formally assesses, for all hedges, both at the hedge’s
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions will be or have been highly effective in offsetting changes
in fair values or cash flows of hedged items and whether they are expected to
continue to be highly effective in the future. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, CIB Marine discontinues hedge accounting
prospectively.
 
 CIB
Marine discontinues hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item (including firm commitments or forecasted
transactions); (2) the derivative expires or is sold, terminated, or exercised;
(3) the derivative is designated as a hedge instrument because it is unlikely
that a forecasted transaction will occur; (4) a hedged firm commitment no longer
meets the definition of a firm commitment; or (5) management determines that
designation of the derivative as a hedge instrument is no longer
appropriate.
 
 When
hedge accounting is discontinued because it is determined that the derivative no
longer qualifies as an effective Fair-Value Hedge, the derivative will continue
to be carried on the balance sheet at its fair value, and the hedged asset or
liability will no longer be adjusted for changes in fair value. When hedge
accounting is discontinued because the hedged item no longer meets the
definition of a firm commitment, the derivative will continue to be carried on
the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which it is determined that a derivative is not highly
effective as a hedge or when hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings and the adjustment to the hedged
asset or liability will be amortized to earnings over the remaining life of the
hedged asset or liability.
 
 Although
none were outstanding at December 31, 2008, CIB Marine has used interest rate
swaps to hedge changes in the fair value of certain fixed rate deposits and
certain loans attributable to changes in market interest rates. CIB Marine
primarily used interest rate swaps that effectively converted the fixed rate
financial instrument into a floating rate financial instrument. CIB Marine
entered into these transactions to provide a floating rate asset or liability
whose rate is highly correlated with the index rate off which the floating rate
is paid in the interest rate swap. CIB Marine generally entered into swap
agreements with nationally recognized securities firms and monitors the credit
status of counterparties and the level of collateral for such
swaps.
 
 CIB
Marine’s mortgage banking activities includes the issuance of rate lock
commitments for residential mortgage loans. When the loan is originated it is
recorded as a residential mortgage loan held for sale. For residential mortgage
loans CIB Marine intends to sell, the interest rate lock commitment and the
residential mortgage loan held for sale are hedged with a best efforts contract
which operates like a forward contracts to sell the loan only if the loan is
originated as agreed with the buyer. Currently, a hedging relationship is not
established under SFAS 133 between the interest rate lock commitments and the
residential mortgage loans held for sale with the best efforts contracts. CIB
Marine is in a short position with respect to the forward contracts, whereby CIB
Marine agrees to sell residential mortgage loans held for sale at a
pre-established price at some future date, and in a long position with the
residential mortgage loans held for sale.
  75
  In
addition, CIB Marine has various agreements arising out of certain credit
relationships under which it may earn other forms of contingent loan fees in
addition to interest. The contingent loan fee is typically based upon, or
determined by, the financial performance of the borrower or as payment for
credit services.
 
 New
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). On January 1, 2008 CIB Marine adopted SFAS 157, except as amended
byFASB issued Staff
Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). SFAS 157 establishes a single authoritative definition
of fair value sets out a framework for measuring fair value and provides a
hierarchal disclosure framework for assets and liabilities measured at fair
value. FSP 157-2 issued by the FASB in February 2008 defers the effective date
of SFAS 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and liabilities that are recognized or disclosed in the
financial statements at fair value on a nonrecurring basis only. These include
nonfinancial assets and liabilities not measured at fair value on an ongoing
basis but subject to fair value adjustments in certain circumstances (for
example, assets that have been deemed to be impaired). CIB Marine has elected to
defer the adoption of SFAS 157 with respect to nonrecurring, nonfinancial assets
and liabilities as permitted by FSP 157-2. The partial adoption of SFAS 157 did
not have a material impact on CIB Marine’s consolidated financial
statements.
 
 CIB Marine’s nonfinancial assets and
liabilities that meet the deferral criteria set forth in FSP No. 157-2 include
foreclosed properties and assets and liabilities of companies held for disposal,
namely CIB Construction. The adoption of SFAS 157 for these nonfinancial assets
and liabilities is not expected to have a material impact on CIB Marine’s
consolidated financial statements.
 
 In October 2008, the FASB issued FSP No.
FAS 157-3,Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not
Active(“FSP 157-3”). FSP
157-3 clarifies the application of SFAS 157 in a market that is not active and
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with SFAS 157. CIB
Marine adopted FSP 157-3 in the third quarter of 2008 with no material impact on
its consolidated financial statements.
 
 In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment
of FASB Statement No. 115(“SFAS 159”). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items
generally on an instrument-by-instrument basis at fair value that are not
currently required to be measured at fair value. SFAS 159 is intended to provide
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. CIB Marine adopted SFAS 159 on January 1,
2008, but as of December 31, 2008, has not made any fair value elections with
respect to any of its eligible assets or liabilities as permitted under the
provisions of SFAS 159. Accordingly, the adoption of SFAS 159 did not have an
impact on CIB Marine’s consolidated financial statements.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (“FSP EITF
99-20-1”). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue
No.99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets, (EITF 99-20). The FSP amends EITF 99-20 to eliminate the
requirement that cash flow estimates used in determining fair value of certain
securities be based exclusively upon those that a market participant would use.
The FSP changes the cash flows used to determine if there has been an
other-than-temporary impairment from the market participant view to a holder’s
estimate as to whether there has been a probable adverse change in estimated
cash flow; allowing management to apply reasonable judgment in assessing whether
an other-than-temporary impairment has occurred. The FSP also provides guidance
for determining estimated cash flows. This FSP is effective for interim and
annual reporting periods ending after December 15, 2008. CIB Marine adopted FSP EITF 99-20-1 in
the fourth quarter of 2008 with no material impact on its consolidated financial
statements.
 
 Note
2-Cash and Due from Banks
 
 Reserves
in the form of deposits with the Federal Reserve Bank and vault cash totaling
$4.5 million and $5.3 million were maintained to satisfy federal regulatory
requirements as of December 31, 2008 and 2007, respectively. These amounts are
included in cash and due from banks in the consolidated balance
sheets.
  76
  Note
3-Securities
 
 The
amortized cost, gross unrealized gains and losses, and fair values of securities
at December 31, 2008 and 2007 are as follows:
 
 Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                  
                  
                  Gross
                    Unrealized
                    Losses
                  
                  
                  Fair
                    Value(Dollars
      in thousands)December
      31, 2008U.S.
      government agencies
                  
                  $
                  44,835
                  
                  
                  $
                  2,244
                  
                  
                  $
                  —
                  
                  
                  $
                  47,079Obligations
      of states and political subdivisions
                  
                  
                  30,236
                  
                  
                  
                  622
                  
                  
                  
                  624
                  
                  
                  
                  30,234Other
      notes and bonds
                  
                  
                  9,012
                  
                  
                  
                  —
                  
                  
                  
                  5,409
                  
                  
                  
                  3,603Commercial
      paper
                  
                  
                  4,800
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,800Mortgage-backed
      securities (agencies)
                  
                  
                  107,194
                  
                  
                  
                  1,754
                  
                  
                  
                  26
                  
                  
                  
                  108,922Mortgage-backed
      securities (non-agencies (1))
                  
                  
                  93,428
                  
                  
                  
                  71
                  
                  
                  
                  8,504
                  
                  
                  
                  84,995Equity
      security
                  
                  
                  955
                  
                  
                  
                  —
                  
                  
                  
                  136
                  
                  
                  
                  819Total
      securities available for sale
                  
                  $
                  290,460
                  
                  
                  $
                  4,691
                  
                  
                  $
                  14,699
                  
                  
                  $
                  280,452December
      31, 2007U.S.
      government agencies
                  
                  $
                  63,104
                  
                  
                  $
                  1,202
                  
                  
                  $
                  7
                  
                  
                  $
                  64,299Obligations
      of states and political subdivisions
                  
                  
                  31,031
                  
                  
                  
                  127
                  
                  
                  
                  223
                  
                  
                  
                  30,935Other
      notes and bonds
                  
                  
                  9,098
                  
                  
                  
                  —
                  
                  
                  
                  200
                  
                  
                  
                  8,898Mortgage-backed
      securities (agencies)
                  
                  
                  111,276
                  
                  
                  
                  810
                  
                  
                  
                  341
                  
                  
                  
                  111,745Mortgage-backed
      securities (non-agencies)
                  
                  
                  100,430
                  
                  
                  
                  389
                  
                  
                  
                  375
                  
                  
                  
                  100,444Total
      securities available for sale
                  
                  $
                  314,939
                  
                  
                  $
                  2,528
                  
                  
                  $
                  1,146
                  
                  
                  $
                  316,321
 
 (1)
                non-agency
      mortgage backed securities comprise non-agency mortgage backed securities
      and collateralized mortgage obligations secured by residential
      mortgages.
 
 Securities
available for sale with a carrying value of $222.3 million and $212.4 million at
December 31, 2008 and 2007, respectively, were pledged to secure public
deposits, Federal Home Loan Bank advances, repurchase agreements and for other
purposes as required or permitted by law.
 
 The
amortized cost and fair value of securities as of December 31, 2008, by
contractual maturity, are shown below. Certain securities, other than
mortgage-backed securities, may be called earlier than their maturity date.
Expected maturities may differ from contractual maturities in mortgage-backed
securities, because certain mortgages may be prepaid without penalties.
Therefore, mortgage-backed securities are not included in the maturity
categories in the following contractual maturity schedule.
 
 Amortized
                  
                  
                  FairCost
                  
                  
                  Value(Dollars
      in thousands)Due
      in one year or less
                  
                  $
                  27,848
                  
                  
                  $
                  28,360Due
      after one year through five years
                  
                  
                  23,660
                  
                  
                  
                  25,415Due
      after five years through ten years
                  
                  
                  15,151
                  
                  
                  
                  15,552Due
      after ten years
                  
                  
                  22,224
                  
                  
                  
                  16,38988,883
                  
                  
                  
                  85,716Mortgage-backed
      securities
                  
                  
                  200,622
                  
                  
                  
                  193,917Other
      Equities
                  
                  
                  955
                  
                  
                  
                  819Total
      securities available for sale
                  
                  $
                  290,460
                  
                  
                  $
                  280,452
 
 The
following tables represent gross unrealized losses and the related fair value of
securities aggregated by investment category and length of time individual
securities have been in a continuous unrealized loss position at December 31,
2008 and December 31, 2007:
  77
 
 Less than 12 months in an
                          unrealized loss position
                        
                        
                        12 months or longer in an
                          unrealized loss position
                        
                        
                        TotalFair Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized
                          Losses(Dollars in thousands)December 31, 2008U.S.
      government agencies
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —Obligations
      of states and political subdivisions
                        
                        
                        8,780
                        
                        
                        
                        428
                        
                        
                        
                        2,260
                        
                        
                        
                        196
                        
                        
                        
                        11,040
                        
                        
                        
                        624Other
      notes and bonds
                        
                        
                        1,220
                        
                        
                        
                        1,516
                        
                        
                        
                        2,034
                        
                        
                        
                        3,893
                        
                        
                        
                        3,254
                        
                        
                        
                        5,409Mortgage-backed
      securities
                        
                        
                        83,820
                        
                        
                        
                        8,530
                        
                        
                        
                        14
                        
                        
                        
                        —
                        
                        
                        
                        83,834
                        
                        
                        
                        8,530Equity
      security
                        
                        
                        819
                        
                        
                        
                        136
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        819
                        
                        
                        
                        136Total
      securities with unrealized losses
                        
                        $
                        94,639
                        
                        
                        $
                        10,610
                        
                        
                        $
                        4,308
                        
                        
                        $
                        4,089
                        
                        
                        $
                        98,947
                        
                        
                        $
                        14,699Securities
      without unrealized losses
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        181,505Total
      securities
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        280,452December 31, 2007U.S.
      government agencies
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        7,500
                        
                        
                        $
                        7
                        
                        
                        $
                        7,500
                        
                        
                        $
                        7Obligations
      of states and political subdivisions
                        
                        
                        16,520
                        
                        
                        
                        149
                        
                        
                        
                        2,394
                        
                        
                        
                        74
                        
                        
                        
                        18,914
                        
                        
                        
                        223Other
      notes and bonds
                        
                        
                        5,800
                        
                        
                        
                        200
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        5,800
                        
                        
                        
                        200Mortgage-backed
      securities
                        
                        
                        41,518
                        
                        
                        
                        212
                        
                        
                        
                        58,603
                        
                        
                        
                        504
                        
                        
                        
                        100,121
                        
                        
                        
                        716Total
      securities with unrealized losses
                        
                        $
                        63,838
                        
                        
                        $
                        561
                        
                        
                        $
                        68,497
                        
                        
                        $
                        585
                        
                        
                        $
                        132,335
                        
                        
                        $
                        1,146Securities
      without unrealized losses
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        183,986Total
      securities
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        316,321
 
 Where the
fair value of a security is less than its cost at December 31, 2008, CIB Marine
has the ability and intent to hold the investment for a sufficient period of
time, up to and including maturity, for a forecasted recovery of fair value up
to (or beyond) the cost of the investment and it does not consider it probable
that it will be unable to collect all amounts due according to the contractual
terms of the debt security; except: (1) for one mortgage-backed security
(non-agencies) an other-than-temporary impairment was recorded at September 30,
2008, the cost basis for the security was reduced from $1.4 million to the
securities fair value of $0.9 million, for a loss of $0.5 million during the
third quarter of 2008; (2) for the same mortgage-backed security (non-agencies)
an additional other-than-temporary impairment was recorded at December 31, 2008,
the cost basis for the security was further reduced from $0.9 million to the
securities fair value of $0.5 million at year end, for a loss of $0.4 million
during the fourth quarter of 2008; and (3) for another mortgage-backed security
(non-agencies) an other-than-temporary impairment was recorded at December 31,
2008, the cost basis for the security was reduced from $2.8 million to the
securities fair value of $1.9 million, for a loss of $0.9 million during the
fourth quarter of 2008.
 
 There
were no sales of securities during 2008. Proceeds from the sales of securities
available for sale during 2007 were $81.2 million. During 2007, CIB Marine did
not realize any gains or losses on these sales, but did record impairment losses
during 2006 related to these sales. In the first quarter of 2007, CIB Marine
decided to sell certain securities in its available for sale portfolio. The sale
of these securities in 2007 supported CIB Marine’s asset-liability strategy of
selling lower yielding assets and purchasing higher yielding assets. A portion
of the proceeds were also used to pay down certain short-term liabilities
incurred as a result of the sale of branches and the purchase of a pool of home
equity loans in 2007. When the decision was made in the first quarter of 2007 to
sell these securities, CIB Marine had not yet filed its 2006 Form 10-K. As a
result of the decision CIB Marine determined the full value of those certain
securities would not be fully recovered and, accordingly, recognized an
other-than-temporary impairment loss of $1.1 million on these securities during
2006. This impairment loss is included in impairment loss on investment
securities on the consolidated statements of operations for 2006.
 
 Net
unrealized losses on investment securities at December 31, 2008, were $10.0
million compared to $1.4 million in net unrealized gains as of December 31,
2007. As of December 31, 2008, Other Notes and Bonds accounted for $5.4 million
in net unrealized losses, or 54% of the total net unrealized losses; and
mortgage backed securities (non-agencies) accounted for $8.5 million in net
unrealized losses, or 84% of the total net unrealized losses; and Other Equity
accounted for $0.1 million in net unrealized losses, or 1% of the total net
unrealized losses. The remaining securities $3.9 million, or (39%) reduced net
unrealized losses at December 31, 2008.
  78
  Municipal Securities. Since
December 31, 2007, several nationally recognized rating agencies downgraded the
credit ratings of several of the investment grade bonds and in some cases,
related credit insuring companies. Several of the downgraded credit insuring
companies insure municipal securities owned by CIB Marine. The municipal
securities that have been downgraded have a par value of $29.2 million and a
fair value of $29.2 million as of December 31, 2008. All the municipal
securities were performing as to full and timely payments of principal and
interest and all securities rated by one or more of the nationally recognized
rating agencies were still considered to be investment grade quality at December
31, 2008. During the first quarter of 2009 one municipal security was downgraded
to BB by at least one nationally recognized statistical rating agency, this
security has a par value of $3.5 million and an unrealized loss of $0.4 million.
CIB Marine has determined it is probable it will be able to collect all amounts
due according to the contractual terms of the securities and as a result has not
recognized other-than-temporary impairment on the municipal securities with a
net unrealized loss as of December 31, 2008.
 
 Other Notes and Bonds. The
fair market values of CIB Marine’s holdings have declined between December 31,
2007, and December 31, 2008, due to deterioration in credit quality and a
worsening of liquidity conditions. CIB Marine holds $8.7 million par value with
$3.3 million fair market value of debt obligations collateralized by diversified
pools of bank trust preferred securities and subordinated debt and to a lesser
extent insurance company and real estate investment trust debt; none of CIB
Marine’s Other Note and Bond security holdings, beneficial or otherwise, of
trust preferred securities or subordinated debt issued by organizations in the
financial industry are in the form of a single issuer debt obligations. These
debt obligations consist of securities issued by banks and other financial
institutions and are protected against loss by credit enhancement such as
over-collateralization and subordinated securities. Unless they are the most
senior class security in the structure, they also may be a security that is
subordinated to more senior classes.
 
 To assist
in the evaluation for other-than-temporary impairment CIB Marine performs
assessments prescribed by EITF 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” and FSP
EITF 99-20-1 “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” by
determining whether it is probable that an adverse change in the estimated cash
flows has occurred. This evaluation of estimated cash flows includes an
assessment of the credit risk inherent in the pool of collateral, estimates of
the timing and severity of the issuer deferrals and defaults and related
recovery and their impact on estimated cash flow water falls for both interest
and principal. CIB Marine also considers current levels of
over-collateralization and collateral coverage tests that trigger changes in the
cash flow water falls in performing the analysis.
 
 To
determine whether there has been an adverse change in estimated cash flows from
the cash flows previously projected, the present value of the remaining cash
flows as estimated at the date they were last previously revised (or the initial
transaction if not prior revised) is compared against the present value of the
cash flows estimated at the current financial reporting date. The cash flows are
discounted at a rate equal to the current yield used to accrete the beneficial
interest.
 
 Given the
assessment of whether or not an adverse change in the estimated cash flows has
occurred, CIB Marine does not consider these securities with unrealized losses
to be other-than-temporarily impaired at December 31, 2008. All the respective
securities were performing as to full and timely payments at December 31, 2008.
Also, as of December 31, 2008, there had been no credit rating
downgrades.
 
 Given the
level of subordinated securities that take losses and deferrals of payments
ahead of CIB Marine’s holdings relative to the current condition of the
underlying assets, CIB Marine does not consider the securities to be
other-than-temporarily impaired at December 31, 2008. As of December 31, 2008,
CIB Marine’s investments in trust preferred collateralized debt obligations
include $4.0 million par value bonds credit rated AAA by two nationally
recognized statistical rating agencies, and that have an amortized cost of $3.9
million and a fair value of $2.1 million; $4.0 million par value bond credit
rated AA that has an amortized cost of $3.9 million and a fair value of $1.0
million; and a bond with a par value of $0.8 million credit rated A that has an
amortized cost of $0.8 million and a fair value of $0.2
million.
  79
  Additional
information as of December 31, 2008, related to these collateralized debt
obligations is provided in the table below:
 
 
 Pooled Trust Preferred Security Detail(dollars in thousands)Deal
                  
                  Class(1)
                  
                  
                  Book Value
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Gain(Loss)
                  
                  Moody’s / S&P /
                    Fitch Ratings
                  
                  % of Current Deferrals and
                    Defaults to Total Current
                    Collateral BalancesPreTSL
      23
                  
                  C-FP
                  
                  
                  $
                  813
                  
                  
                  $
                  178
                  
                  
                  $
                  (635
                  )
                  A3(n)/NR/A
                  
                  
                  5.4
                  %PreTSL
      26
                  
                  B-1
                  
                  
                  
                  3,940
                  
                  
                  
                  952
                  
                  
                  
                  (2,988
                  )
                  Aa2(n)/NR/AA
                  
                  
                  8.7
                  %PreTSL
      27
                  
                  A-1
                  
                  
                  
                  1,923
                  
                  
                  
                  1,042
                  
                  
                  
                  (881
                  )
                  Aaa/AAA(n)/AAA
                  
                  
                  3.8
                  %PreTSL
      28
                  
                  A-1
                  
                  
                  
                  1,985
                  
                  
                  
                  1,081
                  
                  
                  
                  (904
                  )
                  Aaa/AAA(n)/AAA
                  
                  
                  5.5
                  %
  
 (1)
              CIB
      Marine’s security holdings in PreTSL 27 and 28 are the most senior of the
      classes in the deal; CIB Marine’s security holdings in PreTSL 23 and 26
      are not the most senior of the classes in the deal nor are they most
      deeply subordinated.
 
 During
the first quarter of 2009 the pooled trust preferred securities were downgraded
by at least one nationally recognized statistical rating agency, including: (1)
PreTSL 23 class C-FP was downgraded from A to CCC, (2) PreTSL 26 class B1 from
AA to CCC, (3) PreTSL 27 class A1 from AAA to BBB, and (4) PreTSL 28 class A1
from AAA to BBB.
 
 Mortgage-Backed Securities
(Non-Agencies).The unrealized losses in mortgage-backed securities
(non-agencies) (“Non-agency MBS”) were primarily caused by deterioration in
credit quality and a worsening of liquidity conditions. This has impacted the
market prices to varying degrees for each respective security holding based upon
the relative credit quality and liquidity premiums applicable to each security.
At December 31, 2008, CIB Marine had private issue MBS holdings of $96.5 million
par value with a fair value of $85.0 million.
 
 At the
time of purchase, all these securities were credit rated AAA by at least two
nationally recognized statistical rating agencies and by all those that rated
each specific security, which may have included Moody’s, Standard and Poor’s or
Fitch. In addition, at December 31, 2008, all were performing with respect to
the full and timely receipt of principal and interest payments due to CIB
Marine. However, during the year 2008 several securities had been downgraded by
at least one rating agency, including: (1) one security with a par value of $0.3
million and a fair market value of $0.3 million had been downgraded to A; (2)
one security with a par value of $5.2 million and a fair value of $4.5 million
had been downgraded to AA; (3) one security with a par value of $2.8 million, a
fair market value of $1.9 million and an other-than-temporary impairment of $0.9
million recorded during 2008 has been downgraded to a CCC; and (4) one security
with a par value of $1.4 million, a fair market value of $0.5 million and an
other-than-temporary impairment of $0.9 million recorded during 2008 has been
downgraded to a CC. All remaining private issue MBS continued to be rated AAA as
of December 31, 2008. During the first quarter of 2009 two mortgage backed
securities (non-agency) were downgraded,  to less than investment grade
including: (1) downgrade to B from AAA for one security with a current face
value of $3.8 million and an unrealized loss of $0.7 million, (2) downgrade to
BB from AAA one security with a current face value of $4.1 million and an
unrealized loss of $0.4 million.
 
 The
predominant form of underlying collateral in the Non-agency MBS is fixed rate,
first lien single family residential mortgages of both conforming and jumbo
mortgage size with non-traditional underwriting qualities (e.g., Alt-A and
reduced documentation types). The weighted average and median origination loan
to value of the underlying mortgage loan collateral in CIB Marine’s securities
is approximately 60% and 64%, respectively, with a range for the securities’
average origination loan to values of 37% to 73%. The weighted average and
median credit scores at origination for the borrowers of the mortgage loans in
CIB Marine’s securities is greater than 730 with a range for the securities’
average credit scores at origination of 703 to 751. In addition, as of December
31 2008, the mean and median percentages for each security, respectively, of
various delinquency and non-performance measures to the total mortgage loans
collateralizing the securities were: 1) 1.8% and 0.7% for loans 60 or more days
past due but not in foreclosure or transferred to other real estate owned, 2)
1.2% and 0.2% for loans in foreclosure plus other real estate owned, and 3) 2.9%
and 1.4% for the total of loans past due 60 or more days past due, in
foreclosure and other real estate owned. With respect to the ratios reported in
3), the range across the securities was 0.0% to 19.5%; the highest two were
19.5% and 15.3%, both have been downgraded to less than investment grade and
both had other-than-temporary impairment recorded on them during
2008.
  80
  Non-Agency
MBS are assessed for other-than-temporary impairment within the scope of FASB
Statement 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and FSP FAS 115-1 & FAS 124-1, “The Meaning of Other Than
Temporary Impairment and its Application to Certain Investments,” by determining
whether a decline in fair value below the amortized cost basis is other than
temporary. If it is determined that it is probable that CIB Marine, the
investor, will be unable to collect all amounts due according to the contractual
terms of a debt security not impaired at acquisition, then an
other-than-temporary impairment is considered to have occurred and the cost
basis of the security is written down to the securities current fair value. The
write-down is recorded as a reduction in earnings for the respective period
rather than in the unrealized gains (losses) for securities.
 
 To
determine whether or not it is probable that CIB Marine will receive less than
full contractual payment, an assessment is performed of the credit risk inherent
in the residential mortgages in the collateral pool(s) and the specific security
class CIB Marine holds as it relates to the overall deal including the
subordinated classes and their ability to absorb estimated loan losses from the
residential mortgages in the collateral pool(s). A number of factors contributes
to this assessment, including past and current debt ratings, projected
prepayment speeds, past and current payment status, past and current levels of
defaults and estimates of related recoveries, and estimates of future defaults
and their related recoveries, and other factors. Estimates of future levels of
defaults and related recoveries involves consideration of a number of
contributing inputs, including but not limited to the year of origination,
current pay status, trends in home value appreciation (depreciation) for year of
issuance, original loan-to-value ratios, borrower credit scores, loan
documentation types and others. In addition to using various sources for the
inputs from others deemed to be reliable, the resulting estimates of collateral
losses are compared to those derived by others, where available, to determine
reasonableness of the estimates.
 
 All of
CIB Marine’s non-agency MBS holdings are structured so there are subordinated
securities owned by others that were issued to take credit losses should there
be any, before CIB Marine’s holdings begin to share in any credit losses. In
management’s assessment, the level of subordinated securities owned by others is
sufficient to cover expected losses in the mortgage loan collateral to the
extent that CIB Marine does not expect any other-than-temporary impairment,
except for the two securities where other-than-temporary-impairment has been
recorded as prior discussed. CIB Marine has the ability and intent to hold the
investments until expected recoveries of their respective fair value, which may
be at maturity, and as a result it does not consider the investments in the
non-agency MBS with unrealized losses to be other-than-temporarily impaired at
December 31, 2008, except for the two securities with
other-than-temporary-impairment as previously discussed. Expectations that CIB
Marine’s other notes and bonds and non-agency MBS will continue to perform in
accordance with their contractual terms are based on management assumptions
which require the use of estimates and significant judgments. It is reasonably
possible that the underlying collateral of these investments will perform worse
than expected, resulting in adverse changes in cash flows and
other-than-temporary impairment charges in future periods. Events which may
impact CIB Marine’s assumptions include, but are not limited to, increased
delinquencies, default rates and loss severities in the financial instruments
comprising the collateral.
 
 Note
4-Loans and Allowance for Loan Losses
 
 Loans
 
 The
components of loans were as follows:
 
 December 31,2008
                  
                  
                  2007Amount
                  
                  
                  % of
                    Total
                  
                  
                  Amount
                  
                  
                  % of
                    Total(Dollars in thousands)Commercial
                  
                  $
                  75,289
                  
                  
                  
                  13.6
                  %
                  
                  $
                  63,046
                  
                  
                  
                  10.6
                  %Commercial
      real estate
                  
                  
                  258,881
                  
                  
                  
                  46.8
                  
                  
                  
                  258,265
                  
                  
                  
                  43.5Commercial
      real estate construction
                  
                  
                  86,909
                  
                  
                  
                  15.7
                  
                  
                  
                  139,663
                  
                  
                  
                  23.5Residential
      real estate
                  
                  
                  26,110
                  
                  
                  
                  4.7
                  
                  
                  
                  20,938
                  
                  
                  
                  3.5Home
      equity loans
                  
                  
                  103,253
                  
                  
                  
                  18.7
                  
                  
                  
                  108,486
                  
                  
                  
                  18.3Consumer
      loans
                  
                  
                  2,990
                  
                  
                  
                  0.5
                  
                  
                  
                  3,241
                  
                  
                  
                  0.6Receivables
      from sale of CIB Marine stock
                  
                  
                  (51
                  )
                  
                  
                  (0.0
                  )
                  
                  
                  (121
                  )
                  
                  
                  (0.0
                  )Gross
      loans
                  
                  
                  553,381
                  
                  
                  
                  100.0
                  %
                  
                  
                  593,518
                  
                  
                  
                  100.0
                  %Deferred
      loan costs
                  
                  
                  1,826
                  
                  
                  
                  
                  
                  
                  
                  1,741Loans
                  
                  
                  555,207
                  
                  
                  
                  
                  
                  
                  
                  595,259Allowance
      for loan losses
                  
                  
                  (19,242
                  )
                  
                  
                  
                  
                  
                  
                  (20,706
                  )Loans,
      net
                  
                  $
                  535,965
                  
                  
                  
                  
                  
                  
                  $
                  574,553
  81
  The
following table lists information on nonperforming and certain past due
loans:
 
 December 31,2008
                  
                  
                  2007(Dollars
      in thousands)Nonaccrual-loans
                  
                  $
                  15,072
                  
                  
                  $
                  18,866Nonaccrual-loans
      held for sale
                  
                  
                  2,025
                  
                  
                  
                  —Restructured
      loans
                  
                  
                  —
                  
                  
                  
                  —90
      days or more past due and still accruing-loans
                  
                  
                  1,040
                  
                  
                  
                  6690
      days or more past due and still accruing-loans held for
    sale
                  
                  
                  1,680
                  
                  
                  
                  —
 
 Information
on impaired loans is as follows:
 
 December 31,2008
                  
                  
                  2007(Dollars in thousands)Impaired
      loans without a specific allowance
                  
                  $
                  4,363
                  
                  
                  $
                  5,101Impaired
      loans with a specific allowance
                  
                  
                  9,789
                  
                  
                  
                  11,053Total
      impaired loans
                  
                  $
                  14,152
                  
                  
                  $
                  16,154Specific
      allowance related to impaired loans
                  
                  $
                  3,847
                  
                  
                  $
                  4,051Average
      balance of impaired loans
                  
                  $
                  17,765
                  
                  
                  $
                  15,934Cash
      basis interest on impaired loans
                  
                  $
                  669
                  
                  
                  $
                  457
 
 During
2008, CIB Marine recognized a net gain of $0.01 million on the sale of
foreclosed properties and during 2007 and 2006 net losses of $0.02 million and
$0.2 million, respectively was recognized. The 2008 gain is included in net gain
on sale of assets and deposits. The 2007 and 2006 net losses are included in
write down and losses on assets.
 
 During
2007, CIB Marine purchased a $48.2 million closed end pool of fixed rate second
lien home equity loans from Residential Funding Corporation, a division of
General Motors Acceptance Corporation: The purchased pool included 965 loans
with a weighted average yield of 10.0%, term to maturity of 17.5 years,
loan-to-value ratio of 94%, borrower debt service-to-income ratios of 40%, and
FICO score of 709. During the second quarter of 2006, CIB Marine purchased a
$47.8 million pool of fixed rate second lien home equity loans from Residential
Funding Corporation. The purchased pool consisted of 989 loans with a weighted
average yield of 9.5%, term to maturity of 17.3 years, loan-to-value ratio of
91%, borrower debt service-to-income ratios of 39% and FICO score of 713. At
December 31, 2008 and 2007, the remaining balance of these two purchased pools
was $52.2 million and $73.0 million, respectively, with an allocated allowance
of $4.5 million and $5.3 million, respectively. Net charge-offs for the year
ended December 31, 2008 were $12.1 million compared to $1.9 million for the year
ended December 31, 2007.
 
 Mortgage
loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage loans serviced for
others were $2.0 million at both December 31, 2008 and 2007.
 
 At
December 31, 2008 and 2007, CIB Marine had $0.2 million and $1.0 million,
respectively, in outstanding principal balances on loans secured, or partially
secured, by CIB Marine stock. No specific reserves were allocated to these loans
at December 31, 2008, and at December 31, 2007 $0.3 million of specific reserves
were allocated. Loans made specifically to enable the borrower to purchase CIB
Marine stock and which were not adequately secured by collateral other than the
stock have been classified as receivables from sale of stock, recorded as
contra-equity and are not included in this balance.
  82
  Credit
Concentrations
 
 At
December 31, 2008 CIB Marine had fifteen secured borrowing relationships (loans
to one borrower or a related group of borrowers) that exceeded 25% of
stockholders’ equity compared to one at December 31, 2007. The increase in the
number of concentrations is largely due to a decrease in stockholders’ equity,
which resulted in a lower threshold for determining credit concentrations. At
December 31, 2008, the total outstanding commitments on these borrowing
relationships, including lines of credit not fully drawn, ranged from 54% to
109% of equity and 1% to 3% of total loans, and the principal drawn and
outstanding on loans in these borrowing relationships ranged from $1.3 million
to $14.7 million. As of December 31, 2008 one loan for $9.3 million was 30 days
past due. At December 31, 2007 the one relationship, including lines of credit
not fully drawn upon, was 36.9% of equity and 3.7% of total loans and the
principal drawn and outstanding was $6.9 million.
 
 At
December 31, 2008, CIB Marine also had credit relationships within eleven
industries or industry groups with loans outstanding in excess of 25% of
stockholders’ equity:
 
 INDUSTRY
                          
                          Outstanding
                            Balance
                          
                          
                          % of
                            Loans
                          
                          
                          % of
                            Stockholders’
                            Equity(Dollars in millions)Commercial
      Real Estate Developers
                          
                          $
                          169.7
                          
                          
                          
                          31
                          %
                          
                          
                          1,146
                          %Residential
      Real Estate Developers
                          
                          
                          86.9
                          
                          
                          
                          16
                          
                          
                          
                          587Health
      Care Facilities
                          
                          
                          21.5
                          
                          
                          
                          4
                          
                          
                          
                          145Nursing/Convalescent
      Homes
                          
                          
                          17.2
                          
                          
                          
                          3
                          
                          
                          
                          116Motel
      and Hotel
                          
                          
                          16.8
                          
                          
                          
                          3
                          
                          
                          
                          114Manufacturing
                          
                          
                          15.7
                          
                          
                          
                          3
                          
                          
                          
                          106Finance
      & Insurance
                          
                          
                          11.7
                          
                          
                          
                          2
                          
                          
                          
                          79Retail
      Trade
                          
                          
                          9.4
                          
                          
                          
                          2
                          
                          
                          
                          63Other
      Services
                          
                          
                          8.3
                          
                          
                          
                          2
                          
                          
                          
                          56Transportation
      & Warehousing
                          
                          
                          7.6
                          
                          
                          
                          2
                          
                          
                          
                          51Arts
      Entertainment & Recreation
                          
                          
                          5.5
                          
                          
                          
                          1
                          
                          
                          
                          37
 
 Allowance
for Loan Losses
 
 Changes
in the allowance for loan losses were as follows:
 
 For the Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars in thousands)Balance
      at beginning of year
                  
                  $
                  20,706
                  
                  
                  $
                  20,906
                  
                  
                  $
                  24,882Charge-offs
                  
                  
                  (25,558
                  )
                  
                  
                  (8,192
                  )
                  
                  
                  (622
                  )Recoveries
                  
                  
                  1,888
                  
                  
                  
                  1,579
                  
                  
                  
                  1,030Net
      loan (charge-offs) recoveries
                  
                  
                  (23,670
                  )
                  
                  
                  (6,613
                  )
                  
                  
                  408Allowance
      on loans sold
                  
                  
                  (581
                  )
                  
                  
                  —
                  
                  
                  
                  —Transfer
      from accrual for unfunded standby letters of credit to funded standby
      letters of credit (1)
                  
                  
                  510
                  
                  
                  
                  —
                  
                  
                  
                  —Provision
      for (reversal of) loan losses
                  
                  
                  22,277
                  
                  
                  
                  6,413
                  
                  
                  
                  (4,384
                  )Balance
      at end of year
                  
                  $
                  19,242
                  
                  
                  $
                  20,706
                  
                  
                  $
                  20,906Allowance
      for loan losses as a percentage of loans
                  
                  
                  3.47
                  %
                  
                  
                  3.48
                  %
                  
                  
                  4.00
                  %
  
 (1)
              The
      provision for loan losses as presented in the consolidated statement of
      operations is net of $0.2 million recovery of accrued unfunded commitments
      and standby letters of credit for the year ended December 31, 2008. See
      Note 12 for further information regarding the accrual for unfunded
      commitments and standby letters of
credit.
 
 Due
primarily to the rapid decline in economic conditions during the first quarter
of 2009, CIB Marine recognized net charge-offs of $3.5 million and provisions
for loan losses of $2.9 million during the quarter related to its purchased home
equity loan pools.
  83
  Director
and Officer Loans
 
 Certain
directors and principal officers of CIB Marine and its subsidiaries, as well as
companies with which those individuals are affiliated, are customers of, and
conduct banking transactions with, CIB Marine’s subsidiary banks in the ordinary
course of business. This indebtedness has been incurred on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons. The loans to certain
directors and principal officers were current at December 31, 2008. The activity
in these loans during 2008 and 2007 is as follows:
 
 December 31,2008
                  
                  
                  2007(Dollars
      in thousands)Balance
      at beginning of year
                  
                  $
                  6,695
                  
                  
                  $
                  7,025Loans
      included in branch sales
                  
                  
                  (3,438
                  )
                  
                  
                  —New
      loans
                  
                  
                  1,033
                  
                  
                  
                  2,085Repayments
                  
                  
                  (959
                  )
                  
                  
                  (2,415
                  )Balance
      at end of year
                  
                  $
                  3,331
                  
                  
                  $
                  6,695
 
 Note 5-Premises and Equipment,
net
 
 The major
classes of premises and equipment and accumulated depreciation are summarized as
follows:
 
 December 31,2008
                  
                  
                  2007(Dollars
      in thousands)Land
                  
                  $
                  1,146
                  
                  
                  $
                  1,424Buildings
                  
                  
                  3,689
                  
                  
                  
                  6,225Leasehold
      improvements
                  
                  
                  1,430
                  
                  
                  
                  1,638Furniture
      and equipment
                  
                  
                  8,233
                  
                  
                  
                  19,46114,498
                  
                  
                  
                  28,748Less:
      accumulated depreciation
                  
                  
                  (8,704
                  )
                  
                  
                  (19,787
                  )$
                  5,794
                  
                  
                  $
                  8,961
 
 Depreciation
expense for 2008, 2007 and 2006 was $1.3 million, $1.8 million and $2.2 million,
respectively. Total rental expense for 2008, 2007 and 2006 was $1.3 million,
$1.6 million and $1.6 million, respectively. During the year ended December 31,
2008, CIB Marine sold $5.4 million of premises and equipment, which had
accumulated depreciation of $3.2 million.
 
 CIB
Marine leases certain premises and equipment under noncancellable operating
leases, which expire at various dates through 2013. Such noncancellable
operating leases also include options to renew. The following is a schedule by
years of annual future minimum rental commitments required under operating
leases that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 2008.
 
 Amount(Dollars
      in thousands)2009
                    
                    $
                    9132010
                    
                    
                    5502011
                    
                    
                    3582012
                    
                    
                    2942013
                    
                    
                    111Thereafter
                    
                    
                    —$
                    2,226
  84
  Note
6-Companies Held For Disposal and Discontinued Operations
 
 At
December 31, 2008, assets and liabilities of companies held for disposal
consists entirely of the remaining assets and liabilities of CIB Marine’s wholly
owned subsidiary, CIB Construction, including CIB Construction’s subsidiary
Canron. The gross consolidated assets and liabilities of CIB Construction are
reported separately on the consolidated balance sheets at their estimated
liquidation values less costs to sell. Banking regulations limit the holding
period for assets not considered to be permissible banking activities and which
have been acquired in satisfaction of debt previously contracted to five years,
unless extended. CIB Construction is subject to these restrictions, and CIB
Marine has received an extension from the banking regulators to hold Canron
until June 30, 2009.
 
 CIB
Construction acquired 84% of the outstanding stock of Canron through loan
collection activities in 2002. In the third quarter of 2003, the Board of
Directors of Canron authorized management to cease operating Canron and commence
a wind down of its affairs, including a voluntary liquidation of its assets. In
August 2005, Canron authorized and began liquidation distributions to its
shareholders, and in December 2006, Canron filed Articles of Dissolution. At
both December 31, 2008 and 2007, CIB Construction’s net carrying value of its
investment in Canron was zero, and accordingly, CIB Construction included in net
income any liquidation distributions it received from Canron. During 2008,
Canron continued to collect both on and off balance sheet receivables and settle
and resolve payable and claims through the voluntary liquidation process. For
the years ended December 31, 2008, 2007 and 2006 CIB Construction had net income
of $0.5 million, $0.1 million and $0.3 million, respectively. These amounts are
included in net income of discontinued operations.
 
 At
December 31, 2007, assets of companies held for disposal consisted of $1.2
million for CIB Construction and $0.7 million of remaining assets, mainly
mortgage loans, of CIB Marine’s former mortgage banking subsidiary, MSI. CIB
Marine sold substantially all the assets and operations of MSI prior to 2007. In
2008 CIB Marine determined the remaining assets no longer met the criteria of
held for sale and accordingly, transferred the remaining loans to its loan
portfolio. During 2007 and 2006, net income of discontinued operations included
$0.2 million and $0.3 million, respectively, related to MSI.
 
 At
December 31, 2007, the major components of liabilities of companies held for
sale at December 31, 2007 were $2.4 million for CIB Construction, and a $1.8
million tax exposure liability. The tax exposure liability related to CIB
Marine’s investment in a REIT owned by its former Illinois banking subsidiary
which was sold in 2004. In 2007, CIB Marine erroneously concluded that the
statute of limitations had expired with respect to a portion of this exposure
and accordingly did not have a tax liability for that portion at December 31,
2007.During the third quarter of 2008, CIB Marine learned that the statute of
limitations had in fact not expired and increased its REIT tax exposure by $1.7
million, including interest and penalties through that date. In December 2008,
the Illinois Department of Revenue accepted a $0.5 million payment in full
settlement of the issue and CIB Marine reversed $3.0 million of the tax
liabilities through a credit to discontinued operations tax expense.
Discontinued operations tax expense for 2007 included a $1.1 million credit
related to the partial reversal of the REIT tax liability, net of interest and
penalty expense on the remaining liability. See Note 20-Income Taxes for further
information on REIT tax exposure.
 
 Note
7-Sale of Branches
 
 During
the third quarter of 2008, CIB Marine sold all the branches, substantially all
the deposits and the majority of the loan portfolio of its Florida banking
subsidiary, Citrus Bank, at book value plus a deposit premium (the “Citrus
Transaction”). The deposit premium included cash and equity shares of the
purchaser. These equity shares had a market value of $1.0 million on the date of
sale. The sale included $86.7 million of deposits and $41.0 million in assets,
including $38.6 million in loans, $2.1 million in net premises and equipment,
$0.6 million in Federal Reserve Bank stock and $0.3 million in other
liabilities. CIB Marine recognized a pretax gain of $4.2 million on the sale,
which is included in net gain on sale of assets and deposits. The sale agreement
also included a contingent earnout provision based on the future balance of the
deposits sold. Under this provision, the purchaser will pay CIB Marine up to a
total of $1.5 million based on the aggregate balance of the deposits sold as of
the first and second anniversary dates of the sale. Since this contingent
compensation is based on future balances of the deposits sold, the contingent
compensation was not included in the $4.2 million gain.
 
 During
the first half of 2007, CIB Marine’s wholly owned Wisconsin bank subsidiary,
Marine Bank, sold the deposits and property and equipment of its Cedarburg,
Wisconsin and Brookfield, Wisconsin branches. At the time of the sale, goodwill
of $0.7 million was allocated to Cedarburg, and the deposits and net property
and equipment of the sold branches were $49.7 million and $0.4 million,
respectively. CIB Marine recognized a pretax gain of $1.1 million on the sales,
which is included in net gain on sale of assets and deposits.
  85
  During
2006, certain of CIB Marine’s subsidiary banks sold the deposits and certain
assets of six of their branches and recognized a total net pretax gain of $2.7
million. The gain on the sales of the branches is included in net gain on sale
of assets and deposits. Four of the sold branches were located in Illinois, one
in Wisconsin and one in Nebraska. Goodwill of $0.2 million was allocated to the
Wisconsin branch. Additionally, during the third quarter of 2006, CIB Marine
sold a former branch building located in Bloomington, Illinois at no gain or
loss.
 
 Note
8-Other Assets
 
 The
following table summarizes the composition of CIB Marine’s other
assets:
 
 December 31,2008
                  
                  
                  2007(Dollars
      in thousands)Federal
      Home Loan Bank and Federal Reserve Bank stock
                  
                  $
                  11,555
                  
                  
                  $
                  12,298Prepaid
      expenses
                  
                  
                  950
                  
                  
                  
                  1,020Accounts
      receivable
                  
                  
                  124
                  
                  
                  
                  179Trust
      preferred securities underwriting fee, net of amortization
                  
                  
                  1,225
                  
                  
                  
                  1,280Investment
      in trust common securities
                  
                  
                  —
                  
                  
                  
                  3,022Other
      investments
                  
                  
                  1,167
                  
                  
                  
                  1,381Income
      tax receivable (1)
                  
                  
                  890
                  
                  
                  
                  2,737Other
                  
                  
                  9
                  
                  
                  
                  160$
                  15,920
                  
                  
                  $
                  22,077







1
            December
      31, 2008 and 2007, respectively, include $0.7 million and $1.2 million of
      net tax receivable from companies held for disposal per tax sharing
      agreements.





CIB
Marine owns 100% of the capital stock of four statutory business trusts
(“Trusts”) which it had formed for the purpose of issuing trust preferred
securities and investing the proceeds thereof in junior subordinated debentures
of CIB Marine. In accordance with GAAP, CIB Marine does not consolidate these
Trusts and accounts for its investment using the equity method. At December 31,
2007 CIB Marine’s carrying value of its investment in these Trusts was $3.0
million and comprised CIB Marine’s $1.9 million initial investment plus $1.1
million in undistributed net income of the Trusts resulting from accrued
interest on the junior subordinated debentures in excess of interest on the
trust preferred securities. During 2008, CIB Marine deemed its entire investment
in these Trusts impaired and accordingly, recognized a $3.2 million impairment
loss. This loss is included in write down and losses on assets.





The major
components of other investments are as follows:





·
            Investments
      in limited partnership interests in various affordable housing
      partnerships, which had a carrying value of $1.1 million and $1.2 million,
      respectively, at December 31, 2008 and 2007. Equity loss on these limited
      partnerships, included in noninterest expense, was $0.2 million in both
      2008 and 2007 and $0.4 million in 2006. CIB Marine has engaged in these
      transactions to provide additional qualified investments under the
      Community Reinvestment Act and to receive related income tax credits. The
      partnerships provide affordable housing to low-income residents within CIB
      Marine’s markets and other
locations.


·
            Interest
      in a company operating as a small business investment company under the
      Small Business Investment Act of 1958, as amended. CIB Marine committed to
      a $0.5 million investment in this company and as of December 31, 2008 has
      invested $0.4 million. Beginning in 2006, CIB Marine began receiving
      capital distributions on its investment in this company. At both December
      31, 2008 and 2007, CIB Marine’s carrying value of this investment was $0.1
      million.





During
2007, CIB Marine deemed its investment in the common and preferred capital of a
limited liability corporation engaged in the development of owner-occupied
housing in qualified low-income communities was impaired. Accordingly, an
impairment loss for the entire carrying value of $0.7 million was recognized in
2007 and is included in write down and losses on assets.





86





As
members of the FHLB of Chicago, CIB Marine’s subsidiary banks are required to
maintain minimum amounts of Federal Home Loan Bank of Chicago stock as required
by that institution.





In 2005,
the FHLB Chicago Board disclosed its decision to discontinue redemption of
excess, or voluntary, capital stock. Voluntary stock is stock held by members
beyond the amount required as a condition of membership or to support advance
borrowings. In April 2006, the FHLB Chicago announced plans to facilitate
limited stock redemption requests from its members by issuing bonds. During
2006, the FHLB Chicago issued a limited amount of bonds to facilitate voluntary
capital stock redemptions and CIB Marine sold back $14.3 million or 55.6% of its
holdings. This represented approximately 58.7% of the stock CIB Marine requested
to be redeemed at that time. In October 2007, the FHLB Chicago entered into a
consensual Cease and Desist Order (“C&D”) with its regulator, the Federal
Housing Finance Board (“Finance Board”). The C&D states that the Finance
Board has determined that requiring the FHLB Chicago to take the actions
specified in the C&D will improve the condition and practices of the FHLB
Chicago, stabilize its capital, and provide the FHLB Chicago an opportunity to
address the principal supervisory concerns identified by the Finance Board.
Under the terms of the C&D, capital stock repurchases and redemptions,
including redemptions upon membership withdrawal or other termination, are
prohibited unless the Bank has received approval of the Director of the Office
of Supervision of the Finance Board ("OS Director"). The C&D provides that
the OS Director may approve a written request by the FHLB Chicago for proposed
redemptions or repurchases if the OS Director determines that allowing the
redemption or repurchase would be consistent with maintaining the capital
adequacy of the FHLB Chicago and its continued safe and sound operations. The
C&D also provides that dividend declarations are subject to the prior
written approval of the OS Director and that the FHLB Chicago must submit a
Capital Structure Plan to the Finance Board consistent with the requirements of
the Gramm-Leach-Bliley Act and Finance Board regulations. The FHLB Chicago did
not declare any dividends for the year 2008. At December31, 2008 and 2007, CIB
Marine had $11.6 million and $11.5 million, respectively, in FHLB Chicago stock,
of which $3.4 million and $3.9 million was required stock holdings to maintain
the level of borrowings outstanding with the FHLB of Chicago.





Note
9-Deposits





The
aggregate amount of time deposits of $100,000 or more at December 31, 2008 and
2007 were $151.1 million and $169.0 million, respectively. Included in time
deposits are brokered deposits of $36.0 million at December 31, 2008 and $22.2
million at December 31, 2007.





At
December 31, 2008, the scheduled maturities of time deposits are as
follows:





December 31, 2008(Dollars in thousands)2009
                
                $
                417,9552010
                
                
                30,9242011
                
                
                25,2982012
                
                
                6,6272013
                
                
                8,231Thereafter
                
                
                137$
                489,172





Note 10-Short-Term
Borrowings





Borrowings
with original maturities of one year or less are classified as short-term.
Federal funds purchased generally represent one-day borrowings. Securities sold
under repurchase agreements represent borrowings maturing within one year that
are collateralized by U.S. Treasury and Government Agency
Securities.





87





The
following is a summary of short-term borrowings for each of the two years ended
December 31:





At Year end
                
                
                For the YearBalance
                
                
                Weighted-
                  Average
                  Rate
                
                
                Daily
                  Average
                  Balances
                
                
                Weighted-
                  Average
                  Rate
                
                
                Highest
                  Balances at
                  Month End(Dollars in thousands)2008Federal
      funds purchased and securities sold under repurchase
      agreements
                
                $
                19,908
                
                
                
                0.68
                %
                
                $
                29,126
                
                
                
                1.00
                %
                
                $
                30,764Federal
      Home Loan Bank
                
                
                40,000
                
                
                
                0.55
                
                
                
                78,312
                
                
                
                2.29
                
                
                
                100,150Treasury,
      tax and loan note
                
                
                2,898
                
                
                
                0.00
                
                
                
                616
                
                
                
                1.68
                
                
                
                2,898Total
      short-term borrowings
                
                $
                62,806
                
                
                
                0.57
                %
                
                $
                108,054
                
                
                
                1.94
                %2007Federal
      funds purchased and securities sold under repurchase
      agreements
                
                $
                16,276
                
                
                
                3.17
                %
                
                $
                23,412
                
                
                
                4.23
                %
                
                $
                28,555Federal
      Home Loan Bank
                
                
                67,100
                
                
                
                3.90
                
                
                
                15,044
                
                
                
                4.35
                
                
                
                67,100Treasury,
      tax and loan note
                
                
                2,240
                
                
                
                3.59
                
                
                
                872
                
                
                
                5.68
                
                
                
                2,848Total
      short-term borrowings
                
                $
                85,616
                
                
                
                3.76
                %
                
                $
                39,328
                
                
                
                4.31
                %





In 2004,
CIB Marine entered into a Written Agreement with the Federal Reserve Bank of
Chicago. Among other items, the Written Agreement requires CIB Marine to obtain
Federal Reserve Bank approval before incurring additional borrowings or debt and
pre-approval to pay interest on debentures.





Note 11-Long-Term
Borrowings





Long-term
borrowings consist of borrowings having an original maturity of greater than one
year.





FHLB





The
following table presents information regarding amounts payable to the FHLB of
Chicago. All of the borrowings shown in the following table are fixed rate
borrowings.





December 31,
                                                              
                                                              Scheduled
                                                                Maturity2008
                                                              
                                                              
                                                              2007Balance
                                                              
                                                              Rate
                                                              
                                                              
                                                              Balance
                                                              
                                                              
                                                              Rate(Dollars
      in thousands)$
                                                              6,000
                                                              
                                                              
                                                              4.52
                                                              %
                                                              
                                                              $
                                                              6,000
                                                              
                                                              
                                                              
                                                              4.52
                                                              %
                                                              04/24/093,000
                                                              
                                                              
                                                              4.49
                                                              
                                                              
                                                              
                                                              3,000
                                                              
                                                              
                                                              
                                                              4.49
                                                              
                                                              10/26/093,000
                                                              
                                                              
                                                              4.54
                                                              
                                                              
                                                              
                                                              3,000
                                                              
                                                              
                                                              
                                                              4.54
                                                              
                                                              10/25/105,000
                                                              
                                                              
                                                              3.32
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              02/16/105,000
                                                              
                                                              
                                                              3.95
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              08/15/115,000
                                                              
                                                              
                                                              4.21
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              08/14/12$
                                                              27,000
                                                              
                                                              
                                                              4.02
                                                              %
                                                              
                                                              $
                                                              12,000
                                                              
                                                              
                                                              
                                                              4.52
                                                              %





CIB
Marine is required to maintain qualifying collateral as security for both
short-term and long-term FHLB borrowings. The debt to collateral ratio is
dependent upon the type of collateral pledged and ranges from a 60% loan to
value for 1-4 Family Loans (held for sale) to 95% on U.S. Treasury and Agency
Obligation securities. As part of a collateral arrangement with the FHLB, CIB
Marine had assets pledged with a collateral value of $68.7 million and $93.6
million at December 31, 2008 and 2007, respectively. These assets consisted of
securities with a fair value of $74.8 million and $103.6 million at December 31,
2008 and 2007, respectively.





Junior
Subordinated Debentures





CIB
Marine had the following junior subordinated debentures outstanding at December
31, 2008 and 2007:





88








December 31,2008
                
                
                2007
                
                Issue
                  Date
                
                Interest
                  Rate
                
                Maturity Date
                Callable
                  After(Dollars in thousands)CIB
      Marine Capital Trust I
                
                $
                10,310
                
                
                $
                10,310
                
                03/23/00
                
                
                10.88
                %
                03/08/30
                03/08/10CIB
      Statutory Trust III
                
                
                15,464
                
                
                
                15,464
                
                09/07/00
                
                
                10.60
                
                09/07/30
                09/07/10CIB
      Statutory Trust IV
                
                
                15,464
                
                
                
                15,464
                
                02/22/01
                
                
                10.20
                
                02/22/31
                02/22/11CIB
      Statutory Trust V
                
                
                20,619
                
                
                
                20,619
                
                09/27/02
                
                Variable
                (1)
                09/27/32
                09/30/07Total
      junior subordinated debentures
                
                $
                61,857
                
                
                $
                61,857







(1)
            Three-month
      LIBOR + 3.40% adjusted quarterly.





CIB
Marine has formed four statutory business trusts (“Trusts”) for the purpose of
issuing trust preferred securities and investing the proceeds thereof in junior
subordinated debentures of CIB Marine. The trust preferred securities are fully
and unconditionally guaranteed by CIB Marine. The Trusts used the proceeds from
issuing trust preferred securities and the issuance of its common securities to
CIB Marine to purchase the junior subordinated debentures. Interest on the
debentures and distributions on the trust preferred securities are payable
either quarterly or semi-annually in arrears. CIB Marine has the right, at any
time, as long as there are no continuing events of default, to defer payments of
interest on the debentures for consecutive periods not exceeding five years; but
not beyond the stated maturity of the debentures. As a result of the agreement
entered into with its regulator, CIB Marine has elected to defer all such
interest payments subsequent to December 31, 2003, and as a result the Trusts
deferred distributions on its trust preferred securities. At December 31, 2008
and 2007 CIB Marine had accrued interest payable on its $61.9 million junior
subordinated debentures of $39.1 million and $30.3 million, respectively. These
amounts are included in accrued interest payable on the consolidated balance
sheets. These deferral periods extended to the first quarter of 2009, at which
point CIB Marine became obligated to pay all of the accrued interest on such
securities or be in default. The end of the deferral period for Trust IV was
February 22, 2009. On March 25, 2009, the default date for Trust IV as provided
under the debentures, CIB Marine failed to make the required payment of interest
to the holders of Trust IV. Trusts I, III, and V reached the end of their
deferral periods during March 2009, with default dates to occur during April
2009. Throughout the deferral period, interest on the debentures continues to
accrue. In addition, interest also accrues on all interest that was not paid
when due, compounded quarterly or semi-annually. During the deferral period, CIB
Marine may not pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment on its stock, or make any payment of
principal, interest or premium, or redeem any similar debt securities of CIB
Marine, subject to certain limitations. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. The trust preferred
securities qualify as regulatory capital, subject to regulatory
limitation.





CIB
Marine does not have the cash available to make these interest payments prior to
the default dates. At December 31, 2008, the accrued and unpaid interest on the
debentures totaled $39.1million. During 2008, CIB Marine continued to defer interest payments on
the debentures and, as a result, had adequate funding capacity to meet its other
obligations. CIB Marine’s inability to meet its
obligations with regard to these interest payments, in addition to itscontinued losses and in consideration of existing regulatory matters,
raise substantial doubt about CIB Marine’s ability to continue as a going
concern. Management has determined that it does not have the cash available to
bring the Trust Preferred Securities interest payment current and has made no
payments during the first quarter of 2009.





On March
16, 2009 CIB Marine issued a formal Consent Solicitation seeking the consent to
the holders of the trust preferred securities (“TruPS”) to a proposed Plan of
Restructuring that would convert the debt under the debentures into preferred
stock, thus reducing the ongoing interest expense burden and eliminating any
consequences of default on the TruPS (see the discussion in the Liquidity and
Capital Plan Update section).





As of
April 10, 2009, the initial voting deadline established in the Consent
Solicitation, CIB Marine was notified that a sufficient number of negative votes
were cast by the applicable holders of two series of TruPS to prevent approval
of the Plan of Restructuring. Based upon conversations that CIB Marine and its
investment banking firm have had with certain of the TruPS holders, including
certain holders who have initially voted against the Consent Solicitation, CIB
Marine has elected to extend the voting deadline until May 11, 2009 in order to
give it more time to consider amending the terms of the Consent Solicitation to
address such holders’ concerns, as well as to consider other available
options.





89





If the
Plan of Restructuring is ultimately not approved, CIB Marine will be unable to
cure its default on the TruPS.





The
Federal Reserve Board adopted a rule limiting the inclusion of junior
subordinated debentures in the Tier 1 equity capital. The ruling limited the
total restricted Tier 1 capital elements, including junior subordinated
debentures, net of investment in trust, to 25% of total Tier 1 capital elements,
net of goodwill less any associated deferred tax liability. At December 31,
2008, CIB Marine included approximately $8.3 million of its junior subordinated
debentures in total Tier 1 capital.





Note
12-Other Liabilities





December 31,2008
                
                
                2007(Dollars
      in thousands)Accounts
      payable
                
                $
                179
                
                
                $
                117Accrual
      for unfunded commitments and standby letters of credit
                
                
                —
                
                
                
                725Accrued
      real estate taxes
                
                
                147
                
                
                
                158Accrued
      compensation and employee benefits
                
                
                681
                
                
                
                782Accrued
      professional fees
                
                
                490
                
                
                
                448Accrued
      other expenses
                
                
                448
                
                
                
                731Other
      liabilities
                
                
                278
                
                
                
                258$
                2,223
                
                
                $
                3,219





At
December 31, 2007, CIB Marine had a $0.7 million accrual for unfunded
commitments and standby letters of credit related to one standby letter of
credit which it had participated in with other banks. At December 31, 2007, it
also had pledged securities with a total value of $3.3 million to collateralize
its obligations for this participated standby letter of credit. During 2008,
this standby letter of credit matured and was converted to a loan. As a result
of this funding, at December 31, 2008 there were no securities pledged for this
standby letter of credit and during 2008 $0.5 million of the accrual for
unfunded commitments and standby letters of credit was transferred to the
allowance for loan loss. The remaining $0.2 million was reversed through a
credit to provision for credit losses.





Note 13-Stockholders’
Equity





Receivables
from Sale of Stock





Loans not
sufficiently collateralized by assets other than CIB Marine stock and made by
CIB Marine’s subsidiary banks to borrowers who used the proceeds to acquire CIB
Marine stock are classified as receivables from sale of stock and are accounted
for as a reduction of stockholders’ equity and recorded as receivables from sale
of stock, unless the loan had been repaid prior to the issuance of the financial
statements. The balances of loans classified as receivables from sale of stock
totaled $0.05 million and $0.1 million at December 31, 2008 and 2007,
respectively.





Treasury
Stock





Certain
of CIB Marine’s subsidiary banks acquired shares of CIB Marine stock through
collection efforts when the borrowers defaulted on their loans. Any loan balance
in excess of the estimated fair value of the stock and other collateral received
was charged to the allowance for loan losses. At December 31, 2007 all of these
shares were directly owned by CIB Marine’s subsidiary banks and therefore were
excluded from the number of shares outstanding. During 2008, CIB Marine sold
substantially all the assets of Citrus Bank, and merged the remaining assets
into CIB Marine Bancshares, including 5,211 shares of CIB Marine Stock Citrus
Bank had acquired through foreclosure. As a result, at December 31, 2008, 7,452
shares of the 12,663 shares in treasury stock were directly owned by CIB
Marine’s banking subsidiary and thus were excluded from the number of shares
outstanding.





90





Regulatory
Capital





CIB
Marine and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Pursuant to federal
bank holding company and bank regulations, CIB Marine and each bank subsidiary
are assigned to a capital category. The assigned capital category is largely
determined by three ratios that are calculated in accordance with specific
instructions included in the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the bank subsidiaries must
meet specific capital guidelines that involve quantitative measures of the
bank’s assets and certain off-balance sheet items as calculated under regulatory
accounting practices. The banks’ capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. To be categorized as well capitalized, the bank
subsidiaries must maintain total risk adjusted capital, Tier 1 capital and Tier
1 leverage ratios of 10.0%, 6.0% and 5.0%, respectively.





There are
five capital categories defined in the regulations: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Classification of a subsidiary bank in any of the
undercapitalized categories can result in certain mandatory and possible
additional discretionary actions by regulators that could have a direct material
effect on the consolidated financial statements.





At
December 31, 2008, pursuant to FDIC regulations in 12 C.F.R. Part 325, all of
CIB Marine’s subsidiary banks were classified as well capitalized.





At both
December 31, 2008 and 2007, CIB Marine was subject to a Written Agreement it
entered into with the Federal Reserve Bank in the second quarter of 2004. Among
other items, the Written Agreement requires CIB Marine to maintain a sufficient
capital position for the consolidated organization including the current and
future capital requirements of each of its subsidiary banks, nonbank
subsidiaries and the consolidated organization. As of December 31, 2008, CIB
Marine’s Tier 1 leverage ratio had declined from 7.92% at December 31, 2007 to
3.58% and was below the 4.0% required by the Agreement. The decline reflects the
continued operating losses of CIB Marine during 2008. Depending on the extent of
continuing losses incurred by CIB Marine in future periods as well as the
overall size of its balance sheet, further OTTI adjustments to its securities
portfolio and potential loan recoveries, CIB Marine’s capital ratios could
decline further. CIB Marine’s ability to increase its capital and meet the
requirements of the Agreement is dependent upon the successful execution of its
capital plan outlined in Note 11-Long-Term Borrowings.





In
addition, at December 31, 2007, Marine Bank was subject to a Memorandum of
Understanding (“Memorandum”) with the FDIC and its applicable state banking
regulator. This Memorandum was terminated in January 2008, after which none of
the CIB Marine subsidiary banks were party to any formal or informal regulatory
agreement or order.





In March
2009 Marine Bank stipulated to a C&D which was signed by the FDIC and the
WDFI in early April 2009, and is expected to become effective in the near
future. The C&D primarily resulted from the high level of nonperforming
assets of Marine Bank and the resulting impact on its financial condition. The
C&D requires Marine Bank to take certain corrective actions focusing on
reducing exposure to non-performing loans, charging off all loans classified as
loss, imposes restrictions on lending to credits with existing non-performing
loans, and accruing interest on certain delinquent loans in addition to charging
off previously accrued interest on those loans. Key provisions also include a
restriction on paying dividends without regulatory approval, a requirement to
maintain a minimum tier 1 leverage ratio of 10% at Marine Bank, retaining
qualified management, revising lending policies and procedures focused on
documentation, maintaining an appropriate loan review and grading system, and
adopting a comprehensive budget. Failure to adhere to the requirements of the
actions mandated by the C&D, once it becomes effective, can result in more
severe restrictions and civil monetary penalties. The C&D added no
additional requirements to the asset quality and loan review program previously
implemented and currently maintained by Marine Bank. CIB Marine and Marine Bank
also remain committed to maintaining adequate capital levels. Generally,
enforcement actions such as the C&D can be lifted only after subsequent
examinations substantiate complete correction of the underlying
issues.





91





The
actual and required capital amounts and ratios for CIB Marine and its bank
subsidiaries are presented in the tables below.





Actual
                
                
                For Capital
                  Adequacy Purposes
                
                
                To Be Well
                  Capitalized Under
                  Prompt
                  Corrective
                  ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio(Dollars in thousands)December
      31, 2008Total
      capital to risk weighted assetsCIB
      Marine Bancshares, Inc.
                
                $
                65,884
                
                
                
                10.04
                %
                
                $
                52,504
                
                
                
                8.00
                %Central
      Illinois Bank
                
                
                58,451
                
                
                
                17.91
                
                
                
                26,104
                
                
                
                8.00
                
                
                $
                32,630
                
                
                
                10.00
                %Marine
      Bank
                
                
                40,505
                
                
                
                13.31
                
                
                
                24,349
                
                
                
                8.00
                
                
                
                30,436
                
                
                
                10.00Tier
      1 capital to risk weighted assetsCIB
      Marine Bancshares, Inc.
                
                $
                32,942
                
                
                
                5.02
                %
                
                $
                26,252
                
                
                
                4.00
                %Central
      Illinois Bank
                
                
                54,340
                
                
                
                16.65
                
                
                
                13,052
                
                
                
                4.00
                
                
                $
                19,578
                
                
                
                6.00
                %Marine
      Bank
                
                
                36,624
                
                
                
                12.03
                
                
                
                12,174
                
                
                
                4.00
                
                
                
                18,262
                
                
                
                6.00Tier
      1 leverage to average assetsCIB
      Marine Bancshares, Inc.
                
                $
                32,942
                
                
                
                3.58
                %
                
                $
                36,821
                
                
                
                4.00
                %Central
      Illinois Bank
                
                
                54,340
                
                
                
                11.10
                
                
                
                19,577
                
                
                
                4.00
                
                
                $
                24,471
                
                
                
                5.00
                %Marine
      Bank (1)
                
                
                36,624
                
                
                
                9.00
                
                
                
                16,270
                
                
                
                4.00
                
                
                
                20,337
                
                
                
                5.00December
      31, 2007Total
      capital to risk weighted assetsCIB
      Marine Bancshares, Inc.
                
                $
                128,373
                
                
                
                17.26
                %
                
                $
                59,518
                
                
                
                8.00
                %Central
      Illinois Bank
                
                
                60,381
                
                
                
                19.26
                
                
                
                25,082
                
                
                
                8.00
                
                
                $
                31,352
                
                
                
                10.00
                %Marine
      Bank
                
                
                50,023
                
                
                
                14.82
                
                
                
                27,012
                
                
                
                8.00
                
                
                
                33,765
                
                
                
                10.00Citrus
      Bank
                
                
                19,855
                
                
                
                21.87
                
                
                
                7,261
                
                
                
                8.00
                
                
                
                9,077
                
                
                
                10.00Tier
      1 capital to risk weighted assetsCIB
      Marine Bancshares, Inc.
                
                $
                79,026
                
                
                
                10.62
                %
                
                $
                29,759
                
                
                
                4.00
                %Central
      Illinois Bank
                
                
                56,399
                
                
                
                17.99
                
                
                
                12,541
                
                
                
                4.00
                
                
                $
                18,811
                
                
                
                6.00
                %Marine
      Bank
                
                
                45,756
                
                
                
                13.55
                
                
                
                13,506
                
                
                
                4.00
                
                
                
                20,259
                
                
                
                6.00Citrus
      Bank
                
                
                18,698
                
                
                
                20.60
                
                
                
                3,631
                
                
                
                4.00
                
                
                
                5,446
                
                
                
                6.00Tier
      1 leverage to average assetsCIB
      Marine Bancshares, Inc.
                
                $
                79,026
                
                
                
                7.92
                %
                
                $
                39,908
                
                
                
                4.00
                %Central Illinois Bank
      (1)
                
                
                56,399
                
                
                
                12.18
                
                
                
                18,525
                
                
                
                4.00
                
                
                $
                23,156
                
                
                
                5.00
                %Marine Bank (1)
                
                
                45,756
                
                
                
                11.31
                
                
                
                16,177
                
                
                
                4.00
                
                
                
                20,221
                
                
                
                5.00Citrus
      Bank
                
                
                18,698
                
                
                
                15.03
                
                
                
                4,976
                
                
                
                4.00
                
                
                
                6,220
                
                
                
                5.00







(1)
              Pursuant
      to an Order in effect as of the period end, the bank is required to
      maintain a Tier 1 leverage capital level equal to or exceeding 8% of total
      average assets.





The
payment of dividends by banking subsidiaries is subject to regulatory
restrictions by various federal and/or state regulatory authorities. In
addition, dividends paid by bank subsidiaries are further limited if the effect
would result in a bank subsidiary’s capital being reduced below applicable
minimum capital amounts. CIB Marine did not receive any dividend payments from
its subsidiary banks during 2008, and at December 31, 2008 CIB Marine’s
subsidiary banks did not have any retained earnings available for the payment of
dividends to CIB Marine without first obtaining the consent of the
regulators.





Pursuant
to the Written Agreement CIB Marine entered into with its regulators and
throughout such time as the Agreement remains in effect, CIB Marine cannot
declare or pay dividends without first obtaining the consent of the
regulators.





92





Note 14-Other
Expense





Other
expense consisted of the following:





Years Ended December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Payroll
      and other processing charges
                
                $
                69
                
                
                $
                112
                
                
                $
                99Correspondent
      bank charges
                
                
                232
                
                
                
                190
                
                
                
                256Advertising/marketing
                
                
                641
                
                
                
                781
                
                
                
                722Communications
                
                
                857
                
                
                
                964
                
                
                
                1,386Data
      Processing
                
                
                1,089
                
                
                
                79
                
                
                
                —Supplies
      and printing
                
                
                220
                
                
                
                284
                
                
                
                357Shipping
      and handling
                
                
                404
                
                
                
                454
                
                
                
                523Collection
      expense
                
                
                25
                
                
                
                17
                
                
                
                43FDIC
      and state assessment
                
                
                836
                
                
                
                484
                
                
                
                1,289Recording
      and filing fees
                
                
                197
                
                
                
                192
                
                
                
                149Foreclosed
      property
                
                
                317
                
                
                
                17
                
                
                
                7Litigation
      reserve
                
                
                3,400
                
                
                
                —
                
                
                
                1,750Other
      expense
                
                
                2,235
                
                
                
                2,352
                
                
                
                2,696Total
      other expense
                
                $
                10,522
                
                
                $
                5,926
                
                
                $
                9,277





Note
15-Loss Per Share





The
following provides a reconciliation of basic and diluted loss per
share:





For the Years Ended December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands, except share and per share data)Loss
      from continuing operations
                
                $
                (36,233
                )
                
                $
                (15,211
                )
                
                $
                (9,839
                )Weighted
      average shares outstanding:Basic
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779Effect
      of dilutive stock options outstanding
                
                
                —
                
                
                
                —
                
                
                
                —Diluted
                
                
                18,333,779
                
                
                
                18,333,779
                
                
                
                18,333,779Per
      share loss:Basic
                
                $
                (1.98
                )
                
                $
                (0.83
                )
                
                $
                (0.54
                )Effect
      of dilutive stock options outstanding
                
                
                —
                
                
                
                —
                
                
                
                —Diluted
                
                $
                (1.98
                )
                
                $
                (0.83
                )
                
                $
                (0.54
                )





Because CIB Marine has a net loss from
continuing operations in each of the years ended December 31, 2008, 2007 and
2006, options to purchase 1,149,020; 1,151,533; and 971,830 share, respectively,
were excluded from the calculation of diluted loss per share since their assumed
exercise would be anti-dilutive.





Note 16-Financial Instruments with
Off-Balance Sheet Risk





The
following table summarizes the contractual or notional amount of off-balance
sheet financial instruments with credit risk.





2008
                  
                  
                  2007(Dollars in thousands)Commitments
      to extend credit
                  
                  $
                  110,951
                  
                  
                  $
                  174,329Standby
      letters of credit
                  
                  
                  3,913
                  
                  
                  
                  5,886Interest
      rate swaps
                  
                  
                  3,463
                  
                  
                  
                  15,527





CIB
Marine is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. CIB
Marine has entered into commitments to extend credit, which involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheets.





93





Standby
letters of credit are conditional commitments that CIB Marine issues to
guarantee the performance of a customer to a third-party. Fees received to issue
standby letters of credit are deferred and recognized as noninterest income over
the term of the commitment. The guarantees frequently support public and private
borrowing arrangements, including commercial paper issuances, bond funding, and
other similar transactions.CIB Marine issues commercial letters of credit on behalf of customers to
ensure payments or collection in connection with trade transactions. In the
event of a customer’s nonperformance, CIB Marine’s credit loss exposure is the
same as in any extension of credit, up to the letter’s contractual amount.
Management assesses the borrower’s financial condition to determine the
necessary collateral, which may include marketable securities, real estate,
accounts receivable and inventory. Since the conditions requiring CIB Marine to
fund letters of credit may not occur, CIB Marine expects its future cash
requirements to be less than the total outstanding commitments. The maximum
potential future payments guaranteed by CIB Marine under standby letter of
credit arrangements at December 31, 2008 and 2007, is $5.5 million and $5.9
million, respectively, with a weighted average term of approximately 8 months at
both December 31, 2008 and 2007. The standby letters of credit for which
reserves were established were participated to nonaffiliated banks. CIB Marine
did not default on any payment obligations with the other banks.





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. CIB Marine evaluates each customer’s creditworthiness
and determines the amount of the collateral necessary based on management’s
credit evaluation of the counterparty. Collateral held varies, but may include
marketable securities, accounts receivable, inventories, property and equipment,
and real estate.





At
December 31, 2007, CIB Marine was primarily involved with derivative financial
instruments in the form of interest rate swaps utilized for purposes of
asset/liability management to modify the existing market risk characteristics of
certain hedged assets and liabilities. An interest rate swap agreement involves
the exchange of fixed and floating rate interest payment obligations based on
the underlying notional principal amounts. The amounts subject to market and
credit risks are the streams of interest payments under the agreements and not
the notional principal amounts, which are used only to express the volume of the
transactions. CIB Marine’s credit risk on a swap agreement is limited to
nonperformance of the counterparty’s obligations under the terms of the swap
agreement. CIB Marine generally deals with counterparties that have high credit
ratings,and based on
management’s assessments, all counterparties were expected to meet any
outstanding obligations as of December 31, 2007. CIB Marine had no outstanding
interest rate swaps at December 31, 2008.





CIB
Marine had $10.0 million notional value of receive fixed/pay floating interest
rate swaps outstanding as of December 31, 2007 used to hedge fixed rate deposits
with matching interest payment frequencies, maturities, option features and
amounts. As of December 31, 2007, these swaps received Fair Value Hedge
accounting treatment under SFAS 133. CIB Marine had $5.6 million notional value
of pay fixed/receive floating interest rate swaps outstanding as of December 31,
2007 used to hedge fixed rate loans. These swaps are accounted for as Fair Value
Hedges under SFAS 133 as of December 31, 2007. Market value changes during the
period of the interest rate swaps and the hedged assets are reflected in other
noninterest income in the statement of operations.





The fair
value of derivatives that fail to qualify as a hedge and the ineffective
position of derivatives that do qualify as a hedge is charged to other expense
or credited to other income in the period of the change in fair value. Such
amounts charged to net income were $0.05 in 2008 and $0.01 million, in both 2007
and 2006. The fair value adjustment of warrants charged to net income in 2006
was $0.1 million.





Note
17-Commitments and Contingencies





Material
pending litigation, other than that of a routine nature in the ordinary course
of business, is as follows:





94





In June
2004, John C. Ruedi, a former employee of CIB Marine, filed an action against
CIB Marine in the Circuit Court of the Sixth Judicial District, Champaign
County, Illinois for rescission or damages, including punitive damages, in
connection with plaintiff’s October 1, 2002 exercise of options issued by CIB
Marine to acquire 36,688 shares of CIB Marine common stock at various exercise
prices. On June 3, 2005, a first consolidated complaint was filed by Dennis
Lewis, a shareholder, and other alleged shareholders of CIB Marine in the United
States District Court for the Central District of Illinois, Urbana Division,
against CIB Marine and certain of its current and former officers and directors.
The filing consolidated two actions that had been filed in January 2005: one
filed by Lewis in the United States District Court for the Central District of
Illinois, Urbana Division and another filed in the United States District Court
for the Central District of Illinois, Peoria Division by Elaine Sollberger, a
purported shareholder, whose claims were voluntarily dismissed in connection
with the consolidation and were not reasserted in the consolidated complaint.
Plaintiffs sought to maintain the action as a class action, claiming violations
of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by CIB Marine and
other defendants and liability of certain defendants other than CIB Marine under
Section 20(a) of the Exchange Act as controlling persons. The federal court in
Urbana, Illinois granted the motion of CIB Marine and several other defendants
to transfer the action to the United States District Court for the Eastern
District of Wisconsin, sitting in Milwaukee, Wisconsin.





On August
14, 2008, a settlement conference was held in the Dennis Lewis and John Ruedi
matters. As a result of that settlement conference, the remaining defendants
reached an agreement with the plaintiffs in both suits to settle those cases.
The general terms of the settlement involved the payment by CIB Marine of
approximately $3.4 million, together with an additional amount paid by CIB
Marine’s and individual defendants’ insurers, inclusive of costs, and the
defendants’ agreement to certification of a plaintiff class for purposes of
participating in the settlement (all persons who purchased CIB Marine’s stock
between January 21, 2000 and April 12, 2004), in exchange for which all claims
against CIB Marine, its insurer and the individual defendants in both lawsuits
would be dismissed.





The
parties’ agreement to settle the cases was subject to a number of conditions
including the final approval of the terms of the settlement in the Lewis case by
the court in that case. Those conditions were satisfied in the fourth quarter of
2008 and an order was entered dismissing the Lewis case. In December 2008, CIB
Marine paid the agreed upon amount to settle both cases. An order has been
entered in the Lewis case dismissing the claims against CIB Marine and the
individual defendants. No appeal has been taken from the approval of the
settlement in the Lewis case. A final order dismissing the Ruedi case in
accordance with the settlement was entered in February 2009.





As part
of the settlement of the Ruedi and Lewis cases, CIB Marine, the individual
insureds, and the insurer executed mutual releases discharging all parties of
all liability or obligations on existing or future claims under the policy or
claims for recovery from any insured.





In 2003
CIB Marine charged-off $41.7 million related to a condominium project in
Chicago. The loan had been originated by CIB Marine’s former Chicago-based
banking subsidiary, but the bank’s claims against the borrower and guarantors
were transferred to CIB Marine in November 2004 when the bank was sold to an
unaffiliated third party. Since then, CIB Marine has pursued collection from the
guarantors on the loan. CIB Marine continues to pursue its claims, including
available appeals, but it does not expect any material, favorable outcome from
the collection proceedings.





Note
18-Stock Option Plans





CIB
Marine has a nonqualified stock option and incentive plan for its employees and
directors. At December 31, 2008, options to purchase 534,113 shares were
available for future grant. The plan provides for the options to be exercisable
over a ten-year period beginning one year from the date of the grant, provided
the participant has remained in the employ of, or on the Board of Directors of,
CIB Marine and/or one of its subsidiaries. The plan also provides that the
exercise price of the options granted may not be less than 100% of the fair
market value of the common stock on the option grant date. Options vest over
five years. CIB Marine issues new shares upon the exercise of
options.





95





The
following table shows activity relating to stock options.





Number of
                Shares
              
              
              Range of
                Option Prices
                per Share
              
              
              Weighted
                Average
                Exercise Price
              
              
              Weighted Average
                Grant Date Fair
                Value Per ShareShares
      under option at December 31, 2005
              
              
              1,021,487
              
              
              $
              4.10-23.66
              
              
              $
              10.85Granted
              
              
              483,750
              
              
              $
              4.10
              
              
              $
              4.10
              
              
              $
              0.76Lapsed
      or surrendered
              
              
              (332,916
              )
              
              
              4.10-23.66
              
              
              
              9.44Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Shares
      under option at December 31, 2006
              
              
              1,172,321
              
              
              $
              4.10-22.89
              
              
              $
              8.47Granted
              
              
              325,500
              
              
              $
              3.70-4.10
              
              
              $
              3.79
              
              
              $
              0.43Lapsed
      or surrendered
              
              
              (199,794
              )
              
              
              4.10-22.89
              
              
              
              11.20Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Shares
      under option at December 31, 2007
              
              
              1,298,027
              
              
              $
              3.70-22.89
              
              
              $
              6.87Granted
              
              
              5,000
              
              
              $
              2.17
              
              
              $
              2.17
              
              
              $
              0.80Lapsed
      or surrendered
              
              
              (201,410
              )
              
              
              3.70-22.89
              
              
              
              10.67Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Shares
      under option at December 31, 2008
              
              
              1,101,617
              
              
              $
              2.17-22.89
              
              
              $
              6.16Shares
      exercisable at December 31, 2008
              
              
              573,617
              
              
              $
              4.10-22.89
              
              
              $
              8.19





The
following table shows activity relating to nonvested stock options:





Nonvested
      stock options at December 31, 2006
                
                
                703,550Granted
                
                
                325,500Vested
                
                
                (146,950
                )Forfeited
                
                
                (69,350
                )Nonvested
      stock options at December 31, 2007
                
                
                812,750Granted
                
                
                5,000Vested
                
                
                (230,550
                )Forfeited
                
                
                (59,200
                )Nonvested
      stock options at December 31, 2008
                
                
                528,000





The
following table summarizes information about stock options outstanding at
December 31, 2008.





Options Outstanding
                
                
                Options ExercisableWeighted
                
                
                
                
                
                
                
                
                ExercisableNumber of
                
                
                Average
                
                
                
                
                
                Weighted
                
                
                WeightedShares
                
                
                Remaining
                
                
                Average
                
                
                Shares
                
                
                Average
                
                WeightedRange of Option
                
                Outstanding
                
                
                Contractual
                
                
                Exercise
                
                
                Exercisable
                
                
                Exercise
                
                AveragePrices
                
                at 12/31/08
                
                
                Life (Years)
                
                
                Price
                
                
                at 12/31/08
                
                
                Prices
                
                Contractual Term$
      0.00 — 2.17
                
                
                5,000
                
                
                
                9.50
                
                
                $
                2.17
                
                
                
                —
                
                
                $
                —2.18
      — 4.10
                
                
                939,500
                
                
                
                7.29
                
                
                
                4.00
                
                
                
                416,500
                
                
                
                4.0513.90
      — 16.89
                
                
                47,700
                
                
                
                0.58
                
                
                
                16.23
                
                
                
                47,700
                
                
                
                16.2316.90
      — 19.89
                
                
                59,374
                
                
                
                1.57
                
                
                
                18.40
                
                
                
                59,374
                
                
                
                18.4019.90 — 22.89
                
                
                50,043
                
                
                
                2.91
                
                
                
                22.89
                
                
                
                50,043
                
                
                
                22.89$ 2.17 — 22.89
                
                
                1,101,617
                
                
                
                6.51
                
                
                $
                6.16
                
                
                
                573,617
                
                
                $
                8.19
                
                5.88





Note
19-Other Benefit Plans





CIB
Marine provides a defined contribution 401(k) plan to all employees of CIB
Marine and its subsidiaries who have attained age 18. As of August 2006,
employees may enter the Plan on the first day of the month following sixty days
of employment. The plan permits participants to make voluntary tax deferred
contributions up to the maximum permitted by law. Participants age 50 or older
are allowed to make a stated amount of additional contributions on a tax
deferred basis as permitted by law. In 2006, 2007 and 2008, the matching
contribution was 50% of the employee’s contribution up to 6% of compensation.
The total expenses incurred for employer matching contributions to the plan were
$0.3 million in 2008, $0.3 million in 2007 and $0.3 million in 2006. All
administrative costs to maintain the plan are paid by the plan.





96





CIB
Marine has an employee stock ownership plan for the benefit of employees who
attain a certain number of hours worked and length of service. At December 31,
2008, the plan held 205,836 shares of common stock, all of which have been
allocated to participants. CIB Marine recognizes compensation expense for its
contributions to the plan. CIB Marine did not make contributions to the plan in
2008, 2007 or 2006. Contributions are discretionary and are determined annually
by the Board of Directors. The administrative costs to maintain the plan are
paid by the plan.




In
December 2008, the Board of Directors of CIB Marine and the Board of
Administrators of the Employee Stock Ownership Plan (the “Plan” or “ESOP”)
approved a resolution to terminate the Plan effective December 18, 2008,
provided that CIB Marine reserved the right to make such further amendments to
the Plan as deemed necessary or appropriate to preserve the Plan’s qualified
status and facilitate the distribution of benefits. Upon termination of the
Plan, the interest of each participant in the trust fund would be distributed to
such participant or his or her beneficiary at the time prescribed by the Plan
terms and the Code. CIB Marine will pay the costs associated with termination of
the Plan, and as part of the termination CIB Marine’s Board of Directors has
authorized the purchase of CIB Marine stock held by the Plan at a cost of
approximately $0.4 million.





Note
20-Income Taxes





The
provision for income taxes (benefits) on income (loss) from continuing
operations in the consolidated statements of operations consisted of the
following components:





For the Years Ended December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Current
      tax provision (benefit):Federal
                
                $
                (499
                )
                
                $
                53
                
                
                $
                (78
                )State
                
                
                819
                
                
                
                (50
                )
                
                
                (21
                )Deferred
      (benefit)
                
                
                —
                
                
                
                —
                
                
                
                —$
                320
                
                
                $
                3
                
                
                $
                (99
                )





A
reconciliation of the income tax provision (benefit) and income taxes from
continuing operations, which would have been provided by applying the federal
statutory rate of 35%, is as follows:





For the Year Ended December 31,2008
                
                
                2007
                
                
                2006Amount
                
                
                %
                
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %(Dollars in thousands)Income
      tax benefit at statutory tax rate
                
                $
                (12,570
                )
                
                
                (35.0
                )%
                
                $
                (5,323
                )
                
                
                (35.0
                )%
                
                $
                (3,478
                )
                
                
                (35.0
                )%Increase
      (reduction) in tax rate resulting from:State
      income taxes, net of federal income tax effect
                
                
                530
                
                
                
                1.5
                
                
                
                178
                
                
                
                1.2
                
                
                
                12
                
                
                
                0.1Tax-exempt
      interest
                
                
                (41
                )
                
                
                (0.1
                )
                
                
                (202
                )
                
                
                (1.3
                )
                
                
                (337
                )
                
                
                (3.4
                )Affordable
      housing credits
                
                
                (360
                )
                
                
                (1.0
                )
                
                
                (360
                )
                
                
                (2.4
                )
                
                
                (360
                )
                
                
                (3.6
                )Valuation
      allowance
                
                
                13,018
                
                
                
                36.2
                
                
                
                5,666
                
                
                
                37.2
                
                
                
                3,978
                
                
                
                40.0Other,
      net
                
                
                (257
                )
                
                
                (0.7
                )
                
                
                44
                
                
                
                0.3
                
                
                
                86
                
                
                
                0.9$
                320
                
                
                
                0.9
                %
                
                $
                3
                
                
                
                (0.0
                )%
                
                $
                (99
                )
                
                
                (1.0
                )%





The tax
effects of temporary differences that give rise to net deferred tax
(liabilities)/assets reported in other assets in the accompanying consolidated
balance sheets are as follows:





97





December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Deferred
      tax assets:Loss
      carryforwards (1)
                
                $
                81,510
                
                
                $
                66,176
                
                
                $
                59,678Tax
      credit carryforwards
                
                
                2,928
                
                
                
                2,537
                
                
                
                2,177Allowance
      for loan losses
                
                
                7,798
                
                
                
                8,279
                
                
                
                8,221Net
      unrealized loss in securities available for sale
                
                
                4,082
                
                
                
                —
                
                
                
                746Other
      real estate owned
                
                
                —
                
                
                
                —
                
                
                
                4Other
                
                
                2,309
                
                
                
                1,919
                
                
                
                1,435Deferred
      tax assets before valuation allowance
                
                
                98,627
                
                
                
                78,911
                
                
                
                72,261Valuation
      allowance
                
                
                (97,571
                )
                
                
                (76,868
                )
                
                
                (71,202
                )Net
      deferred tax assets
                
                
                1,056
                
                
                
                2,043
                
                
                
                1,059Deferred
      tax liabilities:Fixed
      assets
                
                $
                298
                
                
                $
                275
                
                
                $
                388Net
      unrealized loss in securities available for sale
                
                
                —
                
                
                
                515
                
                
                
                —Other
                
                
                758
                
                
                
                1,253
                
                
                
                671Total
      deferred tax liabilities
                
                
                1,056
                
                
                
                2,043
                
                
                
                1,059Net
      deferred tax assets
                
                $
                —
                
                
                $
                —
                
                
                $
                —





(1)
            Includes
      U.S. federal and state net operating, capital loss and charitable
      contribution carryforwards.





With
respect to continuing and discontinued operations, there were U.S. federal net
operating loss, capital loss and charitable contribution carryforwards of
approximately $199.6 million, $165.8 million, and $150.1 million and state net
operating loss, capital loss and charitable contribution carryforwards of
approximately $276.5 million, $238.4 million, and $225.2 million at December 31,
2008, 2007 and 2006, respectively. In 2004, the sale of CIB-Chicago resulted in
a capital loss of $73.2 million. The net operating loss carryforwards will
expire in varying amounts between 2009 and 2027. $13.5 million of the U.S.
federal net operating loss carryforwards were acquired in connection with the
Canron acquisition, of which $6.7 million will not be available due to separate
return year limitations. Included in the carryforwards at December 31, 2008 are
$64.7 million of capital loss carryforwards, of which $0.3 million is
attributable to Canron. The capital loss carryforwards expire in
2009.





CIB
Marine had Alternative Minimum Tax (“AMT”) credit carryforwards of $0.7 million
at December 31, 2008, 2007 and 2006. $0.1 million of the AMT credit carryforward
was acquired in connection with the Canron acquisition. There were also $2.9
million of General Business Credit carryforwards at December 31, 2008, which
will expire in varying amounts between 2009 and 2013.





As of
December 31, 2005, no U.S. federal or state loss carryback potential remains.
Due to the significant losses in 2006 through 2008, management has determined
that it is not more likely than not that the net deferred tax assets at December
31, 2008 will be realized in their entirety. Therefore, a valuation allowance
has been provided by way of a charge to federal and state tax expense to reduce
the net U.S. federal and state deferred tax asset to zero.





On
January 1, 2007, CIB Marine adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation, and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. The FIN 48 adjustment is related to
CIB Marine’s investment in a REIT, owned by its former Illinois banking
subsidiary, which was sold in 2004. The cumulative effect of adopting FIN 48 was
a $1.0 million increase in liabilities of companies held for disposal and a $1.0
million decrease to the January 1, 2007 retained earnings balance.





During
2007, CIB Marine erroneously concluded that the statute of limitations had
expired with respect to that portion of the REIT exposure related to the 2002
tax year. Based on that conclusion, CIB Marine reversed the $1.3 million tax
liability related to its 2002 tax year exposure through a credit to the
discontinued operations tax expense while also recording a $0.3 million charge
to its discontinued operations tax expense for interest and penalty related to
the remaining REIT tax exposure. At December 31, 2007, CIB Marine had a $1.8
million current tax liability related to the tax exposure of its former
subsidiary. This amount is included in liabilities of companies held for
disposal on the December 31, 2007 consolidated balance sheet.





98





During
the third quarter of 2008, CIB Marine learned that the statute of limitations
had in fact not expired and increased its REIT tax exposure by $1.7 million,
including interest and penalties through that date. In December 2008, CIB Marine
reached a settlement agreement ILDOR regarding its tax exposure related to the
REIT. Under the agreement, ILDOR agreed to a accept $0.5 million payment from
CIB Marine as settlement in full of any and all open issues, including without
limitation, all issues pertaining to the formation and operation of the REIT,
causing or contributing to any alleged deficiencies, including all applicable
taxes, penalties and interest. As a result of this agreement, CIB Marine
reversed the remaining $3.0 million tax liability related to the REIT through a
credit to discontinued operations tax expense.





CIB Marine files income tax returns in
the U. S. federal and various state jurisdictions. CIB Marine is no longer
subject to income tax examinations by U. S. federal tax authorities for yearsbefore 2004, and state tax authorities for years before 2000.At December 31, 2008 and 2007, the
total amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $0.2 million and $2.4 million, respectively.CIB
Marine recognizes any interest and penalties related to unrecognized tax
benefits in the provision for income taxes. As of the date of adoption of FIN 48
on January 1, 2007, approximately
$1.0 million was accrued for the potential payment of interest and
penalties. CIB Marine does not
anticipate significant adjustments to the amount of total unrecognized tax
benefits within the next twelve months.





The
following table reconciles total gross amounts of unrecognized tax benefits at
the beginning and end of 2008 and 2007:





2007Balance
      at January 1, 2007
                  
                  $
                  4,705Additions
      for positions taken during the current year
                  
                  
                  212Additions
      for positions taken in prior years
                  
                  
                  280Reductions
      resulting from expiration of statutes
                  
                  
                  (1,300
                  )Balance
      at December 31, 2007
                  
                  $
                  3,897Re-evaluation
      of prior tax exposures
                  
                  
                  48Additions
      for positions taken in prior years
                  
                  
                  92Reductions
      resulting from settlements with taxing authorities
                  
                  
                  (3,677
                  )Reductions
      resulting from expiration of statutes
                  
                  
                  (209
                  )Balance
      at December 31, 2008
                  
                  $
                  151





Note 21-Fair Value of Financial
Instruments





The
following table presents information about CIB Marine’s assets and liabilities
measured at fair value on a recurring basis as of December 31, 2008, and
indicate the fair value hierarchy of the valuation techniques utilized to
determine such fair value. In general, fair values determined by Level 1 inputs
use quoted prices (unadjusted) in active markets for identical assets or
liabilities that CIB Marine has the ability to access. Fair values determined by
Level 2 inputs use inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2
inputs include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets
where there are few transactions and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates and yield curves
that are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability and include situations where
there is little, if any, market activity for the asset or
liability.





99




Fair
      Value for Measurements Made on a Recurring BasisDescription
                      
                      December
      31, 2008
                      
                      
                      Quoted
      Prices in
                        Active
      Markets for
                        Identical
      Assets
                        (Level
      1)
                      
                      
                      Significant
      Other
                        Observable
      Inputs
                        (Level
      2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level
      3)(Dollars
      in thousands)AssetsAvailable
      for sale securities
                      
                      $
                      280,452
                      
                      
                      $
                      —
                      
                      
                      $
                      277,198
                      
                      
                      $
                      3,254
                      (1)Interest
      rate lock commitments
                      
                      
                      3
                      
                      
                      
                      —
                      
                      
                      
                      3
                      
                      
                      
                      —Total
                      
                      $
                      280,455
                      
                      
                      $
                      —
                      
                      
                      $
                      277,201
                      
                      
                      $
                      3,254
                      (1)
 
 (1)
              Pooled
      trust preferred securities in other notes and bonds in Note 4 were
      transferred from Level 2 to Level 3 inputs during 2008 due to the use of
      significant unobservable inputs since the volume and level of trading
      activity in the assets declined significantly. Significantly unobservable
      inputs utilized, included liquidity and credit risk spreads from similar
      and comparable, but not identical, types of debts instruments credit risk
      factors and cash flows from models and analysis. The Level 3 Input fair
      market values were derived using the Level 3 inputs in income approach
      (present value technique) models proprietary to and prepared by
      independent third parties. The amount of gains or losses for the year
      ended December 31, 2008 for available for sale securities with Level 3
      inputs included $3.3 million in unrealized losses included in other
      comprehensive loss of stockholders’
equity.
 
 The
following table presents information about CIB Marine’s assets and liabilities
measured at fair value on a non-recurring basis as of December 31, 2008 and
indicates the fair value hierarchy of the valuation techniques utilized to
determine such fair value, as defined by SFAS 157.
 
 Fair
      Value for Measurements Made on a Nonrecurring BasisDescription
                      
                      December
      31,
                        2008
                      
                      
                      Quoted
      Prices in
                        Active
      Markets
                        forIdentical
                        Assets(Level
      1)
                      
                      
                      Significant
      Other
                        Observable
      Inputs
                        (Level
      2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level
      3)
                      
                      
                      Total
      Gains
                        (Losses)
      in
                        Period(Dollars
      in thousands)AssetsImpaired
      loans (1)
                      
                      $
                      8,512
                      
                      
                      $
                      —
                      
                      
                      $
                      8,512
                      
                      
                      $
                      —
                      
                      
                      $
                      (819
                      )Other
      equity investments
                      
                      
                      65
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      65
                      
                      
                      
                      —Total
                      
                      $
                      8,577
                      
                      
                      $
                      —
                      
                      
                      $
                      8,512
                      
                      
                      $
                      65
                      
                      
                      $
                      (819
                      )
 
 (1)
                Impaired
      loans gains (losses) in period include only those attributable to the
      loans represented in the fair value measurements for December 31,
      2008.
 
 The
following section describes the valuation methodologies used to measure
recurring financial instruments at fair value, including the classification of
related pricing inputs.
 
 Securities Available-for-Sale.
Where quoted market prices are available from active markets with high volumes
of frequent trades for identical securities, the security is presented as a
Level 1 input security. These would include predominantly U.S. Treasury Bills,
Notes and Bonds, and to certain mortgage-backed and government agency
securities. Securities classified under Level 2 inputs include those where
quoted market prices are available from an inactive market, where quoted market
prices are available from an active market of similar but not identical
securities, where pricing models use the U.S. Treasury or US dollar LIBOR swap
yield curves, where market quoted volatilities are used, and where correlated or
market corroborated inputs are used such as prepayment speeds, expected default
and loss severity rates. Securities with predominantly Level 2 inputs include
U.S. government agency and government sponsored enterprise issued securities and
mortgage-backed securities, certain corporate or foreign sovereign debt
securities, private issue mortgage-backed securities, other asset backed
securities, equity securities with quoted market prices but low or infrequent
trades and debt obligations of states and political subdivisions. Where Level 1
or Level 2 inputs are either not available, or are significantly adjusted, the
securities are classified under Level 3 inputs. The available-for-sale
securities using Level 3 inputs were pooled trust preferred securities with fair
values measured using predominantly the income valuation approach (present value
technique), where expected future cash flows less expected losses were
discounted using a discount rate comprised of benchmark interest rates plus
credit, liquidity and option premium spreads from similar and comparable, but
not identical, types of debt instruments and from models. The credit and
liquidity premium spreads used in the discount rates and the credit factors used
in deriving cash flows represent significant unobservable
inputs.
  100
 
 Impaired Loans. Impaired loans
often, but not always, have an impairment loss. Impairment losses are included
in the allowance for loan losses. The impairment loss is based on a Level 1 or
Level 2 quoted market price input, a discounted cash flow analysis, or a fair
value estimate of the collateral using Level 2 inputs, including primarily the
appraised value of the real estate with certain other market correlated or
corroborated information. The fair value of impaired loans represented in the
fair value table includes only those with an impairment loss and where that
impairment loss was determined based upon a fair value estimate of the
collateral.
 
 The table
below summarizes the information required by SFAS No. 107, Disclosures about Fair Value of
Financial Instruments(“SFAS 107”).
 
 December 31, 2008Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
                  
                  $
                  57,231
                  
                  
                  $
                  57,231Loans
      held for sale
                  
                  
                  4,777
                  
                  
                  
                  4,777Securities
                  
                  
                  280,452
                  
                  
                  
                  280,452Loans,
      net
                  
                  
                  535,965
                  
                  
                  
                  533,914Federal
      Home Loan Bank
                  
                  
                  11,555
                  
                  
                  
                  11,555Accrued
      interest receivable
                  
                  
                  4,289
                  
                  
                  
                  4,289Financial
      liabilities:Deposits
                  
                  
                  694,632
                  
                  
                  
                  702,548Short-term
      borrowings
                  
                  
                  62,806
                  
                  
                  
                  62,806Long-term
      borrowings
                  
                  
                  27,000
                  
                  
                  
                  27,985Junior
      subordinated debentures
                  
                  
                  61,857
                  
                  
                  
                  
                  (2)Accrued
      interest payable
                  
                  
                  41,377
                  
                  
                  
                  41,377
 
 December 31, 2008Contractual
                    or
      Notional
                    Amount
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value(Dollars
      in thousands)Off-balance
      sheet items:Commitments
      to extend credit
                  
                  $
                  110,951
                  
                  
                  $
                  —
                  
                  
                  $
                  —Standby
      letters of credit (1)
                  
                  
                  3,913
                  
                  
                  
                  (24
                  )
                  
                  
                  (24
                  )Interest
      rate swap agreements
                  
                  
                  3,463
                  
                  
                  
                  —
                  
                  
                  
                  —
 
 December 31, 2007Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
                  
                  $
                  74,841
                  
                  
                  $
                  74,841Loans
      held for sale
                  
                  
                  —
                  
                  
                  
                  —Securities
                  
                  
                  316,321
                  
                  
                  
                  316,321Loans,
      net
                  
                  
                  574,553
                  
                  
                  
                  581,068Federal
      Home Loan Bank and Federal Reserve Bank stock
                  
                  
                  12,298
                  
                  
                  
                  12,298Accrued
      interest receivable
                  
                  
                  5,839
                  
                  
                  
                  5,839Financial
      liabilities:Deposits
                  
                  
                  745,590
                  
                  
                  
                  743,189Short-term
      borrowings
                  
                  
                  85,616
                  
                  
                  
                  85,616Long-term
      borrowings
                  
                  
                  12,000
                  
                  
                  
                  12,094Junior
      subordinated debentures
                  
                  
                  61,857
                  
                  
                  
                  65,275Accrued
      interest payable
                  
                  
                  33,223
                  
                  
                  
                  33,223
  101
 
 December 31, 2007Contractual
                    or
      Notional
                    Amount
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value(Dollars
      in thousands)Off-balance
      sheet items:Commitments
      to extend credit
                  
                  $
                  174,329
                  
                  
                  $
                  —
                  
                  
                  $
                  —Standby
      letters of credit (1)
                  
                  
                  5,886
                  
                  
                  
                  (753
                  )
                  
                  
                  (753
                  )Interest
      rate swap agreements
                  
                  
                  15,527
                  
                  
                  
                  39
                  
                  
                  
                  39
  
 (1)
              Includes
      an accrued liability for probable losses on unfunded commitments to extend
      credit and standby letters of credit of $0.7 million at December 31,
      2007.
 (2)
              An
      estimate of fair value of the junior subordinated debentures has not been
      made because it is not practicable to make such estimate at this time.
      Pertinent information to estimating the fair value can be found in Note
      11-Long-term borrowings.
 
 Fair
value amounts represent estimates of value at a point in time. Significant
estimates regarding economic conditions, loss experience, risk characteristics
associated with particular financial instruments and other factors were used for
the purposes of this disclosure. These estimates are subjective in nature and
involve matters of judgment. Therefore, they cannot be determined with
precision. Changes in the assumptions could have a material impact on the
amounts estimated.
 
 While
these estimated fair value amounts are designed to represent estimates of the
amounts at which these instruments could be exchanged in a current transaction
between willing parties, it is CIB Marine’s intent to holdmost of its
financial instruments to maturity. Therefore, it is not probable that the fair
values shown will be realized in a current transaction.
 
 The
estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) is
not reflected. The value of this item is significant.
 
 Because
of the wide range of valuation techniques and the numerous estimates that must
be made, it may be difficult to make reasonable comparisons of CIB Marine’s fair
value to that of other financial institutions. It is important that the many
uncertainties discussed above be considered when using the estimated fair value
disclosures and to realize that because of these uncertainties the aggregate
fair value should in no way be construed as representative of the underlying
value of CIB Marine.
 
 The
following describes the methodology and assumptions used to estimate fair value
of financial instruments required by SFAS 107.
 
 Cash
and Cash Equivalents
 
 The
carrying amount reported in the balance sheet for cash and cash equivalents
approximates their fair value. For purposes of this disclosure only, cash
equivalents include cash and due from banks, Federal Funds sold and repurchase
agreements.
 
 Available
for Sale Securities
 
 The
estimated fair values of securities by type are provided in Note 3-Securities.
These are based on quoted market prices, when available. If a quoted market
price is not available, fair value is estimated using Level 2 and Level 3
pricing inputs as described within Note 21-Fair Values of Financial
Instruments.
  Loans
held for Sale
 
 The fair
value of loans held for sale, primarily commercial loans estimated at the value
of the loan based on the underlying value of the collateral and residential
mortgage loans estimated using current market prices for similar mortgage loans
in the market.
  102
  Loans
Receivable
 
 For loans
that reprice frequently, the carrying value approximates their value. The fair
values of all other loans receivable were estimated by discounting the expected
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and maturities. The carrying value
and the fair value of loans receivable is net of the allowance for loan
losses.
 
 Federal
Home Loan Bank and Federal Reserve Bank Stock
 
 The
carrying amounts of Federal Home Loan Bank and Federal Reserve Bank Stock
approximate their fair values.
 
 Accrued
Interest Receivable
 
 The
carrying amounts of accrued interest approximate their fair values.
 
 Deposit
Liabilities
 
 The
carrying value of deposits with no stated maturity approximates their fair value
as they are payable on demand. The estimated fair value of fixed time deposits
is based on discounted cash flow analyses. The discount rates used in these
analyses are based on market rates of alternative funding sources currently
available for similar remaining maturities.
 
 Short-term
Borrowings
 
 The
carrying value of short-term borrowings payable within three months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than three months is based on quoted market prices, when
available. Debt for which quoted prices were not available was valued using cash
flows discounted at a current market rate for similar types of debt. For
purposes of this disclosure, short-term borrowings are those borrowings with
stated final maturities of less than or equal to one year, including securities
sold under agreements to repurchase, U.S. Treasury tax and loan notes, lines of
credit, commercial paper and other similar borrowings.
 
 Long-term
Borrowings
 
 The
carrying value of long-term borrowings payable within three months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than three months is based on quoted market prices, when
available. Debt for which quoted prices were not available was valued using cash
flows discounted at a current market rate for similar types of debt. For
purposes of this disclosure, long-term borrowings are those borrowings with
stated final maturity of more than one year, including Federal Home Loan Bank
advances with stated final maturity of more than one year. Notwithstanding their
stated final maturity of more than one year, junior subordinated debentures are
excluded from long-term borrowings.
 
 Junior
Subordinated Debentures
 
 An
estimate of fair value of the junior subordinated debentures has not been made
because it is not practicable to make such estimate at this time. Pertinent
information to estimating the fair value can be found in Note 11-Long-term
borrowings. For December 31, 2007 the fair value was estimated using option
adjusted spread valuation models with an option free spread approximating a
non-investment grade credit quality.
 
 Accrued
Interest Payable
 
 The
carrying amounts of accrued interest are used to approximate their fair
values.
  103
 
 Off-Balance
Sheet Instruments
 
 The fair
value and carrying value of letters of credit and unused and open ended lines of
credit have been estimated based on the unearned fees charged for those
commitments net of accrued liability for probable losses.
 
 The fair
value of interest rate swaps is based upon quoted market prices, when available.
If a quoted market price is not available, fair value is estimated based on the
net of the discounted cash flows of the fixed leg and the floating leg of the
swap using as a discount rate currently existing rates available for swaps of
comparable remaining term, notional value, index and counterparty credit
risk.
 
 Note 22-Parent Company Financial
Statements
 
 The
condensed financial statements of the parent company only, are presented as
follows:
 
 Condensed
Balance Sheets
 
 December 31,2008
                  
                  
                  2007(Dollars in thousands)AssetsCash
      and due from affiliated banks
                  
                  $
                  13,237
                  
                  
                  $
                  25,747Investments
      in subsidiaries
                  
                  
                  99,894
                  
                  
                  
                  121,605Loans
      to subsidiaries
                  
                  
                  604
                  
                  
                  
                  608Premises
      and equipment, net
                  
                  
                  512
                  
                  
                  
                  764Investment
      in subsidiaries held for disposal
                  
                  
                  (687
                  )
                  
                  
                  (2,969
                  )Other
      investments
                  
                  
                  885
                  
                  
                  
                  3,141Income
      tax receivable
                  
                  
                  789
                  
                  
                  
                  2,593Other
      assets
                  
                  
                  1,871
                  
                  
                  
                  1,878Total
      assets
                  
                  $
                  117,105
                  
                  
                  $
                  153,367LiabilitiesLoans
      to subsidiaries-subscribed stock
                  
                  $
                  51
                  
                  
                  $
                  121Accrued
      interest payable
                  
                  
                  39,090
                  
                  
                  
                  30,258Junior
      subordinated debentures
                  
                  
                  61,857
                  
                  
                  
                  61,857Other
      liabilities
                  
                  
                  1,305
                  
                  
                  
                  825Total
      liabilities
                  
                  
                  102,303
                  
                  
                  
                  93,061Stockholders’
      EquityPreferred
      stock, $1 par value; 5,000,000 shares authorized, none
    issued
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $1 par value; authorized shares, 50,000,000; issued shares,
      18,346,442 in 2008 and 2007; outstanding shares, 18,341,231 in 2008 and
      18,346,442 in 2007
                  
                  
                  18,346
                  
                  
                  
                  18,346Capital
      surplus
                  
                  
                  158,613
                  
                  
                  
                  158,398Accumulated
      deficit
                  
                  
                  (151,936
                  )
                  
                  
                  (117,537
                  )Accumulated
      other comprehensive income (loss), net
                  
                  
                  (10,008
                  )
                  
                  
                  1,382Receivables
      from sale of stock
                  
                  
                  (51
                  )
                  
                  
                  (121
                  )Treasury
      stock at cost, 12,663 shares
                  
                  
                  (162
                  )
                  
                  
                  (162
                  )Total
      stockholders’ equity
                  
                  
                  14,802
                  
                  
                  
                  60,306Total
      liabilities and stockholders’ equity
                  
                  $
                  117,105
                  
                  
                  $
                  153,367
  104
  Condensed
Statements of Operations
 
 Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Interest
      and Dividend IncomeDividends
      from subsidiaries
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,575Loan
      and other interest from subsidiaries
                  
                  
                  319
                  
                  
                  
                  1,216
                  
                  
                  
                  1,332Total
      interest and dividend income
                  
                  
                  319
                  
                  
                  
                  1,216
                  
                  
                  
                  2,907Interest
      ExpenseJunior
      subordinated debentures
                  
                  
                  8,887
                  
                  
                  
                  8,556
                  
                  
                  
                  7,742Total
      interest expense
                  
                  
                  8,887
                  
                  
                  
                  8,556
                  
                  
                  
                  7,742Net
      interest loss
                  
                  
                  (8,568
                  )
                  
                  
                  (7,340
                  )
                  
                  
                  (4,835
                  )Noninterest
      incomeEquity
      in undistributed earnings (loss) of subsidiaries
                  
                  
                  (13,537
                  )
                  
                  
                  (695
                  )
                  
                  
                  911Fees
      from subsidiaries
                  
                  
                  5,111
                  
                  
                  
                  5,894
                  
                  
                  
                  6,435Gain
      on sale of assets, net
                  
                  
                  —
                  
                  
                  
                  191
                  
                  
                  
                  —Other
      income
                  
                  
                  503
                  
                  
                  
                  223
                  
                  
                  
                  234Total
      noninterest income
                  
                  
                  (7,923
                  )
                  
                  
                  5,613
                  
                  
                  
                  7,580Noninterest
      expenseCompensation
      and employee benefits
                  
                  
                  6,842
                  
                  
                  
                  7,134
                  
                  
                  
                  8,358Equipment
                  
                  
                  475
                  
                  
                  
                  716
                  
                  
                  
                  864Occupancy
      and premises
                  
                  
                  576
                  
                  
                  
                  742
                  
                  
                  
                  728Professional
      services
                  
                  
                  2,986
                  
                  
                  
                  2,083
                  
                  
                  
                  1,039Write
      down and losses on assets
                  
                  
                  3,232
                  
                  
                  
                  21
                  
                  
                  
                  247Other
                  
                  
                  4,653
                  
                  
                  
                  1,593
                  
                  
                  
                  3,076Total
      noninterest expense
                  
                  
                  18,764
                  
                  
                  
                  12,289
                  
                  
                  
                  14,312Loss
      before income taxes
                  
                  
                  (35,255
                  )
                  
                  
                  (14,016
                  )
                  
                  
                  (11,567
                  )Income
      tax benefit
                  
                  
                  (856
                  )
                  
                  
                  (245
                  )
                  
                  
                  (2,289
                  )Net
      loss
                  
                  $
                  (34,399
                  )
                  
                  $
                  (13,771
                  )
                  
                  $
                  (9,278
                  )
  105
  Condensed
Statement of Cash Flows
 
 Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Cash
      Flows from Operating Activities:Net
      loss
                  
                  $
                  (34,399
                  )
                  
                  $
                  (13,771
                  )
                  
                  $
                  (9,278
                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Equity
      in undistributed (earnings) loss of subsidiaries
                  
                  
                  13,537
                  
                  
                  
                  695
                  
                  
                  
                  (911
                  )Depreciation
      and amortization
                  
                  
                  289
                  
                  
                  
                  427
                  
                  
                  
                  521Write
      down and losses on assets
                  
                  
                  3,232
                  
                  
                  
                  21
                  
                  
                  
                  247Deferred
      tax benefit
                  
                  
                  (3,297
                  )
                  
                  
                  —
                  
                  
                  
                  —Gain
      on sale of assets
                  
                  
                  —
                  
                  
                  
                  (191
                  )
                  
                  
                  —Decrease
      (increase) in interest receivable and other assets
                  
                  
                  (2,220
                  )
                  
                  
                  1,875
                  
                  
                  
                  (3,588
                  )Increase
      in interest payable junior subordinated debentures
                  
                  
                  8,832
                  
                  
                  
                  8,501
                  
                  
                  
                  7,688Increase
      (Decrease) in other interest payable and other liabilities
                  
                  
                  3,776
                  
                  
                  
                  (624
                  )
                  
                  
                  (931
                  )Net
      cash used in operating activities
                  
                  
                  (10,250
                  )
                  
                  
                  (3,067
                  )
                  
                  
                  (6,252
                  )Cash
      Flows from Investing Activities:Net
      (increase) decrease in loans
                  
                  
                  4
                  
                  
                  
                  (537
                  )
                  
                  
                  718Dividends
      received from subsidiaries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,575Capital
      expenditures
                  
                  
                  18
                  
                  
                  
                  (101
                  )
                  
                  
                  (124
                  )Increase
      (Decrease) in investment in subsidiaries held for disposal
                  
                  
                  (2,282
                  )
                  
                  
                  (1,226
                  )
                  
                  
                  351Proceeds
      from sale of foreclosed property
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  637Net
      cash (used in) provided by investing activities
                  
                  
                  (2,260
                  )
                  
                  
                  (1,864
                  )
                  
                  
                  3,157Cash
      Flows from Financing Activities:Reduction
      in receivable from the sale of stock
                  
                  
                  —
                  
                  
                  
                  30
                  
                  
                  
                  —Net
      cash used in financing activities
                  
                  
                  —
                  
                  
                  
                  30
                  
                  
                  
                  —Net
      decrease in cash and cash equivalents
                  
                  
                  (12,510
                  )
                  
                  
                  (4,901
                  )
                  
                  
                  (3,095
                  )Cash
      and cash equivalents, beginning of year
                  
                  
                  25,747
                  
                  
                  
                  30,648
                  
                  
                  
                  33,743Cash
      and cash equivalents, end of year
                  
                  $
                  13,237
                  
                  
                  $
                  25,747
                  
                  
                  $
                  30,648
  106
  Note 23-Quarterly Consolidated
Financial Information (Unaudited)
 
 First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter
                  
                  
                  TOTAL(Dollars
      in thousands, except share data)2008Total
      interest income
                  
                  $
                  15,801
                  
                  
                  $
                  14,071
                  
                  
                  $
                  13,548
                  
                  
                  $
                  12,721
                  
                  
                  $
                  56,141Total
      interest expense
                  
                  
                  9,780
                  
                  
                  
                  8,712
                  
                  
                  
                  8,219
                  
                  
                  
                  7,790
                  
                  
                  
                  34,501Net
      interest income
                  
                  
                  6,021
                  
                  
                  
                  5,359
                  
                  
                  
                  5,329
                  
                  
                  
                  4,931
                  
                  
                  
                  21,640Provision
      for (reversal of) credit losses
                  
                  
                  808
                  
                  
                  
                  8,525
                  
                  
                  
                  10,141
                  
                  
                  
                  2,589
                  
                  
                  
                  22,063Net
      interest income (loss) after provision for credit losses
                  
                  
                  5,213
                  
                  
                  
                  (3,166
                  )
                  
                  
                  (4,812
                  )
                  
                  
                  2,342
                  
                  
                  
                  (423
                  )Other
      noninterest income
                  
                  
                  433
                  
                  
                  
                  457
                  
                  
                  
                  4,661
                  
                  
                  
                  607
                  
                  
                  
                  6,158Other
      noninterest expense
                  
                  
                  8,357
                  
                  
                  
                  11,259
                  
                  
                  
                  9,879
                  
                  
                  
                  12,153
                  
                  
                  
                  41,648Loss
      from continuing operations before income taxes
                  
                  
                  (2,711
                  )
                  
                  
                  (13,968
                  )
                  
                  
                  (10,030
                  )
                  
                  
                  (9,204
                  )
                  
                  
                  (35,913
                  )Income
      tax expense
                  
                  
                  44
                  
                  
                  
                  2
                  
                  
                  
                  88
                  
                  
                  
                  186
                  
                  
                  
                  320Loss
      from continuing operations
                  
                  
                  (2,755
                  )
                  
                  
                  (13,970
                  )
                  
                  
                  (10,118
                  )
                  
                  
                  (9,390
                  )
                  
                  
                  (36,233
                  )Discontinued
      operations:Pretax
      income (loss) from discontinued operations
                  
                  
                  8
                  
                  
                  
                  (36
                  )
                  
                  
                  493
                  
                  
                  
                  28
                  
                  
                  
                  493Tax
      effect for discontinued operations (1)
                  
                  
                  7
                  
                  
                  
                  28
                  
                  
                  
                  1,571
                  
                  
                  
                  (2,947
                  )
                  
                  
                  (1,341
                  )Net
      income (loss) from discontinued operations
                  
                  
                  1
                  
                  
                  
                  (64
                  )
                  
                  
                  (1,078
                  )
                  
                  
                  2,975
                  
                  
                  
                  1,834Net
      loss
                  
                  $
                  (2,754
                  )
                  
                  $
                  (14,034
                  )
                  
                  $
                  (11,196
                  )
                  
                  $
                  (6,415
                  )
                  
                  $
                  (34,399
                  )Earnings
      (loss) per share:BasicLoss
      from continuing operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.76
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.52
                  )
                  
                  $
                  (1.98
                  )Discontinued
      operations
                  
                  
                  0.00
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.06
                  )
                  
                  
                  0.17
                  
                  
                  
                  0.10Net
      Loss
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.77
                  )
                  
                  $
                  (0.61
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (1.88
                  )DilutedLoss
      from continuing operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.76
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.52
                  )
                  
                  $
                  (1.98
                  )Discontinued
      operations
                  
                  
                  0.00
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.06
                  )
                  
                  
                  0.17
                  
                  
                  
                  0.10Net
      loss
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.77
                  )
                  
                  $
                  (0.61
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (1.88
                  )2007Total
      interest income
                  
                  $
                  15,403
                  
                  
                  $
                  15,773
                  
                  
                  $
                  15,688
                  
                  
                  $
                  15,830
                  
                  
                  $
                  62,694Total
      interest expense
                  
                  
                  9,851
                  
                  
                  
                  9,784
                  
                  
                  
                  10,018
                  
                  
                  
                  10,414
                  
                  
                  
                  40,067Net
      interest income
                  
                  
                  5,552
                  
                  
                  
                  5,989
                  
                  
                  
                  5,670
                  
                  
                  
                  5,416
                  
                  
                  
                  22,627Provision
      for (reversal of) credit losses
                  
                  
                  694
                  
                  
                  
                  (681
                  )
                  
                  
                  5,834
                  
                  
                  
                  566
                  
                  
                  
                  6,413Net
      interest income after provision for credit losses
                  
                  
                  4,858
                  
                  
                  
                  6,670
                  
                  
                  
                  (164
                  )
                  
                  
                  4,850
                  
                  
                  
                  16,214Other
      noninterest income
                  
                  
                  1,795
                  
                  
                  
                  602
                  
                  
                  
                  227
                  
                  
                  
                  426
                  
                  
                  
                  3,050Other
      noninterest expense
                  
                  
                  8,879
                  
                  
                  
                  8,700
                  
                  
                  
                  8,742
                  
                  
                  
                  8,151
                  
                  
                  
                  34,472Loss
      from continuing operations before income taxes
                  
                  
                  (2,226
                  )
                  
                  
                  (1,428
                  )
                  
                  
                  (8,679
                  )
                  
                  
                  (2,875
                  )
                  
                  
                  (15,208
                  )Income
      tax (benefit) expense
                  
                  
                  3
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3Loss
      from continuing operations
                  
                  
                  (2,229
                  )
                  
                  
                  (1,428
                  )
                  
                  
                  (8,679
                  )
                  
                  
                  (2,875
                  )
                  
                  
                  (15,211
                  )Discontinued
      operations:Pretax
      income from discontinued operations
                  
                  
                  417
                  
                  
                  
                  (14
                  )
                  
                  
                  8
                  
                  
                  
                  6
                  
                  
                  
                  417Tax
      effect for discontinued operations
                  
                  
                  67
                  
                  
                  
                  (1,230
                  )
                  
                  
                  70
                  
                  
                  
                  70
                  
                  
                  
                  (1,023
                  )Net
      income from discontinued operations
                  
                  
                  350
                  
                  
                  
                  1,216
                  
                  
                  
                  (62
                  )
                  
                  
                  (64
                  )
                  
                  
                  1,440Net
      loss
                  
                  $
                  (1,879
                  )
                  
                  $
                  (212
                  )
                  
                  $
                  (8,741
                  )
                  
                  $
                  (2,939
                  )
                  
                  $
                  (13,771
                  )Earnings
      (loss) per share:BasicLoss
      from continuing operations
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.83
                  )Discontinued
      operations
                  
                  
                  0.02
                  
                  
                  
                  0.07
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.00
                  )
                  
                  
                  0.08Net
      Loss
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.48
                  )
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.75
                  )DilutedLoss
      from continuing operations
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.83
                  )Discontinued
      operations
                  
                  
                  0.02
                  
                  
                  
                  0.07
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.00
                  )
                  
                  
                  0.08Net
      loss
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.48
                  )
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.75
                  )
 
 (1) At
September 30, 2008, CIB Marine had a $3.5 million tax exposure liability related
to its investment in a REIT. In December 2008, CIB Marine reached a settlement
agreement whereby it agreed to pay $0.5 million for full settlement of this
liability. As a result of this agreement, in the fourth quarter of 2008, CIB
Marine reversed the remaining $3.0 million tax liability related to the REIT
through a credit to discontinued operations tax expense. See Note 20-Income
Taxes for further discussion.
  107
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 There
were no disagreements or reportable events of the nature required to be
disclosed pursuant to Item 304 (b) of Regulation S-K.
 
 ITEM 9A(T). CONTROLS AND
PROCEDURES
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
 CIB
Marine maintains a system of disclosure controls and procedures designed to
provide reasonable assurance that information required to be disclosed by CIB
Marine in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls are also designed to reasonably
assure that such information is accumulated and communicated to management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), as appropriate to allow timely decisions regarding required disclosure.
Disclosure controls include components of internal control over financial
reporting, which consist of control processes designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with U.S. generally accepted accounting
principles.
 
 CIB
Marine’s management, under the supervision and with the participation of its CEO
and CFO, evaluated the effectiveness of the design and operation of the
company’s disclosure controls and procedures as of December 31, 2008. Based on
this evaluation, management has concluded that the disclosure controls and
procedures were effective as of December 31, 2008.
 
 (b)CIB Marine’s management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in 13a-15(f) and 15d-15(f) under the Exchange
Act. A company’s internal control over financial reporting is a process designed
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. Internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of CIB Marine, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of CIB Marine are
being made only in accordance with authorizations of management and directors of
CIB Marine; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of CIB Marine’s
assets that could have a material effect on interim or annual consolidated
financial statements. 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.
 
 CIB
Marine’s management, with the participation of its CEO and CFO, conducted an
evaluation of the effectiveness of CIB Marine’s internal controls over financial
reporting as of December 31, 2008 based on the framework and criteria
established in Internal
Controls-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this
evaluation. Based on this evaluation, management concluded that CIB Marine’s
internal control over financial reporting is effective as of December 31,
2008.
 
 This
annual report on Form 10-K does not include an attestation of CIB Marine’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by CIB
Marine’s registered public accounting firm pursuant to temporary rules of the
SEC that permit CIB Marine to provide only management’s report in this annual
report on Form 10-K.
  108
 
 (c)
Changes in Internal Control over Financial Reporting
 
 There
were no changes in CIB Marine’s internal control over financial reporting during
the quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect CIB Marine’s internal control over
financial reporting.
 
 ITEM
9B. OTHER INFORMATION
 
 None.
 
 PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 The
following table sets forth the names and ages of all Directors of CIB Marine at
December 31, 2008, the positions and offices with CIB Marine held by each
Director, the period that each has held any position with CIB Marine, the
expiration of such Director’s term, and a brief account of each Director’s
business experience during at least the past five years. CIB Marine did not hold
an annual meeting of shareholders during 2004, 2005, 2006, or 2007. Accordingly,
in order for the staggered board to be properly constituted, at the 2008 annual
meeting, three directors were elected to serve for a one-year term expiring at
the annual meeting in 2009, three directors were elected to serve for a two-year
term expiring at the annual meeting in 2010, and three directors were elected to
serve for a three-year term expiring at the annual meeting in 2011. At the 2009
annual meeting and each subsequent annual meeting, only one class of directors
will be elected to serve for a three-year term until such directors’ successors
have been duly elected and qualified or until such directors’ earlier
resignation, death or removal. There are no family relationships between any
Director or executive officer of CIB Marine.
 
 Directors
 
 Name
      and Age
                        
                        Serving
                          Since
                        
                        Term
                          Expired
      or
                          Scheduled
      to
                          Expire
                        
                        Position
      with CIB Marine or Other
                          Principal
      Occupation and Other DirectorshipsCharles
      E. Baker (64)
                        
                        2008
                        
                        2010
                        
                        Director
      of CIB Marine since January 2008; Director of Marine Bank since July 2006;
      Director of Central Illinois Bank since February 2009; Partner at Ernst
      & Young LLP, an accounting, tax and advisory services firm from 1969
      to 2005; Senior Technical Advisor at Clifton Gunderson LLP, an accounting,
      tax and consulting services firm from January 2006 to present; Director of
      Northeast Communications of Wisconsin and Aurora Health Care from 2006 to
      present.Norman
      E. Baker (62)
                        
                        1988
                        
                        2009
                        
                        Chairman
      of Central Illinois Bank from February 2004 to March 2006, Director of
      Central Illinois Bank from 1988 to December 2007 and since February 2009;
      Director of CIB-Indiana, from 1998 until its merger into Marine-Wisconsin
      in August 2006; Director of Marine-Wisconsin from 2006 to December 2007
      and since February 2009; Chairman of Marine-FSB from February 2004 to June
      2005 and Director of Marine-FSB from October 1999 until its merger into
      Marine-Wisconsin in March 2006. President and Chief Executive Officer of
      Estoy Pronto, Inc., a consulting and investment company, since July
      1994.
 
  109
  
 W.
      Scott Blake (48)
                
                1987
                
                2009
                
                Chairman
      of CIB Marine from February 2004 to March 2007; Chairman of
      Marine-Wisconsin since March 2006, Director of Marine-Wisconsin since
      December 2002; Director of Central Illinois Bank since February 2009;
      Manager of CIB Marine Capital LLC since 2001; and Director of MICR, Inc.
      from 2000 until its dissolution in January 2008. President of Blake
      Capital Corp., a real estate development, investment and property
      management company, since July 1998.(3)Stanley
      J. Calderon (63)
                
                2004
                
                2011
                
                Chairman
      of CIB Marine from March 2007 to February 2009; President and Chief
      Executive Officer of CIB Marine from April 2004 to March 2007; Director of
      the following bank and nonbank subsidiaries of CIB Marine: Central
      Illinois Bank since December 2004, Marine-Wisconsin since February 2005,
      Citrus Bank from February 2005 until its merger into CIB Marine in August
      2008, CIB Marine Information Services, Inc. since March 2005, and CIB
      Marine Capital LLC since September 2008. Prior to joining CIB Marine, Mr.
      Calderon was Executive Vice President and Manager of Middle Market Banking
      for the Midwest Region of Bank One from 1999 to 2003.(1)John
      P. Hickey, Jr. (61)
                
                2007
                
                2010
                
                Chairman
      of CIB Marine since February 2009. Director of CIB Marine since May 2007;
      President and Chief Executive Officer of CIB Marine since March 2007;
      Director, President and CEO of Marine since April 2006; Director of
      Central Illinois Bank since February 2008; Director of CIB Marine Capital
      LLC since September 2008; and Director of Citrus Bank, N.A. from March
      2007 until its merger with CIB Marine in August 2008. Prior to joining CIB
      Marine, Mr. Hickey was Senior Vice President of Business Banking at
      Guaranty Bank in 2006; and from 2001 to 2005 held senior management
      positions with Marsh McLennan, first as Managing Director of the Western
      region, then as the Managing Director of a substantial business segment of
      the company.(1)Steven
      C. Hillard (46)
                
                2004
                
                2011
                
                Director
      of CIB Marine from 1991 to 2002 and since September 2004; Director of
      MICR, Inc. from December 2004 until its dissolution in January 2008;
      Director of Marine Bank since February 2009; Director of Central Illinois
      Bank from 1992 to 2002 and since February 2009. President of HILMUN
      Holdings, Inc., a diversified holding company with interests in
      manufacturing and financial investments, since September 1991; President
      and CEO of HL Precision Machining, Inc., a manufacturer of precision parts
      and components, since July 2006; Chief Executive Officer and Chairman of
      the Board of Pinnacle Door Company, a distributor and installer of garage
      doors, from September 1992 to July 2007; Managing member of HILMUN
      Development, LLC, a real estate development company, from 1993 to 2008;
      and Chairman, President and Chief Executive Officer of Strategic Capital
      Bancorp, Inc. from November 2002 to September 2004.(4)Gary
      L. Longman (60)
                
                2004
                
                2011
                
                Director
      of Central Illinois Bank and Marine Bank since February 2009; President of
      Sunny Ridge Family Center, an adoption agency, since June 2003; President
      of G.L. Longman Consulting, a consulting business, since January 2001;
      Partner at KPMG, LLP, an accounting, tax and advisory services firm from
      1980 to 2000.
 
  110
  
 Donald
      M. Trilling (78)
                
                1987
                
                2009
                
                Chairman
      of the Board of CIB Marine from September 1987 to February 2004; Director
      of Central Illinois Bank from 1987 to April 2004 and since February 2009;
      Director of Marine Bank since February 2009. Sales Representative at TTT,
      a phone service company, since January 2005; Secretary of Illini Tile
      Distributors Inc., an importer and distributor of ceramic tiles, from 1983
      to 2002.(2)Howard
      E. Zimmerman (80)
                
                1987
                
                2010
                
                Director
      of Central Illinois Bank and Marine Bank since February 2009; Retired;
      Chairman of the Board of Zimmerman Real Estate Group, a real estate
      appraisal and consulting company since
1986.
 
 (1)
                Effective
      February 1, 2009, Mr. Calderon resigned from his position as Chairman of
      the Board of Directors of CIB Marine and was succeeded by Mr. John P.
      Hickey, Jr. Mr. Calderon remains a director of CIB
  Marine.
 (2)
                In
      September 2003, Illini Tile Distributors, Inc. entered into liquidation
      through an assignment for the benefit of creditors under Illinois
      law.
 (3)
                On
      March 31, 2009 CIB Marine accepted Mr. Blake’s resignation from all board
      positions with CIB Marine and its
affiliates.
 (4)
                On
      April 14, 2009, CIB Marine accepted Mr. Hillard’s resignation from its
      Board of Directors, committees of the Board, and all Boards of Directors
      of its affiliates and
subsidiaries.
 
 Executive
Officers
 
 Information
regarding executive officers is included as a supplemental item at the end of
Item 4 part I of this Form 10-K.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Exchange Act requires executive officers and Directors, and persons
who own more than ten percent of a registered class of CIB Marine’s stock, to
file reports of ownership and changes in ownership with the SEC. Executive
officers, Directors and greater than ten percent shareholders are required by
SEC regulation to furnish CIB Marine with copies of all Section 16(a) forms they
file.
 
 Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Annual Statement of
Changes In Beneficial Ownership of Securities on Form 5 were required for those
persons, CIB Marine believes that, for the period January 1, 2008 through
December 31, 2008, its executive officers and Directors complied with all filing
requirements applicable to them.
 
 Code
of Ethics
 
 CIB
Marine has adopted a Code of Ethics (the “Code”) which applies to all of CIB
Marine’s Directors, officers and employees. A copy of the Code may be accessed
on CIB Marine’s website at www.cibmarine.com by clicking on the “Code of Ethics
Policy” link in the Corporate Governance section of the website.
 
 Audit
Committee & Audit Committee Financial Expert
 
 CIB
Marine’s Board of Directors has established an Audit Committee to assist the
Board in its general oversight of CIB Marine’s financial reporting, internal
controls and audit functions. As of December 31, 2008, the committee comprised
Directors C. Baker, Hillard, Longman, Trilling and Zimmerman. Mr. Charles Baker
was appointed to the Committee in April 2008. Mr. Longman serves as the
committee’s Chairman.
 
 The Board
has adopted a written charter for the Audit Committee setting forth the specific
duties, responsibilities and authorities of the committee. The charter is
available in the “Corporate Governance” section of CIB Marine’s website at
www.cibmarine.com.
 
 The Board
of Directors has determined that all of the members of the Audit Committee
satisfy the independence requirements of Nasdaq. In addition, the Board has
determined that Messrs. Longman and C. Baker are “audit committee financial
experts” as such term is defined by the SEC rules.
  111
  In
November 2008, the Audit Committee established a sub-committee, the Accounting
Issues Committee, to assist it in addressing the complex accounting issues
facing the Company.  Members of the Accounting Issues Committee meet as
core accounting issues arise that require further oversight and independence
from management.
 
 ITEM
11. EXECUTIVE COMPENSATION
 
 The
following table sets forth the cash and non-cash compensation for the last two
fiscal years, where applicable, awarded to or earned by CIB Marine’s named
executive officers.
 
 SUMMARY
      COMPENSATION TABLEName
      and Principal Position
                                            
                                            Year
                                            
                                            Salary
      ($)
                                            
                                            
                                            Bonus
      ($)
                                            
                                            
                                            Option
                                              Awards
      ($)(1)
                                            
                                            
                                            All
      Other
                                              Compensation
                                              ($)(2)
                                            
                                            
                                            Total
      ($)John
      P. Hickey, Jr.(3)
                                            
                                            2008
                                            
                                            $
                                            268,400
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            8,775
                                            
                                            
                                            $
                                            277,175Chairman
      of the Board of Directors,
                                            
                                            2007
                                            
                                            $
                                            249,846
                                            
                                            
                                            $
                                            45,000
                                            (4)(5)
                                            
                                            $
                                            4,783
                                            
                                            
                                            $
                                            12,046
                                            
                                            
                                            $
                                            311,675President
      and CEOEdwin
      J. Depenbrok(6)
                                            
                                            2008
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Senior
      Vice President and
                                            
                                            2007
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Chief
      Financial OfficerCharles
      J. Ponicki(7)
                                            
                                            2008
                                            
                                            $
                                            206,462
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            7,064
                                            
                                            
                                            $
                                            213,526Senior
      Vice President and
                                            
                                            2007
                                            
                                            $
                                            84,615
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            129
                                            
                                            
                                            $
                                            1,719
                                            
                                            
                                            $
                                            86,463Chief
      Credit OfficerMichael
      L. Rechkemmer
                                            
                                            2008
                                            
                                            $
                                            185,815
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            6,759
                                            
                                            
                                            $
                                            192,574Executive
      Vice President and
                                            
                                            2007
                                            
                                            $
                                            180,000
                                            
                                            
                                            $
                                            15,000
                                            (5)
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            9,616
                                            
                                            
                                            $
                                            204,616Chief
      Operations Officer
  
 (1)
              Represents
      grants of options to purchase CIB Marine’s common stock made pursuant to
      CIB Marine's stock option plan. This column shows the dollar amount of
      expense recognized by CIB Marine for financial reporting purposes in 2008
      in accordance with Financial Accounting Standards No. 123R (“SFAS
      No. 123R”), disregarding adjustments for potential
      forfeitures, for all outstanding stock options granted to each named
      executive officer. See Item 8, Note 1 – Summary of Significant Accounting
      Policies Stock-Based Compensation contained in Part II of this 2008 Form
      10-K for a discussion of the assumptions made in the valuation of these
      option awards. Under SFAS No. 123R, the fair value of option awards
      is recognized as expense over the vesting period of the
    award.
 (2)
              The
      table below provides the details of amounts included in the “All Other
      Compensation” table for each named executive officer. The perquisites are
      valued for disclosure purposes at their incremental cost to CIB Marine in
      accordance with SEC regulations.
 (3)
              On
      March 2, 2007, Mr. John P. Hickey succeeded Mr. Stanley Calderon as CIB
      Marine’s President and CEO. Mr. Hickey was an employee of Marine Bank
      prior to being appointed CIB Marine’s President and
  CEO.
 (4)
              This
      amount includes a $30,000 signing bonus paid by Marine Bank to Mr. Hickey
      pursuant to the terms of his employment agreement with Marine Bank in
      connection with his position as President and CEO of the
    bank.
 (5)
              During
      2006, Messrs. Hickey and Rechkemmer were provided with company-owned
      automobiles for their use. In 2007, CIB Marine terminated this perquisite,
      and Messrs. Hickey and Rechkemmer were each paid a one-time payment of
      $15,000 in lieu of the continued
program.
 (6)
              On
      January 7, 2008, Mr. Depenbrok was appointed CIB Marine’s Chief Financial
      Officer, to succeed Mr. Steven T. Klitzing, who resigned in November 2007.
      Prior to being named CIB Marine’s Chief Financial Officer, Mr. Depenbrok,
      via his firm, dbrok group, LLC, was hired by CIB Marine as a consultant to
      provide various financial management services. Mr. Depenbrok serves as a
      non-employee officer of CIB Marine. During fiscal year 2008, CIB Marine
      paid dbrok group, LLC $230,775 for its services; $220,600 of which was for
      work performed by Mr. Depenbrok.
 (7)
              Mr.
      Charles J. Ponicki was appointed Chief Credit Officer effective January 7,
      2008. Prior to being named CIB Marine’s Chief Credit Officer, Mr. Ponicki
      was employed by Marine Bank and then hired by CIB Marine as its Senior
      Vice President - Credit Administration in October
  2007.
  112
  
 Name
      and Position
                                        
                                        Year
                                        
                                        Life
                                          Insurance
                                          Premiums
                                        
                                        
                                        401(k)
                                          Match
                                        
                                        
                                        Car
                                          Allowance
                                        
                                        
                                        Club
      Dues
                                        
                                        
                                        Parking/
                                          Transit
                                        
                                        
                                        TotalJohn
      P. Hickey, Jr.
                                        
                                        2008
                                        
                                        $
                                        1,875
                                        
                                        
                                        $
                                        6,900
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        8,775Chairman
      of the Board of Directors,
                                        
                                        2007
                                        
                                        
                                        1,866
                                        
                                        
                                        
                                        6,750
                                        
                                        
                                        
                                        3,430
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        12,046President
      and CEOEdwin
      J. Depenbrok
                                        
                                        2008
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Senior
      Vice President and
                                        
                                        2007
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Chief
      Financial OfficerCharles
      J. Ponicki
                                        
                                        2008
                                        
                                        $
                                        1,186
                                        
                                        
                                        $
                                        5,878
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        7,064Senior
      Vice President and
                                        
                                        2007
                                        
                                        
                                        296
                                        
                                        
                                        
                                        1,423
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,719Chief
      Credit OfficerMichael
      L. Rechkemmer
                                        
                                        2008
                                        
                                        $
                                        1,185
                                        
                                        
                                        $
                                        5,574
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        6,759Executive
      Vice President and
                                        
                                        2007
                                        
                                        
                                        1,176
                                        
                                        
                                        
                                        5,882
                                        
                                        
                                        
                                        1,077
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,481
                                        
                                        
                                        
                                        9,616Chief
      Operations Officer
 
 Employment
Agreements
 
 In
October 2007, CIB Marine entered into an employment agreement with Mr. Hickey,
its President and CEO, which continues until June 1, 2010 and provides for a
minimum base salary of $260,000 per year, and 50,000 stock options pursuant to
CIB Marine’s stock option plan which were granted on May 31, 2007. The agreement
also provides for severance equal to continued salary for the remainder of the
term of the agreement if Mr. Hickey's employment is terminated by CIB
Marine for other than cause or he terminates his employment with CIB Marine
for good reason (as defined in the agreement), including a change in control of
CIB Marine. Mr. Hickey voluntarily agreed to waive the minimum salary provision
in his employment agreement for the period between January 12, 2009 and June 30,
2009, taking a 15% reduction in his base salary, pursuant to a plan adopted by
CIB Marine to reduce the compensation of its senior executive
officers.
 
 Retention
Bonus Agreements
 
 In the
first quarter of 2009, the Company’s Compensation and Stock Option
Committee authorized the implementation of retention bonuses for the following
named executive officers: John P. Hickey, Jr., Charles J. Ponicki and Michael L.
Rechkemmer, in addition to certain other officers of the Company. The retention
bonuses are designed to provide an incentive for the executive officers to
remain in management positions with the Company through the restructuring of the
trust preferred securities, the implementation of various cost cutting measures
at the Company and the consolidation of Central Illinois Bank and Marine Bank.
Each of the executive officers who remains employed by the Company through his
retention bonus payment date (June 30, 2009 for Mr. Rechkemmer and September 30,
2009 for Messrs. Hickey and Ponicki) will receive a retention bonus equal to six
(6) months’ salary. In addition, if any executive officer’s position is
scheduled for elimination as part of the Company’s reduction in force, such
officer will have their retention bonus calculated on their pre-reduction salary
as of December 31, 2008.
 
 401(k)
Plan
 
 CIB
Marine’s 401(k) plan is a tax-qualified retirement plan the covers all eligible
employees generally, including the named executive officers. An employee can
elect to defer a percentage of his or her compensation on a pre-tax basis, up to
a maximum in 2008 of $15,500, or $20,500 if age 50 or over, and CIB Marine
contributes a matching contribution of 50% up to 6% of the employee’s deferral
contributions. CIB Marine’s contributions under the plan on behalf of each named
executive officer are included in the “All Other Compensation” column of the
Summary Compensation Table above. CIB Marine provides no other retirement
benefits for its executives, including the named executive
officers.
 
 OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
 
 This
table sets forth the information for each named executive officer with respect
to each grant of stock options outstanding as of December 31,
2008.
  113
 
 Option
      AwardsName
                                        
                                        Number
      of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options
      (#)
                                          Exercisable
                                        
                                        
                                        Number
      of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options
      (#)
                                          Unexercisable
                                        
                                        
                                        Option
                                          Exercise
                                          Price
      ($)
                                        
                                        
                                        Option
                                          Expiration
      DateJohn
      P. Hickey, Jr.
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        40,000
                                        (1)
                                        
                                        $
                                        4.10
                                        
                                        
                                        05/31/201710,000
                                        
                                        
                                        
                                        15,000
                                        (2)
                                        
                                        
                                        4.10
                                        
                                        
                                        11/16/201610,000
                                        
                                        
                                        
                                        15,000
                                        (3)
                                        
                                        
                                        4.10
                                        
                                        
                                        03/30/2016Edwin
      J. Depenbrok
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Michael
      L. Rechkemmer
                                        
                                        
                                        7,050
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        16.23
                                        
                                        
                                        07/29/200910,190
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        18.40
                                        
                                        
                                        07/27/20109,830
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        22.89
                                        
                                        
                                        11/29/201112,000
                                        
                                        
                                        
                                        8,000
                                        (4)
                                        
                                        
                                        4.10
                                        
                                        
                                        09/29/20158,000
                                        
                                        
                                        
                                        12,000
                                        (2)
                                        
                                        
                                        4.10
                                        
                                        
                                        11/16/2016Charles
      Ponicki
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        20,000
                                        (5)
                                        
                                        
                                        3.70
                                        
                                        
                                        11/30/2017
 
 (1)
              One-fifth
      of these options became fully exercisable on May 31, 2008, one-fifth
      become fully exercisable on May 31, 2009, one-fifth become fully
      exercisable on May 31, 2010, one-fifth become fully exercisable on May 31,
      2011, and one-fifth become fully exercisable on May 31,
    2012.
 (2)
              One-fifth
      of these options became fully exercisable on November 16, 2007, one-fifth
      became fully exercisable on November 16, 2008, one-fifth become fully
      exercisable on November 16, 2009, one-fifth become fully exercisable on
      November 16, 2010, and one-fifth become fully exercisable on November 16,
      2011.
 (3)
              One-fifth
      of these options became fully exercisable on March 30, 2007, one-fifth of
      these options became fully exercisable on March 30, 2008, one-fifth of
      these options become fully exercisable on March 30, 2009, one-fifth of
      these options become fully exercisable on March 30, 2010, and one-fifth of
      these options become fully exercisable on March 30,
  2011.
 (4)
              One-fifth
      of these options became fully exercisable on September 29, 2006, one-fifth
      became fully exercisable on September 29, 2007, one-fifth became fully
      exercisable on September 29, 2008, one-fifth become fully exercisable on
      September 29, 2009, and one-fifth become fully exercisable on September
      29, 2010.
 (5)
              One-fifth
      of these options became fully exercisable on November 30, 2008, one-fifth
      become fully exercisable on November 30, 2009, one-fifth become fully
      exercisable on November 30, 2010, one-fifth become fully exercisable on
      November 30, 2011, and one-fifth become fully exercisable on November 30,
      2012.
 
 If a
named executive officer’s employment terminates by reason of death or
disability, all of the named executive officer’s outstanding options vest and
may be exercised within twelve months after the date of such termination, but in
no event later than the expiration date of such options.
 
 DIRECTORS'
COMPENSATION
 
 For
fiscal year 2008, the Board agreed to forego the payment of the normal retainer
for all Board members except for Mr. Calderon, the Chairman of CIB Marine, who
would be paid an annual retainer of $15,000 in quarterly installments.
Non-employee Directors received a fee of $1,000 for each CIB Marine Board
meeting attended, except that the Chairman of the Board of Directors was paid
$2,000 per each Board meeting attended.. Directors serving on the Audit,
Executive, Litigation, Investment, Executive Loan, and Accounting Issues
Committees received a fee of $1,000, $1,000, $300, $300, $300 and $300,
respectively per meeting attended, except that the Chairman of the Audit
Committee was paid $2,000 per Audit Committee meeting attended. In addition, the
Chairman of the Audit Committee was paid an annual retainer of $10,000 in
quarterly installments. Employees of CIB Marine, receive no fees for their
service on the Boards of Directors or committees of CIB Marine or its affiliates
and subsidiaries.
 
 In
January 2009, the Compensation and Stock Option Committee reduced the Directors’
fee for each CIB Marine Board meeting attended from $1,000 to
$500.
  114
 
 The
following table sets forth all compensation paid to each of CIB Marine’s
non-employee Directors in 2008:
 
 Name
                  
                  Fees
      Earned or Paid in
                    Cash
      ($)
                  
                  
                  Option
      Awards
                    ($)(1)
                  
                  
                  Total
      ($)Charles
      E. Baker(2)
                  
                  $
                  26,700
                  
                  
                  
                  —
                  
                  
                  $
                  26,700Norman
      E. Baker
                  
                  
                  31,200
                  
                  
                  
                  —
                  
                  
                  
                  31,200W.
      Scott Blake(3)
                  
                  
                  35,700
                  
                  
                  
                  —
                  
                  
                  
                  35,700Stanley
      J. Calderon
                  
                  
                  75,900
                  
                  
                  
                  —
                  
                  
                  
                  75,900Steven
      C. Hillard(4)
                  
                  
                  21,000
                  
                  
                  
                  —
                  
                  
                  
                  21,000Gary
      L. Longman
                  
                  
                  42,500
                  
                  
                  
                  —
                  
                  
                  
                  42,500Donald
      M. Trilling
                  
                  
                  22,000
                  
                  
                  
                  —
                  
                  
                  
                  22,000Howard
      Zimmerman
                  
                  
                  22,000
                  
                  
                  
                  —
                  
                  
                  
                  22,000
  
 (1)
              There
      were no options granted to directors during 2008. As of December 31, 2008,
      the Directors had the following amounts of outstanding options: Charles E.
      Baker – 0; Norman E. Baker – 18,050; W. Scott Blake – 48,050; Stanley
      Calderon – 90,000; Steven C. Hillard – 0; Donald M. Trilling – 18,050; and
      Howard E. Zimmerman – 18,050.
 (2)
              Mr.
      Baker was appointed to the Board of CIB Marine in January
      2008.
 (3)
              On
      March 31, 2009, CIB Marine accepted Mr. Blake’s resignation from its Board
      of Directors, committees of the Board, and all Boards of Directors of its
      affiliates and subsidiaries.
 (4)
              On
      April 14, 2009, CIB Marine accepted Mr. Hillard’s resignation from its
      Board of Directors, committees of the Board, and all Boards of Directors
      of its affiliates and subsidiaries.
 
 Mr.
Hickey is not included in this table since he is a named executive officer and
received no additional compensation for service as a director.
 
 Directors
are reimbursed for any out-of-pocket expenses they incur. CIB Marine’s Directors
who are also directors of its subsidiaries receive compensation from such
subsidiaries in varying amounts based on the director compensation schedules of
such subsidiaries. Messrs. C. Baker, Blake and Calderon were the only directors
in 2008 to be paid such compensation and their fees, which are included in the
totals above, totaled $5,500; $5,700; and $15,800,
respectively.
 
 COMPENSATION
COMMITTEE
 
 CIB
Marine’s Board of Directors has established a Compensation and Stock Option
Committee to assist the Board in establishing policies relating to executive
compensation, determine the salary and bonus of named executive officers,
recommend to the Board the adoption of, or any substantive amendments to, any
employee benefit or long-term executive compensation plan or program in which
named executive officers participate, and administer the stock-based plan of CIB
Marine. As of December 31, 2008, the membership of the committee comprised
Directors C. Baker, N. Baker, Blake, Calderon, Hillard, Longman, Trilling and
Zimmerman, and Mr. Zimmerman served as the committee’s Chairman.
 
 The Board
has adopted a written charter for the Compensation and Stock Option Committee
setting forth the specific duties, responsibilities and authorities of the
committee. The charter is available in the “Corporate Governance” section of the
Company’s website at www.cibmarine.com.
 
 The Board
of Directors has determined that all of the members of the Compensation and
Stock Option Committee except Mr. Calderon satisfy the independence requirements
of Nasdaq.
 
 ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 
 Equity
Compensation Plan Information
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
 
 The
following table provides information as of December 31, 2008, regarding shares
outstanding and available for issuance under CIB Marine’s existing equity
compensation plans.
  115
 
 Equity
      Compensation Plan Information(1)Plan
      category
                        
                        Number
      of
                          securities
      to be
                          issued
      upon
                          exercise
      of
                          outstanding
                          options,
      warrants
                          and
      rights
                        
                        
                        Weighted-
                          average
      exercise
                          price
      of
                          outstanding
                          options,
                          warrants
      and
                          rights
                        
                        
                        Number
      of securities
                          remaining
      available for
                          future
      issuance under
                          equity
      compensation
                          plans
      (excluding
                          securities
      reflected in
                          column
      (a))(a)
                        
                        
                        (b)
                        
                        
                        (c)Equity
      compensation plans approved by security holders
                        
                        
                        1,101,617
                        
                        
                        $
                        6.16
                        
                        
                        
                        534,113Equity
      compensation plans not approved by security holders
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        
                        1,101,617
                        
                        
                        $
                        6.16
                        
                        
                        
                        534,113


(1)
              See
      Item 8, Note 1-Summary of Significant Accounting Policies-Stock-Based
      Compensation and Note 18-Stock Option Plans in Part II of this Form 10-K
      for additional information regarding CIB Marine’s stock-based compensation
      plans.
 
 Stock
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth, as of February 28, 2009, the number of shares of
common stock of CIB Marine beneficially owned by (1) each stockholder believed
by CIB Marine to be a beneficial owner of more than five percent of the
outstanding common stock of CIB Marine, based on information available to CIB
Marine, (2) each director of CIB Marine, (3) each of the named executive
officers, and (4) all directors and executive officers of CIB Marine as a group.
Except as otherwise indicated, each person listed has sole voting and investment
power over shares beneficially owned. For purposes of this table, all references
to the right to acquire shares within 60 days refers to the 60 day period
commencing February 28, 2009.
 
 Beneficial Owner
                
                Beneficial
      Ownership of
                  Common
      StockAmount
      and
                  Nature of
      Beneficial
                  Ownership(1)
                
                
                Percentage
      of
                  Common
      Stock
                  Outstanding5%
      StockholdersBradford
      M. Johnson
                  P.O.
      Box 8208
                  Shawnee
      Mission, KS 66208-8208
                
                
                1,116,378
                (2)
                
                
                6.09
                %Named
      Executive Officers and DirectorsCharles
      E. Baker
                
                
                —
                
                
                
                *Norman
      E. Baker
                
                
                387,500
                (3)
                
                
                2.11
                %(4)W.
      Scott Blake
                
                
                192,150
                (5)
                
                
                1.05
                %(4)Stanley
      J. Calderon
                
                
                90,167
                (6)
                
                
                *Edwin
      J. Depenbrok
                
                
                —
                (7)
                
                
                *John
      P. Hickey, Jr.
                
                
                35,003
                (8)
                
                
                *Steven
      C. Hillard
                
                
                165,030
                (16)
                
                
                *Gary
      L. Longman
                
                
                —
                
                
                
                *Charles
      J. Ponicki
                
                
                5,000
                (9)
                
                
                *Daniel
      J. Rasmussen
                
                
                24,598
                (10)
                
                
                *Michael
      L. Rechkemmer
                
                
                58,068
                (11)
                
                
                *Patrick
      J. Straka
                
                
                49,896
                (12)
                
                
                *Donald
      M. Trilling
                
                
                215,532
                (13)
                
                
                1.18
                %(4)Howard
      E. Zimmerman
                
                
                125,650
                (14)
                
                
                *All
      Directors and Executive Officers as a group (14 persons)
                
                
                1,348,593
                
                
                
                7.35
                %(15)


*  Less
than one percent
 (1)
                Unless
      otherwise indicated, the nature of beneficial ownership for shares shown
      in this column is sole voting and investment power. The information
      contained in this column is based upon information furnished to the
      Company by the persons named
above.
 (2)
                Based
      solely on information provided in Form 13-G filed with the Securities
      & Exchange Commission by beneficial
owner.
 (3)
                Includes
      18,050 shares Mr. Baker has the right to acquire within 60 days upon the
      exercise of stock options.
 (4)
                Percentage
      is calculated on a partially diluted basis, assuming only the exercise of
      stock options by such individual which are exercisable within 60
      days.
  116
  (5)
                Includes
      58,050 shares that Mr. Blake had the right to acquire within 60 days upon
      the exercise of stock options, and 60,000 shares held in two trusts for
      the benefit of Mr. Blake’s mother, for which Mr. Blake shares voting and
      investment powers, and for which Mr. Blake disclaims beneficial ownership
      of the shares. On March 31, 2009, CIB Marine accepted Mr. Blake’s
      resignation from all
      positions with CIB Marine and its
  affiliates.
 (6)
                Includes
      90,000 shares that Mr. Calderon has the right to acquire within 60 days
      upon the exercise of stock
options.
 (7)
                On
      January 7, 2008, Mr. Depenbrok was appointed CIB Marine’s Chief Financial
      Officer, to succeed Mr. Steven T. Klitzing, who resigned in November
      2007.
 (8)
                Includes
      35,000 shares that Mr. Hickey has the right to acquire within 60 days upon
      the exercise of stock
options.
 (9)
                Includes
      5,000 shares that Mr. Ponicki has the right to acquire within 60 days upon
      the exercise of stock options. Mr. Charles J. Ponicki was appointed Chief
      Credit Officer effective January 7,
2008.
 (10)
                Includes
      24,047 shares that Mr. Rasmussen has the right to acquire within 60 days
      upon the exercise of stock
options.
 (11)
                Includes
      47,070 shares that Mr. Rechkemmer has the right to acquire within 60 days
      upon the exercise of stock
options.
 (12)
                Includes
      1,400 shares jointly owned by Mr. Straka and his wife, 6,300 shares owned
      by partnerships with respect to which Mr. Straka shares voting and
      investment power, and 36,145 shares that Mr. Straka has the right to
      acquire within 60 days upon the exercise of stock
  options.
 (13)
                Includes
      68,705 shares held in a trust for the benefit of Mr. Trilling's wife and
      18,050 shares that Mr. Trilling has the right to acquire within 60 days
      upon the exercise of stock
options.
 (14)
                Includes
      18,050 shares Mr. Zimmerman has the right to acquire within 60 days upon
      the exercise of stock
options.
 (15)
                Percentage
      is calculated on a diluted basis, assuming the exercise of all stock
      options which are exercisable within 60 days by individuals included in
      the above table.
 (16)
                On
      April 14, 2009, CIB Marine accepted Mr. Hillard’s resignation from all
      positions with CIB Marine and its
  affiliates.
 
 ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 Transactions
with Related Persons
 
 During
2008, Directors and executive officers of CIB Marine, as well as members of
their immediate families and various corporations and other entities associated
with the directors, were clients of and had transactions with the Banks in the
ordinary course of business. These transactions included loans and deposits.
Similar transactions may occur in the ordinary course of business in the future.
All loans were made on a non-preferential basis and did not involve more than
the normal risk of collectibility or present other unfavorable
terms.
 
 Review,
Approval or Ratification of Related Party Transactions
 
 CIB
Marine has various policies and procedures, including its Code of Ethics, annual
questionnaires completed by all directors and executive officers, and regulatory
compliance requirements (including Regulation O, which restricts loans by the
subsidiary banks to directors, executive officers, principal stockholders and
their affiliates and requires approval by the board of directors of the banks
for certain such loans), all of which are designed to identify transactions or
relationships that may constitute conflicts of interest or otherwise require
disclosure under applicable SEC rules. When such a transaction or relationship
is identified, the Board of Directors of CIB Marine evaluates the transaction or
relationship and determines if the transaction is permissible or a prohibited
conflict of interest.
 
 Director
Independence
 
 The Board
has determined that each of the following directors is an “independent director”
as such term is defined in Nasdaq Marketplace Rule 4200(a)(15): Charles E.
Baker, Norman E. Baker, W. Scott Blake, Steven C. Hillard, Gary L. Longman,
Donald M. Trilling and Howard E. Zimmerman. Stanley J. Calderon and John P.
Hickey, Jr. are not independent under the Nasdaq rule since Mr. Hickey is
currently a CIB Marine officer, and Mr. Calderon was an officer of CIB Marine
within the last three years.
 
 ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
following table presents fees for professional audit services rendered by CIB
Marine’s independent registered public accounting firm KPMG LLP (“KPMG”) for the
audit of its annual financial statements for 2008 and 2007, and fees billed for
other services rendered by KPMG.
  117
 
 2008
                    
                    
                    2007(Dollars
      in thousands)Audit
      fees
                    
                    $
                    548
                    
                    
                    $
                    467Audit
      related fees (1)
                    
                    
                    64
                    
                    
                    
                    48Tax
      fees (2)
                    
                    
                    104
                    
                    
                    
                    152Total
      fees
                    
                    $
                    716
                    
                    
                    $
                    667


(1)
      Audit related fees incurred and paid by CIB Marine’s ESOP and 401(k)
      Plans.
 (2)
      Tax fees consisted of fees for tax consultation and tax compliance
      services.
 
 The audit
committee pre-approves all auditing services and permitted non-audit services
provided by the independent auditors. These services may include audit services,
audit-related services, tax services, and other services. The audit committee
pre-approved all services performed by the independent auditors in
2007.
 
 PART
IV
 
 ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a)(1)
Financial Statements
 
 The
following financial statements of CIB Marine are filed as a part of this
document under Part II, Item 8, Financial Statements and Supplementary
Data.
 
 •
              Report
      of Independent Registered Public Accounting
  Firm.
 •
              Consolidated
      Balance Sheets as of December 31, 2008 and
2007.
 •
              Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007, and
      2006.
 •
              Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
      2007 and 2006.
 •
              Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006.
 •
              Notes
      to Consolidated Financial
Statements.
 
 (a)(2)
Financial Statement Schedules
 
 All
schedules have been omitted as the required information is either inapplicable
or included in the Notes to Consolidated Financial Statements contained in Part
II, Item 8 of this Form 10-K.
 
 (a)(3) Exhibits
 
 Exhibit No.
                        
                        Exhibit3.1
                        
                        Amended
      and Restated Articles of Incorporation of CIB Marine Bancshares, Inc.
      (incorporated by reference to Exhibit 3.1 to CIB Marine’s Form 10-K filed
      with the Securities and Exchange Commission on October 31,
      2005).3.2
                        
                        Bylaws
      of CIB Marine Bancshares, Inc. (incorporated by reference to Exhibit 3.2
      to CIB Marine’s Form 10-K filed with the Securities and Exchange
      Commission on October 31, 2005).*10.1
                        
                        CIB
      Marine Bancshares, Inc. 1999 Stock Option and Incentive Plan, as amended
      (incorporated by reference to Exhibit 10.1 to CIB Marine’s Form 10-K filed
      with the Securities and Exchange Commission on March 31,
      2003).*10.2
                        
                        First
      Amendment to the CIB Marine Bancshares, Inc. 1999 Stock Option and
      Incentive Plan (incorporated by reference to Exhibit 10.2 to CIB Marine’s
      Form 10-K filed with the Securities and Exchange Commission on October 31,
      2005).*10.3
                        
                        CIB
      Marine Bancshares, Inc. 1999 Stock Option and Incentive Plan Key Employee
      Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit
      99.1 of CIB Marine’s Form 8-K filed with the Securities and Exchange
      Commission on September 23,
2005).
  118
 
 Exhibit No.
                                          
                                          Exhibit*10.4
                                          
                                          CIB
      Marine Bancshares, Inc. 1999 Stock Option and Incentive Plan Key Employee
      Non-Qualified Stock Option Agreement (accelerated vesting upon sale of
      subsidiary bank) (incorporated by reference to Exhibit 99.2 of CIB
      Marine’s Form 8-K filed with the Securities and Exchange Commission on
      September 23, 2005).*10.5
                                          
                                          CIB
      Marine Bancshares, Inc. 1999 Stock Option and Incentive Plan Key Employee
      Non-Qualified Stock Option Agreement (accelerated vesting upon sale of
      subsidiary bank) (incorporated by reference to Exhibit 99.1 of CIB
      Marine’s Form 8-K filed with the Securities and Exchange Commission on
      November 16, 2006).*10.6
                                          
                                          CIB
      Marine Bancshares, Inc. Severance Pay Plan (incorporated by reference to
      Exhibit 10.1 of CIB Marine’s Form 8-K filed with the Securities and
      Exchange Commission on April 18, 2005).*10.7
                                          
                                          Employment
      Agreement between John P. Hickey, Jr. and CIB Marine Bancshares, Inc.
      (incorporated by reference to Exhibit 99 to CIB Marine’s Form 8-K filed
      with the Securities and Exchange Commission on October 23,
      2007).10.8
                                          
                                          Written
      Agreement between CIB Marine and the Federal Reserve Bank of Chicago
      (incorporated by reference to Exhibit 99.5 of CIB Marine’s Form 8-K filed
      with the Securities and Exchange Commission on June 1,
    2004).10.9
                                          
                                          Agreement
      between Edwin J. Depenbrok and CIB Marine Bancshares, Inc. (incorporated
      by reference to Exhibit 99 to CIB Marine’s Form 8-K filed with the
      Securities and Exchange Commission on January 7, 2008).10.10
                                          
                                          Amendment
      to Agreement between Edwin J. Depenbrok and CIB Marine Bancshares, Inc.
      (incorporated by reference to Exhibit 99.1 to CIB Marine’s Form 8-K filed
      with the Securities and Exchange Commission on October 6,
      2008.10.11
                                          
                                          Form
      of Retention Bonus Agreement for Executive Officers and other
      employees.14.1
                                          
                                          Code
      of Ethics (incorporated by reference to Exhibit 99 to the Company’s Form
      8-K filed November 2, 2004).21
                                          
                                          Subsidiaries
      of CIB Marine23.1
                                          
                                          Consent
      of KPMG LLP31.1
                                          
                                          Certification
      of John P. Hickey, Jr., Chief Executive Officer, under Rule
      13a-14(a)/15d-14(a).31.2
                                          
                                          Certification
      of Edwin J. Depenbrok, Chief Financial Officer, under Rule
      13a-14(a)/15d-14(a).32.1
                                          
                                          Certification
      of John P. Hickey, Jr., Chief Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
      2002.32.2
                                          
                                          Certification
      of Edwin J. Depenbrok, Chief Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of Sarbanes- Oxley Act of
      2002.
  Pursuant
to Item 601(b)(4)(iii)(A) of Regulation S-K, CIB Marine is not filing certain
documents. CIB Marine agrees to furnish a copy of each such document upon the
request of the Commission.
 
 *
              Indicates
      management contracts and compensatory arrangements required to be filed
      pursuant to Item 15(b) of this Annual
Report.
 
 (b)
Exhibits
 See Item
15(a)(3)
 
 (c)
Financial Statement Schedules
 See Item
15(a)(2)
  119
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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.
 
 CIB
      MARINE BANCSHARES, INC.(registrant)By: /s/ JOHN P. HICKEY,
  Jr.Date:
      April 15, 2009
                John
      P. Hickey, Jr.Chairman
      of the Board of DirectorsPresident
      and Chief Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature
                
                Title
                
                Date/s/ JOHN P. HICKEY, Jr.
                
                Chairman
      of the Board of Directors
                
                April
      15, 2009John
      P. Hickey, Jr.
                
                President
      and Chief Executive
                  Officer
      (Principal Executive Officer)/s/ EDWIN J. DEPENBROK
                
                Chief
      Financial Officer (Principal
                
                April
      15, 2009Edwin
      J. Depenbrok
                
                Financial
      and Accounting Officer)/s/ NORMAN E. BAKER
                
                Director
                
                April
      15, 2009Norman
      E. Baker/s/ CHARLES E. BAKER
                
                Director
                
                April
      15, 2009Charles
      E. Baker/s/ STANLEY J. CALDERON
                
                Director
                
                April
      15, 2009Stanley
      J. Calderon/s/ GARY L. LONGMAN
                
                Director
                
                April
      15, 2009Gary
      Longman/s/ DONALD M. TRILLING
                
                Director
                
                April
      15, 2009Donald
      M. Trilling/s/ HOWARD E. ZIMMERMAN
                
                Director
                
                April
      15, 2009Howard
      E. Zimmerman
  120