UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2012

¨	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.)

1930 W. Bluemound Road, Suite D, Waukesha, Wisconsin		53186
(Address of principal executive offices)		(Zip Code)

(262) 695-6010

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No ¨

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 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 Exchange Act). Yes ¨ No R

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes R No ¨

As of July 31, 2012 there were 18,346,391 shares issued and 18,135,344 shares outstanding of the registrant’s common stock, $1.00 par value per share.

EXPLANATORY NOTE

This document is intended to speak as of June 30, 2012, except as otherwise noted.

FORM 10-Q TABLE OF CONTENTS

	Page #

Part I – Financial Information

Item 1 Financial Statements (Unaudited)

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011	4

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011	6

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	7

Notes to Unaudited Consolidated Financial Statements	8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3 Quantitative and Qualitative Disclosures About Market Risk	56

Item 4 Controls and Procedures	57

Part II – Other Information

Item 1 Legal Proceedings	57

Item 1A Risk Factors	57

Item 6 Exhibits	58

Signatures	59

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CIB MARINE BANCSHARES, INC.

Consolidated Balance Sheets

	June 30, 2012			December 31, 2011
	(Unaudited)
	(Dollars in thousands, except share data)
Assets
Cash and due from banks	$	65,836		$	44,828
Investment securities:
Securities available for sale		78,770			89,009
Trading securities		11,242			—
Total investment securities		90,012			89,009
Loans held for sale		385			2,120
Loans		330,720			357,632
Allowance for loan losses		(12,208	)		(16,128	)
Net loans		318,512			341,504
Federal Home Loan Bank stock		4,745			11,555
Premises and equipment, net		4,286			4,559
Accrued interest receivable		1,434			1,648
Other real estate owned		8,041			7,088
Other assets		1,578			1,665
Total assets	$	494,829		$	503,976
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing demand	$	58,062		$	58,884
Interest-bearing demand		28,433			29,080
Savings		155,985			154,365
Time		169,931			180,257
Total deposits		412,411			422,586
Short-term borrowings		8,420			9,784
Federal Home Loan Bank advances		5,000			5,000
Accrued interest payable		311			376
Other liabilities		1,606			2,008
Total liabilities		427,748			439,754
Commitments and contingent liabilities (Note 10)		—			—
Stockholders’ Equity
Preferred stock, $1 par value; 5,000,000 authorized shares; 7% fixed noncumulative perpetual issued-55,624 shares of Series A and 4,376 shares of Series B convertible; aggregate liquidation preference-$60,000		51,000			51,000
Common stock, $1 par value; 50,000,000 authorized shares;18,346,391 issued shares; 18,135,344 outstanding shares		18,346			18,346
Capital surplus		158,490			158,480
Accumulated deficit		(158,468	)		(159,298	)
Accumulated other comprehensive income related to available for sale securities		2,132			2,113
Accumulated other comprehensive loss related to non-credit other-than-temporary impairments		(3,890	)		(5,890	)
Accumulated other comprehensive loss, net		(1,758	)		(3,777	)
Treasury stock 218,499 shares at cost		(529	)		(529	)
Total stockholders’ equity		67,081			64,222
Total liabilities and stockholders’ equity	$	494,829		$	503,976

See accompanying Notes to Unaudited Consolidated Financial Statements

CIB MARINE BANCSHARES, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Interest and Dividend Income
Loans	$	4,510		$	5,089		$	9,214		$	10,314
Loans held for sale		35			102			69			204
Securities		889			1,282			1,898			2,731
Other investments		36			31			58			46
Total interest and dividend income		5,470			6,504			11,239			13,295
Interest Expense
Deposits		799			1,448			1,666			2,982
Short-term borrowings		3			3			6			6
Federal Home Loan Bank advances		54			103			107			205
Total interest expense		856			1,554			1,779			3,193
Net interest income		4,614			4,950			9,460			10,102
Provision for (reversal of) loan losses		(2,728	)		1,679			(2,655	)		2,768
Net interest income after provision for (reversal of) loan losses		7,342			3,271			12,115			7,334
Noninterest Income
Deposit service charges		124			163			258			331
Other service fees		61			51			119			75
Other income		72			12			82			41
Total other-than-temporary impairment losses
Total impairment loss		(1,294	)		(75	)		(1,422	)		(127	)
Loss recognized in other comprehensive income		—			52			—			52
Net impairment loss recognized in earnings		(1,294	)		(23	)		(1,422	)		(75	)
Gains on sale of assets		64			2			95			42
Total noninterest income (loss)		(973	)		205			(868	)		414
Noninterest Expense
Compensation and employee benefits		2,555			2,373			4,987			4,756
Equipment		219			218			421			503
Occupancy and premises		363			549			747			980
Data processing		144			238			286			438
Federal deposit insurance		263			308			529			680
Professional services		345			562			727			988
Telephone and data communication		110			114			214			251
Insurance		191			166			407			306
Write downs and losses on assets		673			233			1,086			1,012
Other expense		515			585			963			1,049
Total noninterest expense		5,378			5,346			10,367			10,963
Income (loss) from continuing operations before income taxes		991			(1,870	)		880			(3,215	)
Income tax expense		50			—			50			—
Income (loss) from continuing operations		941			(1,870	)		830			(3,215	)
Discontinued Operations:
Pretax income from discontinued operations		—			379			—			379
Income tax expense		—			—			—			—
Income from discontinued operations		—			379			—			379
Net income (loss)		941			(1,491	)		830			(2,836	)
Preferred stock dividends		—			—			—			—
Net income (loss) allocated to common stockholders	$	941		$	(1,491	)	$	830		$	(2,836	)

(Continued)

CIB MARINE BANCSHARES, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss) (continued)

(Unaudited)

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012		2011
	(Dollars in thousands, except per share data)
Other comprehensive income (loss):
Change in unrealized losses on securities available for sale, net of reclassification	$	50		$	563		$	18	$	758
Change in unrealized losses on securities available for sale for which a portion of OTTI has been recognized in earnings, net of reclassification		(378	)		(372	)		740		504
Recognition in earnings of unrealized losses on securities available for sale previously recorded and reclassified to trading account		1,261			—			1,261		—
Net realized gains on available for sale securities		—			—			—		—
Total other comprehensive income		933			191			2,019		1,262
Comprehensive income (loss)	$	1,874		$	(1,300	)	$	2,849	$	(1,574	)
Earnings (Loss) Per Share:
Basic:
Income (loss) from continuing operations	$	0.05		$	(0.10	)	$	0.04	$	(0.18	)
Discontinued operations		—			0.02			—		0.02
Net income (loss)	$	0.05		$	(0.08	)	$	0.04	$	(0.16	)
Diluted:
Income (loss) from continuing operations	$	0.03		$	(0.10	)	$	0.02	$	(0.18	)
Discontinued operations		—			0.02			—		0.02
Net income (loss)	$	0.03		$	(0.08	)	$	0.02	$	(0.16	)

Weighted average shares-basic		18,127,892			18,127,892			18,127,892		18,127,892
Weighted average shares-diluted		35,631,892			18,127,892			35,631,892		18,127,892

See accompanying Notes to Unaudited Consolidated Financial Statements

CIB MARINE BANCSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock											Accumulated Other
	Shares		Par Value		Preferred Stock		Capital Surplus		Accumulated Deficit			Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars in thousands)
Balance at January 1, 2011		18,346,391	$	18,346	$	51,000	$	158,458	$	(153,874	)	$	(4,648	)	$	(529	)	$	68,753
Comprehensive loss:
Net loss		—		—		—		—		(2,836	)		—			—			(2,836	)
Other comprehensive income		—		—		—		—		—			1,262			—			1,262
Total comprehensive loss																			(1,574	)
Stock option expense		—		—		—		15		—			—			—			15
Balance at June 30, 2011		18,346,391	$	18,346	$	51,000	$	158,473	$	(156,710	)	$	(3,386	)	$	(529	)	$	67,194

Balance at January 1, 2012		18,346,391	$	18,346	$	51,000	$	158,480	$	(159,298	)	$	(3,777	)	$	(529	)	$	64,222
Comprehensive income:
Net income		—		—		—		—		830			—			—			830
Other comprehensive income		—		—		—		—		—			2,019			—			2,019
Total comprehensive income																			2,849
Stock option expense		—		—		—		10		—			—			—			10
Balance at June 30, 2012		18,346,391	$	18,346	$	51,000	$	158,490	$	(158,468	)	$	(1,758	)	$	(529	)	$	67,081

See accompanying Notes to Unaudited Consolidated Financial Statements

CIB MARINE BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2012			2011
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)	$	830		$	(2,836	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred loan fee amortization		6			9
Depreciation and other amortization		263			119
Provision for (reversal of) loan losses		(2,655	)		2,768
Proceeds from sale of loans held for sale		1,737			369
Gains on sale of assets		(95	)		(42	)
Write down and losses on assets		1,086			1,012
Impairment loss on available for sale securities		1,422			75
Decrease (increase) in interest receivable and other assets		278			(88	)
Decrease in accrued interest payable and other liabilities		(467	)		(407	)
Net cash provided by operating activities		2,405			979
Cash Flows from Investing Activities
Maturities of securities available for sale		8,970			6,002
Purchase of securities available for sale		(5,952	)		—
Repayments of mortgage-backed securities available for sale		11,355			19,428
Purchase of mortgage-backed securities available for sale		(14,876	)		—
Decrease in Federal Home Loan Bank stock		6,810			—
Net decrease in other investments		32			33
Net decrease in loans		23,868			27,033
Proceeds from sale of other real estate owned		142			609
Premises and equipment expenditures		(207	)		(52	)
Net cash provided by investing activities		30,142			53,053
Cash Flows from Financing Activities
Decrease in deposits		(10,175	)		(24,603	)
Net decrease in short-term borrowings		(1,364	)		(4,840	)
Net cash used in financing activities		(11,539	)		(29,443	)
Net increase in cash and cash equivalents		21,008			24,589
Cash and cash equivalents, beginning of period		44,828			27,267
Cash and cash equivalents, end of period	$	65,836		$	51,856
Supplemental Cash Flow Information
Cash paid (received) during the period for:
Interest expense	$	1,844		$	3,328
Income taxes		—			(64	)
Supplemental Disclosures of Noncash Activities
Transfer of loans to other real estate owned		1,773			3,881
Transfer of available for sale securities to trading account securities		11,242			—

See accompanying Notes to Unaudited Consolidated Financial Statements

CIB MARINE BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1-Basis of Presentation

Nature of Operations

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for interim financial information. Certain information and footnote disclosures have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with CIB Marine Bancshares, Inc.’s 2011 Annual Report on Form 10-K (“2011 Form 10-K”). References to “CIB Marine” include CIB Marine Bancshares, Inc. and its subsidiaries unless otherwise specified. In the opinion of management, the unaudited consolidated financial statements included in this Form 10-Q reflect all adjustments necessary to present fairly CIB Marine’s financial condition, results of operations and cash flows. The results of operations for the quarter and six months ended June 30, 2012 are not necessarily indicative of results for the entire year. The consolidated financial statements include the accounts of CIB Marine and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP 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, other real estate owned 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, recent sales and condition in real estate markets and economic conditions, both locally and nationally. Changes in these factors can significantly affect CIB Marine’s net interest income, noninterest expense and the value of its recorded assets and liabilities.

Summary of Significant Accounting Polices

CIB Marine engages in trading activities for its own account. Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings. Interest and dividends are included in net interest income. This is a change since December 31, 2011 to the significant accounting policies. See the 2011 Form 10-K for all other significant accounting policies.

Reclassifications

Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to the current period’s presentation.

New Accounting Pronouncements

Beginning with the first quarter of 2012 disclosure requirements, the Financial Accounting Standards Board (“FASB”) requires companies to disclose more of the processes for valuing items categorized as Level 3 in the fair value hierarchy, provide quantitative information about the significant unobservable inputs used in the measurement and, in certain cases, explain how sensitive the measurements are to changes in the inputs. Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on CIB Marine’s financial condition, results of operations or liquidity.

Deregistration

On May 24, 2012, following passage of the Jumpstart Our Business Startups Act, which increased the number of shareholders of record threshold for deregistration under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank holding companies, CIB Marine filed a Form 15 with the Securities and Exchange Commission (“SEC”), giving notice of termination of the registration of CIB Marine’s common stock under Section 12(g) of the Exchange Act. The termination of CIB Marine's registration is expected to become effective on or about August 22, 2012. As a result of the effectiveness of the termination of registration, CIB Marine will no longer be required to file annual or periodic reports under Sections 13 or 15(d) of the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, or comply with the proxy rules or file proxy materials under Section 14 of the Exchange Act, and CIB Marine's directors and executive officers will no longer be required to comply with the requirements of Section 16 of the Exchange Act, until such time as CIB Marine has 2,000 or more shareholders of record as of the end of any calendar year.

Note 2-Securities

The amortized cost, gross unrealized gains and losses and fair values of securities at June 30, 2012 and December 31, 2011 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
June 30, 2012
U.S. government agencies (SBA loan-backed)	$	5,746	$	31	$	—	$	5,777
States and political subdivisions		26,789		1,877		549		28,117
Trust preferred collateralized debt obligations		8,264		—		4,503		3,761
Other debt obligation		150		—		—		150
Residential mortgage-backed securities (agencies)		33,748		1,304		33		35,019
Residential mortgage-backed securities (non-agencies (1))		5,831		118		3		5,946
Total securities available for sale		80,528		3,330		5,088		78,770

December 31, 2011
U.S. government agencies (non SBAs)	$	7,006	$	65	$	—	$	7,071
States and political subdivisions		28,611		1,835		502		29,944
Trust preferred collateralized debt obligations		8,295		—		5,061		3,234
Other debt obligation		150		—		—		150
Residential mortgage-backed securities (agencies)		25,075		1,435		—		26,510
Residential mortgage-backed securities (non-agencies (1))		23,649		149		1,698		22,100
Total securities available for sale	$	92,786	$	3,484	$	7,261	$	89,009

(1)

Residential mortgage-backed securities (non-agencies) comprise non-agency issued mortgage-backed securities and collateralized mortgage obligations secured by residential real estate mortgage loans.

Trading securities at June 30, 2012, had an amortized cost and fair value of $11.2 million. There have been no purchases or sales of trading securities year to date.

During the first six months of 2012, $5.7 million of securities backed by Small Business Administration (“SBA”) loans were purchased at premiums. All of the SBA loan backed securities purchased are variable rate with quarterly resets indexed to the Prime rate with stated final maturities from 16 to 25 years and with principal cash flows guaranteed by the SBA.

At the end of the second quarter of 2012, CIB Marine transferred at fair value its non-investment grade residential mortgage-backed securities (non-agencies) (“Non-agency MBS”) of $11.2 million from available for sale (“AFS”) to trading securities. The transfer resulted in other-than-temporary impairment (“OTTI”) write-down of its amortized cost basis through earnings of $1.3 million. CIB Marine has the intent to sell the trading securities as part of its strategy to reduce its lower quality asset holdings. This represents a rare occurrence for CIB Marine for a number of reasons, including but not limited to: 1) there have been no transfers to trading at any time in CIB Marine’s history for fixed income securities, 2) the transfer represented all of the non-investment grade Non-agency MBS, 3) the transfer was the result of a historically unique strategy to reduce non-investment grade Non-agency MBS, 4) the regulatory policy treatments of non-investment grade securities have some adverse effects including the impact on risk-weighted assets for regulatory capital and, 5) to mitigate the expected risk of complying with new capital requirements under Basel III.

At the date of transfer, the non-investment grade Non-agency MBS had an amortized cost of $12.5 million, a fair value of $11.2 million and a gross unrealized loss of $1.3 million.

Securities available for sale with a carrying value of $36.7 million and $47.1 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, Federal Home Loan Bank of Chicago (“FHLBC”) advances, repurchase agreements, federal reserve discount window advances, a federal funds and letter of credit guidance facility at a correspondent bank, and for other purposes as required or permitted by law.

The amortized cost and fair value of securities available for sale at June 30, 2012, 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 Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	1,173	$	1,195
Due after one year through five years		10,050		10,708
Due after five years through ten years		15,716		16,364
Due after ten years		14,010		9,538
		40,949		37,805
Residential mortgage-backed securities (agencies)		33,748		35,019
Residential mortgage-backed securities (non-agencies)		5,831		5,946
Total securities available for sale	$	80,528	$	78,770

The following table represents gross unrealized losses and the related fair value of securities available for sale aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:

	Less than 12 months in an unrealized loss position				12 months or longer in an unrealized loss position				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
June 30, 2012
States and political subdivisions	$	—	$	—	$	1,918	$	549	$	1,918	$	549
Trust preferred collateralized debt obligations		—		—		3,761		4,503		3,761		4,503
Residential mortgage-backed securities (agencies)		6,144		33		—		—		6,144		33
Residential mortgage-backed securities (non-agencies)		895		3		—		—		895		3
Total securities with unrealized losses	$	7,039	$	36	$	5,679	$	5,052	$	12,718	$	5,088
Securities without unrealized losses										66,052
Total securities available for sale									$	78,770

December 31, 2011
States and political subdivisions	$	1,628	$	33	$	1,996	$	469	$	3,624	$	502
Trust preferred collateralized debt obligations		—		—		3,234		5,061		3,234		5,061
Residential mortgage-backed securities (non-agencies)		3,417		33		10,702		1,665		14,119		1,698
Total securities with unrealized losses	$	5,045	$	66	$	15,932	$	7,195	$	20,977	$	7,261
Securities without unrealized losses										68,032
Total securities available for sale									$	89,009

Management evaluates securities available for sale for OTTI at least on a quarterly basis and more frequently when economic or market conditions warrant. For those securities available for sale with fair value less than cost at June 30, 2012, because CIB Marine does not intend to sell the investment, nor is it more likely than not that CIB Marine will be required to sell the investments before recovery of their respective amortized cost bases, which may be maturity, CIB Marine does not consider those securities to have been OTTI at quarter end, except for two trust preferred collateralized debt obligations (“TPCDOs”) with no credit-related OTTI recognized during the first six-month periods of both 2012 and 2011.

The non-investment grade Non-agency MBS had nominal credit-related OTTI and $1.3 million of other OTTI recognized during the second quarter of 2012, and $0.2 million credit-related OTTI recognized during the six-month period of 2011. The $1.3 million of other OTTI recognized during the second quarter of 2012 is the result of the write-down of these securities to fair value at the time of transfer from available for sale to trading securities.

There were no sales of securities available for sale during the first six months of 2012 and 2011.

Net unrealized losses on investment securities available for sale at June 30, 2012 were $1.8 million compared to $3.8 million at December 31, 2011. At June 30, 2012, TPCDOs accounted for $4.5 million in net unrealized losses. The remaining securities partially offset those losses with net unrealized gains of $2.7 million at June 30, 2012.

States and Political Subdivisions (“Municipal Securities”). At June 30, 2012, for those Municipal Securities rated by nationally recognized statistical rating agencies, all were rated investment grade except one general obligation bond issued by the City of Detroit, Michigan issued in 2005, which was downgraded to a CC rating with a par value of $2.5 million, amortized cost of $2.5 million and fair market value of $1.9 million, to be repaid with ad valorem property taxes. This bond was rated AAA at issue and at the time of purchase by CIB Marine. The City of Detroit and the State of Michigan continue to take actions to correct the financial issues of the city. There is no reported OTTI at June 30, 2012. CIB Marine does not intend to sell, nor is it more likely than not that it will be required to sell, any of its Municipal Securities before recovery of their amortized cost bases, which may be maturity and CIB Marine does not expect a credit loss. As a result, CIB Marine has not recognized any OTTI on its Municipal Securities.

Trust Preferred Collateralized Debt Obligations. At June 30, 2012, CIB Marine held four TPCDOs with an $8.6 million par value, an amortized cost of $8.3 million and fair value of $3.8 million. To a limited extent these securities are protected against credit loss by credit enhancements, such as over-collateralization and subordinated securities. Unless they are the most senior class security in the structure, however, they also may be subordinated to more senior classes as identified later in this section. All the TPCDOs have collateral pools and are not single-issuer securities. Preferred Term Securities, LTD (“PreTSLs”) 27 A-1 and 28 A-1 are the most senior classes where all other classes issued in those pools are subordinated to them, and PreTSLs 23 C-FP and 26 B-1 are mezzanine or subordinated classes, but not the most deeply subordinated classes of securities in their pools.

To determine whether or not OTTI is evident, the projected cash flows are discounted using the Index Rate plus the original discount margin. The Index Rate for each security is the 3-Month US Dollar London InterBank Offered Rate (“LIBOR”). The discount rates are as follows: LIBOR + 0.73% for PreTSL 23 C-FP, LIBOR + 0.56% for PreTSL 26 B-1, LIBOR + 0.30% for PreTSL 27 A-1 and LIBOR + 0.90% for PreTSL 28 A-1. Other key assumptions used in deriving cash flows for the pool of collateral for determining whether OTTI exists include default rate scenarios with annualized default rate vectors starting at 2.0% and declining towards 0.25% by year 2014, loss severity rates of approximately 85%, or a recovery rate of 15%, and prepayment speeds of approximately 1% per annum. All current defaults are applied a loss severity of 100% or a recovery rate of 0%, and all current deferrals are applied a loss severity of 85%, or a recovery rate of 15%, with a two-to-five year recovery lag and all future deferral or default events are considered to be defaults with a two-year recovery lag and loss severity of 85%, or a recovery rate of 15%.

Additional information related to the TPCDOs and related OTTI as of June 30, 2012 is provided in the table below:

	PreTSL 23			PreTSL 26			PreTSL 27			PreTSL 28
	(Dollars in thousands)
Class		C-FP			B-1			A-1			A-1
Seniority		Mezzanine			Mezzanine			Senior			Senior
Amortized cost	$	747		$	3,846		$	1,816		$	1,855
Fair value		117			601			1,566			1,477
Unrealized loss		(630	)		(3,245	)		(250	)		(378	)
Total credit-related OTTI recognized in earnings (1)		(66	)		(103	)		—			—
Moody’s /S&P /Fitch Ratings		C/NR/C			Ca/NR/CC			Baa3/BB/BB			Baa3/B/BB
Percent of current deferrals and defaults to total collateral balances		25	%		29	%		28	%		27	%
Break in yield (2)		16	%		24	%		40	%		38	%
Coverage (3)		(16	)%		(17	)%		19	%		22	%
Number of issues in performing collateral		95			47			33			38
Percent of expected deferrals and defaults to performing collateral (4)		8	%		8	%		8	%		8	%
Percent of excess subordination to performing collateral (5)		(11	%)		(2	%)		32	%		33	%

(1)

Total OTTI recognized in earnings and accumulated other comprehensive income (“AOCI”) reflect results since the acquisition date of the securities by CIB Marine, all of which was recognized prior to June 30, 2012.

(2)

The percent of additional immediate defaults of performing collateral at a 85% loss severity rate that would cause a break in yield, meaning that the security would not receive all its contractual cash flows through maturity even though a class could enter a period where payments received are payments-in-kind (“PIK”) but later paid in cash in addition to any accrued interest on the PIKs. Based on a collateral level analysis, PreTSL 23 and 26 projected deferrals and defaults indicate there would be a break in yield resulting in credit component OTTI.

(3)

The percentage points by which the class is over or (under) collateralized with respect to its collateral ratio thresholds at which cash payments are to be received from lower classes or directed to higher classes (i.e., if the coverage actual over (under) is negative). A current positive (negative) coverage ratio by itself does not necessarily mean that there will be a full receipt (shortfall) of contractual cash flows through maturity as actual results realized with respect to future defaults, default timing, loss severities, recovery timing, redirections of payments in other classes and other factors could act to cause (correct) a deficiency at a future date.

(4)

A point within a range of estimates for the percent of future deferrals and defaults to performing collateral used in assessing credit-related OTTI.

(5)

The excess subordination as a percentage of the remaining performing collateral is calculated by taking the difference of total performing collateral less the current class balances of senior classes divided by the current class balances of those senior to and including the respective class for which the measure is applicable.

Residential Mortgage-Backed Securities (Non-agencies). At June 30, 2012, available for sale securities with a par value of $13.7 million, a book value of $12.5 million and a fair value of $11.2 million were below investment grade and were transferred to the trading account. At December 31, 2011, these securities had a par value of $17.2 million and unrealized losses of $1.6 million. The decline of $3.5 million in par value in these securities was primarily due to the repayment of principal. CIB Marine’s principal and interest payments received on these securities from the purchase date through June 30, 2012 have all been timely and in full except for two securities with previously recorded credit-related OTTI, where payments received have been timely but with amounts reduced by losses where subordinated tranches are no longer able to absorb the loss.

The remaining Non-agencies AFS securities have a par value of $5.0 million, have credit rating grades of BBB or better, and have unrealized gains $0.1 million at June 30, 2012.

Roll Forward of OTTI Related to Credit Loss. The following table is a roll forward of the amount of OTTI related to credit losses on available for sale securities that have been recognized in earnings for which a portion of OTTI was recognized in AOCI for the quarters and six months ended June 30, 2012 and 2011:

	Quarters Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
	(Dollars in thousands)
Beginning of period balance of the amount related to credit losses on debt securities held by CIB Marine at the beginning of the period for which a portion of OTTI was recognized in AOCI	$	1,606		$	1,242	$	1,478		$	1,190
Additions for the amount related to credit loss for which an OTTI was not previously recognized		—			11		—			11
Reduction for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis		(1,470	)		—		(1,470	)		—
Additional increase to the amount related to the credit loss for which OTTI was previously recognized when CIB Marine does not intend to sell the security and is it more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis		33			12		161			64
End of period balance of credit losses related to OTTI for which a portion was recognized in AOCI (1)	$	169		$	1,265	$	169		$	1,265

(1)

The table includes a reduction of the OTTI activity related to the non-investment grade Non-agency RMBS subsequently transferred to trading securities at June 30, 2012. The remaining end of period balances of credit losses related to OTTI for which a portion was recognized in AOCI is related to the TPCDOs only.

Note 3- Loans and Allowance for Loan Losses

Loans

The components of loans were as follows:

	At June 30, 2012						At December 31, 2011
	Amount			% of Total			Amount			% of Total
	(Dollars in thousands)
Commercial	$	39,814			12.1	%	$	44,385			12.4	%
Commercial real estate		205,172			62.2			221,420			62.1
Construction and development		12,155			3.7			17,260			4.8
Residential real estate		18,988			5.7			16,593			4.7
Home equity		30,678			9.3			31,831			8.9
Purchased home equity pools		20,268			6.2			22,646			6.4
Other consumer		2,733			0.8			2,542			0.7
Gross loans		329,808			100.0	%		356,677			100.0	%
Deferred loan costs		912						955
Loans		330,720						357,632
Allowance for loan losses		(12,208	)					(16,128	)
Loans, net	$	318,512					$	341,504

CIB Marine serves the credit needs of its customers by offering a wide variety of loan programs to customers, primarily in its core footprint of Wisconsin, Illinois and Indiana. For financial institutions, significant loan concentrations may occur when groups of borrowers have similar economic characteristics and are similarly affected by changes in economic or other conditions. At June 30, 2012 and December 31, 2011, significant concentrations exist in commercial real estate loans.

The following table presents the aging of the recorded investment in past due loans at June 30, 2012 and December 31, 2011:

	June 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Accruing Loans
Commercial	$	19	$	—	$	—	$	19	$	39,340	$	39,359
Commercial real estate:
Owner occupied		951		—		—		951		57,814		58,765
Non-owner occupied		—		—		—		—		139,099		139,099
Construction and development		—		—		—		—		9,320		9,320
Residential real estate:
Owner occupied		—		—		—		—		13,722		13,722
Non-owner occupied		—		—		—		—		4,486		4,486
Home equity		55		71		—		126		30,006		30,132
Purchased home equity pools		591		261		—		852		19,416		20,268
Other consumer		—		—		—		—		2,733		2,733
Deferred loan costs		5		1		—		6		906		912
Total	$	1,621	$	333	$	—	$	1,954	$	316,842	$	318,796

Nonaccrual Loans (1)
Commercial	$	—	$	—	$	455	$	455	$	—	$	455
Commercial real estate:
Owner occupied		—		—		—		—		—		—
Non-owner occupied		—		51		6,950		7,001		307		7,308
Construction and development		—		—		1,610		1,610		1,225		2,835
Residential real estate:
Owner occupied		126		—		375		501		279		780
Non-owner occupied		—		—		—		—		—		—
Home equity		—		—		—		—		546		546
Purchased home equity pools		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Deferred loan costs		—		—		—		—		—		—
Total	$	126	$	51	$	9,390	$	9,567	$	2,357	$	11,924

Total loans
Commercial	$	19	$	—	$	455	$	474	$	39,340	$	39,814
Commercial real estate:
Owner occupied		951		—		—		951		57,814		58,765
Non-owner occupied		—		51		6,950		7,001		139,406		146,407
Construction and development		—		—		1,610		1,610		10,545		12,155
Residential real estate:
Owner occupied		126		—		375		501		14,001		14,502
Non-owner occupied		—		—		—		—		4,486		4,486
Home equity		55		71		—		126		30,552		30,678
Purchased home equity pools		591		261		—		852		19,416		20,268
Other consumer		—		—		—		—		2,733		2,733
Deferred loan costs		5		1		—		6		906		912
Total	$	1,747	$	384	$	9,390	$	11,521	$	319,199	$	330,720

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Accruing Loans
Commercial	$	250	$	—	$	—	$	250	$	43,812	$	44,062
Commercial real estate:
Owner occupied		34		—		—		34		56,332		56,366
Non-owner occupied		—		—		—		—		153,777		153,777
Construction and development		—		—		—		—		10,424		10,424
Residential real estate:
Owner occupied		172		—		—		172		11,452		11,624
Non-owner occupied		—		—		—		—		4,377		4,377
Home equity		496		267		—		763		30,564		31,327
Purchased home equity pools		193		495		—		688		21,958		22,646
Other consumer		—		—		—		—		2,479		2,479
Deferred loan costs		3		2		—		5		950		955
Total	$	1,148	$	764	$	—	$	1,912	$	336,125	$	338,037

Nonaccrual Loans (1)
Commercial	$	—	$	—	$	323	$	323	$	—	$	323
Commercial real estate:
Owner occupied		—		—		—		—		—		—
Non-owner occupied		91		—		9,445		9,536		1,741		11,277
Construction and development		1,345		—		2,470		3,815		3,021		6,836
Residential real estate:
Owner occupied		—		87		356		443		149		592
Non-owner occupied		—		—		—		—		—		—
Home equity		68		74		—		142		362		504
Purchased home equity pools		—		—		—		—		—		—
Other consumer		—		—		—		—		63		63
Deferred loan costs		—		—		—		—		—		—
Total	$	1,504	$	161	$	12,594	$	14,259	$	5,336	$	19,595

Total loans
Commercial	$	250	$	—	$	323	$	573	$	43,812	$	44,385
Commercial real estate:
Owner occupied		34		—		—		34		56,332		56,366
Non-owner occupied		91		—		9,445		9,536		155,518		165,054
Construction and development		1,345		—		2,470		3,815		13,445		17,260
Residential real estate:
Owner occupied		172		87		356		615		11,601		12,216
Non-owner occupied		—		—		—		—		4,377		4,377
Home equity		564		341		—		905		30,926		31,831
Purchased home equity pools		193		495		—		688		21,958		22,646
Other consumer		—		—		—		—		2,542		2,542
Deferred loan costs		3		2		—		5		950		955
Total	$	2,652	$	925	$	12,594	$	16,171	$	341,461	$	357,632

(1)

Nonaccrual loans that are not past due often represent loans with deep collateral depreciation, and significantly deteriorated financial condition with weakened guarantors, where applicable, but have been able to make payments or bring loans current.

The following table lists information on nonaccrual, restructured and certain past due loans:

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Nonaccrual-loans	$	11,924	$	19,595
Nonaccrual-loans held for sale		—		1,375
Restructured loans accruing		10,229		10,706
90 days or more past due and still accruing-loans and loans held for sale		—		—

The following table presents the recorded investment in nonaccrual and loans past due over 90 days on accrual by class of loans:

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Commercial	$	455	$	323
Commercial real estate:
Owner occupied		—		—
Non-owner occupied		7,308		11,277
Construction and development		2,835		6,836
Residential real estate:
Owner occupied		780		592
Non-owner occupied		—		—
Home equity		546		504
Other consumer		—		63
Total	$	11,924	$	19,595

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Impaired loans without a specific allowance	$	12,472	$	13,257
Impaired loans with a specific allowance		13,161		23,026
Total impaired loans	$	25,633	$	36,283
Specific allowance related to impaired loans	$	1,832	$	5,528

Payments received on impaired loans that are accruing are recognized in interest income according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual are generally not recognized in interest income, but are applied as a reduction to the principal outstanding. The following table presents loans individually evaluated for impairment by class of loans at June 30, 2012, December 31, 2011 and June 30, 2011:

	Unpaid Principal Balance		Recorded Investment		Specific Allowance for Loan Losses Allocated		Average Recorded Investment for the Quarter Ended		Average Recorded Investment for the Six Months Ended		Interest Income Recognized for the Quarter Ended		Interest Income Recognized for the Six Months Ended
	(Dollars in thousands)
June 30, 2012
With no related allowance:
Commercial	$	590	$	455	$	—	$	362	$	242	$	—	$	—
Commercial real estate:
Owner occupied		—		—		—		—		—		—		—
Non-owner occupied		12,470		8,184		—		6,867		6,471		19		25
Construction and development		7,922		2,820		—		3,220		4,413		—		—
Residential real estate:
Owner occupied		647		610		—		611		519		1		2
Non-owner occupied		—		—		—		—		—		—		—
Home equity		337		337		—		339		347		—		—
Purchased home equity pools		—		—		—		—		—		—		—
Other consumer		66		66		—		70		73		—		—
	$	22,032	$	12,472	$	—	$	11,469	$	12,065	$	20	$	27
With an allowance recorded:
Commercial	$	12	$	12	$	12	$	174	$	228	$	—	$	—
Commercial real estate:
Owner occupied		5,464		5,464		767		5,533		5,468		31		57
Non-owner occupied		5,220		5,220		812		9,294		11,268		6		24
Construction and development		—		—		—		—		—		—		—
Residential real estate:
Owner occupied		728		724		39		644		568		1		1
Non-owner occupied		—		—		—		—		—		—		—
Home equity		1,307		1,307		105		1,316		1,284		2		6
Purchased home equity pools		428		428		91		429		430		—		—
Other consumer		6		6		6		6		28		—		—
		13,165		13,161		1,832		17,396		19,274		40		88
Total	$	35,197	$	25,633	$	1,832	$	28,865	$	31,339	$	60	$	115

The amount of cash basis income recognized on impaired loans totaled $0.02 million and $0.04 million for the quarter and six months ended June 30, 2012, respectively.

	Unpaid Principal Balance		Recorded Investment		Specific Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
December 31, 2011
With no related allowance:
Commercial	$	—	$	—	$	—	$	221	$	19
Commercial real estate:
Owner occupied		—		—		—		3,805		—
Non-owner occupied		7,892		5,680		—		7,115		31
Construction and development		13,388		6,799		—		9,098		43
Residential real estate:
Owner occupied		336		336		—		398		2
Non-owner occupied		—		—		—		—		—
Home equity		363		363		—		305		1
Purchased home equity pools		—		—		—		—		—
Other consumer		78		79		—		91		—
	$	22,057	$	13,257	$	—	$	21,033	$	96
With an allowance recorded:
Commercial	$	336	$	336	$	126	$	1,432	$	9
Commercial real estate:
Owner occupied		5,338		5,338		591		1,955		44
Non-owner occupied		15,215		15,215		4,571		12,255		97
Construction and development		—		—		—		1,051		—
Residential real estate:
Owner occupied		421		417		62		517		6
Non-owner occupied		—		—		—		—		—
Home equity		1,218		1,218		71		1,667		6
Purchased home equity pools		432		432		70		462		—
Other consumer		70		70		37		21		—
		23,030		23,026		5,528		19,360		162
Total	$	45,087	$	36,283	$	5,528	$	40,393	$	258

The amount of cash basis income recognized on impaired loans totaled $0.1 million for the year ended December 31, 2011.

	Unpaid Principal Balance		Recorded Investment		Specific Allowance for Loan Losses Allocated		Average Recorded Investment for the Quarter Ended		Average Recorded Investment for the Six Months Ended		Interest Income Recognized for the Quarter Ended		Interest Income Recognized for the Six Months Ended
	(Dollars in thousands)
June 30, 2011
With no related allowance:
Commercial	$	642	$	340	$	—	$	282	$	306	$	19	$	19
Commercial real estate:
Owner occupied		8,802		6,272		—		6,301		6,342		—		—
Non-owner occupied		11,038		7,559		—		7,567		6,471		6		6
Construction and development		15,433		7,726		—		10,451		11,132		—		43
Residential real estate:
Owner occupied		347		347		—		350		439		—		—
Non-owner occupied		—		—		—		—		—		—		—
Home equity		258		258		—		298		288		—		—
Purchased home equity pools		—		—		—		—		—		—		—
Other consumer		90		90		—		93		97		—		—
	$	36,610	$	22,592	$	—	$	25,342	$	25,075	$	25	$	68

With an allowance recorded:
Commercial	$	2,175	$	2,175	$	805	$	2,149	$	2,163	$	9	$	9
Commercial real estate:
Owner occupied		—		—		—		—		—		—		—
Non-owner occupied		14,080		13,828		3,726		12,337		10,603		18		54
Construction and development		2,288		2,288		284		1,482		988		—		—
Residential real estate:
Owner occupied		435		431		62		451		581		2		6
Non-owner occupied		—		—		—		—		—		—		—
Home equity		1,800		1,800		165		1,800		1,815		3		3
Purchased home equity pools		480		480		85		481		482		—		—
Other consumer		9		9		6		9		9		—		—
		21,267		21,011		5,133		18,709		16,641		32		72

Total	$	57,877	$	43,603	$	5,133	$	44,051	$	41,716	$	57	$	140

The amount of cash basis income recognized on impaired loans totaled $0.01 million and $0.05 million for the quarter and six months ended June 30, 2011, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011

Balance at beginning of period	$	16,092		$	14,926		$	16,128		$	14,645
Charge-offs		(4,545	)		(2,739	)		(7,274	)		(4,130	)
Recoveries		3,389			1,099			6,009			1,682
Net loan charge-offs		(1,156	)		(1,640	)		(1,265	)		(2,448	)
Provision for (reversal of) loan losses		(2,728	)		1,679			(2,655	)		2,768
Balance at end of period	$	12,208		$	14,965		$	12,208		$	14,965
Allowance for loan losses as a percentage of loans		3.69	%		3.91	%		3.69	%		3.91	%

A summary of the changes in the allowance for loan losses by portfolio segment for the quarters and six months ended June 30, 2012 and 2011 and December 31, 2011, is as follows.

	Commercial			Commercial Real Estate			Construction and Development			Residential Real Estate			Home Equity			Purchased Home Equity Pools			Other Consumer			Total
	(Dollars in thousands)
For the quarter ended June 30, 2012
Balance at beginning of period	$	1,242		$	10,607		$	437		$	296		$	1,018		$	2,440		$	52		$	16,092
Provision for (reversal of) loan losses		(37	)		(501	)		90			(67	)		99			(2,330	)		18			(2,728	)
Charge-offs		(135	)		(3,665	)		(140	)		—			(230	)		(352	)		(23	)		(4,545	)
Recoveries		15			650			—			—			109			2,615			—			3,389
Balance at end of period	$	1,085		$	7,091		$	387		$	229		$	996		$	2,373		$	47		$	12,208

For the six months ended June 30, 2012
Balance at beginning of period	$	1,417		$	10,471		$	428		$	344		$	964		$	2,425		$	79		$	16,128
Provision for (reversal of) loan losses		(218	)		76			770			(78	)		367			(3,634	)		62			(2,655	)
Charge-offs		(135	)		(4,589	)		(812	)		(37	)		(461	)		(1,145	)		(95	)		(7,274	)
Recoveries		21			1,133			1			—			126			4,727			1			6,009
Balance at end of period	$	1,085		$	7,091		$	387		$	229		$	996		$	2,373		$	47		$	12,208

At June 30, 2012
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	12		$	1,579		$	—		$	39		$	105		$	91		$	6		$	1,832
Ending balance collectively evaluated for impairment		1,073			5,512			387			190			891			2,282			41			10,376

Loans:
Ending balance individually evaluated for impairment	$	467		$	18,868		$	2,820		$	1,334		$	1,644		$	428		$	72		$	25,633
Ending balance collectively evaluated for impairment		39,347			186,304			9,335			17,654			29,034			19,840			2,661			304,175

	Commercial			Commercial Real Estate			Construction and Development			Residential Real Estate			Home Equity			Purchased Home Equity Pools			Other Consumer			Total
	(Dollars in thousands)

For the year ended December 31, 2011
Balance at beginning of year	$	2,691		$	7,466		$	873		$	351		$	856		$	2,349		$	59		$	14,645
Provision (credit) for loan losses		(1,433	)		7,626			1,239			(6	)		1,438			(2,521	)		38			6,381
Charge-offs		—			(5,390	)		(2,027	)		(1	)		(1,392	)		(2,639	)		(19	)		(11,468	)
Recoveries		159			769			343			—			62			5,236			1			6,570
Balance at end of year	$	1,417		$	10,471		$	428		$	344		$	964		$	2,425		$	79		$	16,128

Allowance for loan losses:
Ending balance individually evaluated for impairment	$	126		$	5,162		$	—		$	62		$	71		$	70		$	37		$	5,528
Ending balance collectively evaluated for impairment		1,291			5,309			428			282			893			2,355			42			10,600

Loans:
Ending balance individually evaluated for impairment	$	336		$	26,233		$	6,799		$	753		$	1,581		$	432		$	149		$	36,283
Ending balance collectively evaluated for impairment		44,049			195,187			10,461			15,840			30,250			22,214			2,393			320,394

	Commercial			Commercial Real Estate			Construction and Development			Residential Real Estate			Home Equity			Purchased Home Equity Pools			Other Consumer			Total
	(Dollars in thousands)
For the quarter ended June 30, 2011
Balance at beginning of period	$	2,176		$	8,629		$	922		$	281		$	948		$	1,917		$	53		$	14,926
Provision (credit) for loan losses		30			1,474			182			33			118			(154	)		(4	)		1,679
Charge-offs		—			(1,787	)		—			(1	)		(147	)		(804	)		—			(2,739	)
Recoveries		2			60			—			—			24			1,013			—			1,099
Balance at end of period	$	2,208		$	8,376		$	1,104		$	313		$	943		$	1,972		$	49		$	14,965

For the six months ended June 30, 2011
Balance at beginning of period	$	2,691		$	7,466		$	873		$	351		$	856		$	2,349		$	59		$	14,645
Provision (credit) for loan losses		(625	)		2,717			344			(37	)		429			(53	)		(7	)		2,768
Charge-offs		—			(2,193	)		(113	)		(1	)		(382	)		(1,438	)		(3	)		(4,130	)
Recoveries		142			386			—			—			40			1,114			—			1,682
Balance at end of period	$	2,208		$	8,376		$	1,104		$	313		$	943		$	1,972		$	49		$	14,965

At June 30, 2011
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	805		$	3,726		$	284		$	62		$	165		$	85		$	6		$	5,133
Ending balance collectively evaluated for impairment		1,403			4,650			820			251			778			1,887			43			9,832

Loans:
Ending balance individually evaluated for impairment	$	2,515		$	27,659		$	10,014		$	778		$	2,058		$	480		$	99		$	43,603
Ending balance collectively evaluated for impairment		42,528			204,704			14,312			16,066			33,799			24,252			2,182			337,843

Troubled Debt Restructurings

CIB Marine has allocated $0.9 million of specific reserves to customers whose loan terms have been modified as troubled debt restructuring (“TDR”) at June 30, 2012 and December 31, 2011. CIB Marine has no additional lending commitments at June 30, 2012 or December 31, 2011 to customers with outstanding loans that are classified as TDR.

A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports a reasonable assurance of repayment and of performance according to the modified terms of the loan. TDRs on nonaccrual status generally remain on nonaccrual status until the borrower’s financial condition supports the debt service requirements and at least a six-month payment history.

At June 30, 2012, there were $12.4 million of TDR loans, of which $2.2 million were classified as nonaccrual and $10.2 million were classified as restructured loans and accruing. At December 31, 2011, there were $14.5 million TDR loans, of which $3.8 million were classified as nonaccrual and $10.7 million were classified as restructured loans and accruing.

The following tables show the modifications for TDRs made during the second quarter and first six months of 2012 and 2011, and TDRs for which there were payment defaults during the periods on modifications made during the prior twelve months.

	2012						2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(Dollars in thousands)
Quarters ended June 30,
Troubled Debt Restructurings
Commercial real estate:
Non-owner occupied		—	$	—	$	—		—	$	—	$	—
Residential real estate:
Owner occupied		3		292		292		—		—		—
Home equity		1		82		82		3		120		120
		4	$	374	$	374		3	$	120	$	120

Six Months ended June 30,
Troubled Debt Restructurings
Commercial real estate:
Non-owner occupied		1	$	228	$	228		—	$	—	$	—
Residential real estate:
Owner occupied		6		528		528		—		—		—
Home equity		1		82		82		4		164		164
		8	$	838	$	838		4	$	164	$	164

	Quarters Ended June 30,								Six Months Ended June 30,
	2012				2011				2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings with payment defaults
Commercial real estate:
Owner occupied		—		—		2	$	1,025		—		—		1	$	915
Non-owner occupied		1		608		—		—		1		608		—		—
Construction and development		1		200		—		—		1		200		—		—
Residential real estate:
Owner occupied		1		67		—		—		1		67		—		—
		3	$	875		2	$	1,025		3	$	875		1	$	915

Net charge-offs related to troubled debt restructurings totalled $0.2 million and $1.4 million for the quarters ended, and $0.4 million and $1.8 million for the six months ended June 30, 2012 and 2011, respectively.

Credit Quality Indicators

CIB Marine categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CIB Marine uses the following definitions for credit risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard-Accrual. Loans classified as substandard-accrual have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. Such loans are characterized by an increased possibility that the institution will sustain some loss if the deficiencies are not corrected; however, based on recent experience and expectations for future performance, they are on accrual status.

Substandard-Nonaccrual. Loans classified as substandard-nonaccrual have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Such loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected, and they are on nonaccrual status.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.

At June 30, 2012 and December 31, 2011, the breakdown of loans by class and risk category is as follows:

	Pass		Special Mention		Substandard- Accrual		Substandard- Nonaccrual		Doubtful		Total Loans
	(Dollars in thousands)
June 30, 2012
Commercial	$	35,731	$	3,051	$	577	$	455	$	—	$	39,814
Commercial real estate:
Owner occupied		49,398		3,873		5,494		—		—		58,765
Non-owner occupied		124,970		7,886		6,243		7,308		—		146,407
Construction and development		8,719		346		255		2,835		—		12,155
Residential real estate:
Owner occupied		12,833		289		600		405		375		14,502
Non-owner occupied		4,455		31		—		—		—		4,486
Home equity		28,989		307		836		546		—		30,678
Purchased home equity pools		13,868		—		6,400		—		—		20,268
Other consumer		2,715		12		6		—		—		2,733
	$	281,678	$	15,795	$	20,411	$	11,549	$	375		329,808
Deferred loan costs												912
Total											$	330,720

December 31, 2011
Commercial	$	35,847	$	7,367	$	848	$	323	$	—	$	44,385
Commercial real estate:
Owner occupied		49,696		959		5,711		—		—		56,366
Non-owner occupied		128,156		15,733		9,888		11,277		—		165,054
Construction and development		8,981		1,184		259		6,836		—		17,260
Residential real estate:
Owner occupied		10,368		762		494		236		356		12,216
Non-owner occupied		4,345		32		—		—		—		4,377
Home equity		29,884		359		1,084		504		—		31,831
Purchased home equity pools		14,997		—		7,649		—		—		22,646
Other consumer		2,220		251		8		63		—		2,542
	$	284,494	$	26,647	$	25,941	$	19,239	$	356		356,677
Deferred loan costs												955
Total											$	357,632

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $1.0 million at both June 30, 2012 and December 31, 2011.

Note 4-Other Real Estate Owned

A summary of other real estate owned (“OREO”) is as follows:

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Balance at beginning of period	$	8,031		$	4,529		$	7,088		$	5,314
Transfer of loans at net realizable value to OREO		484			3,718			1,773			3,881
Sale proceeds		(121	)		(347	)		(142	)		(609	)
Gain from sale of OREO		61			—			70			39
Write down and losses on sales of OREO		(414	)		(128	)		(748	)		(853	)
Balance at end of period	$	8,041		$	7,772		$	8,041		$	7,772

Net expenses from operations of OREO, gains/losses on disposals and write downs of properties were $0.4 million and $0.1 million for the quarters ended, and $0.7 million and $0.8 million for the six months ended June 30, 2012 and 2011, respectively.

Note 5-Federal Home Loan Bank Chicago

As a member of the FHLBC, CIBM Bank is required to maintain minimum amounts of FHLBC stock as required by that institution. At December 31, 2011, CIB Marine owned $11.6 million carrying value in FHLBC stock and the stock was carried at par of which $1.3 million were required stock holdings with the FHLBC based on the asset size of CIBM Bank. On February 15, 2012, the FHLBC repurchased $5.3 million of stock at par value and on May 15, 2012, the FHLBC repurchased $1.6 million. After the repurchases and at June 30, 2012, CIB Marine had $4.7 million remaining carrying value in FHLBC stock of which $1.1 million were required stock holdings with the FHLBC.

Note 6-Short-term Borrowings

The following is a summary of short-term borrowings:

	June 30, 2012					December 31, 2011
	Balance		Rate			Balance		Rate
	(Dollars in thousands)
Securities sold under repurchase agreements	$	8,420		0.21	%	$	9,784		0.21	%

Securities sold under repurchase agreements were primarily to commercial customers of CIBM Bank under overnight repurchase sweep arrangements.

The Written Agreement (defined below), among other things, requires CIB Marine to obtain Federal Reserve Bank of Chicago (“Federal Reserve Bank”) approval before incurring additional borrowings. This is not required for CIBM Bank.

Note 7- Federal Home Loan Bank Advances

Long-term borrowings of $5.0 million with a maturity date of August 14, 2012 as of both June 30, 2012 and December 31, 2011 consisted of borrowings from the FHLBC having an original maturity of greater than one year. All of the borrowings are fixed-rate borrowings collateralized by municipal securities and loans. CIB Marine is required to maintain qualifying collateral as security for both short-term and long-term FHLBC borrowings. CIBM Bank had assets pledged at the FHLBC sufficient to support total borrowings of $40.2 million and $8.5 million at June 30, 2012 and December 31, 2011, respectively. These pledged assets consisted of securities with a fair value of $2.8 million and $9.4 million at June 30, 2012 and December 31, 2011, respectively, and loans of $42.8 million at June 30, 2012. During 2012, CIBM Bank received an upgrade from the FHLBC allowing the use of a blanket lien for qualifying loan assets which increased CIBM Bank’s availability of borrowing credit with the agency. As a result, additional potential borrowings available at the FHLBC at June 30, 2012 and December 31, 2011 were $35.2 million and $3.5 million, respectively.

Note 8-Stockholders’ Equity

Regulatory Capital

At both June 30, 2012 and December 31, 2011, CIB Marine was subject to a written agreement entered into with the Federal Reserve Bank in the second quarter of 2004 (the “Written Agreement”). The Written Agreement requires CIB Marine, among other things, to obtain Federal Reserve Bank approval before incurring additional borrowings or debt and also requires CIB Marine to maintain a sufficient capital position for the consolidated organization, including the current and future capital requirements of its subsidiary bank, nonbank subsidiaries and the consolidated organization. CIB Marine is prohibited from paying any dividends without Federal Reserve Bank consent pursuant to the Written Agreement.

At both June 30, 2012 and December 31, 2011, CIB Marine’s wholly-owned subsidiary bank, CIBM Bank, was under a Consent Order (“Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Illinois Department of Financial and Professional Regulation, Division of Banking (“IDFPR”). The Consent Order requires CIBM Bank, among other things, to take certain corrective actions focused on reducing exposure to nonaccrual loans, restrict lending to credits with existing nonaccrual loans, restricting the payment of dividends without regulatory approval, maintain a minimum Tier 1 leverage ratio of 10% and a minimum total risk-based capital ratio of 12%, develop a management plan and implement its recommendations, institute for board compliance and monitoring of the provisions of the Consent Order, and develop and maintain a plan for reducing and managing credit concentrations. Also, CIBM Bank is restricted from issuing or renewing brokered deposits unless it obtains permission from the FDIC to do so.

At June 30, 2012 and December 31, 2011, CIB Marine’s capital ratios were above the minimum levels required by the Written Agreement. At June 30, 2012 and December 31, 2011, CIBM Bank was in compliance with the minimum capital requirements as set forth in the Consent Order and believes it is in substantial compliance with the other requirements set forth in the Consent Order. CIBM Bank was classified as “adequately capitalized” as of June 30, 2012.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Provisions					Minimum Required Pursuant to the Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2012
Total capital to risk-weighted assets
CIB Marine Bancshares, Inc.	$	73,910		18.55	%	$	31,882		8.00	%
CIBM Bank		62,232		15.71			31,682		8.00		$	39,602		10.00	%	$	47,522		12.00	%

Tier 1 capital to risk-weighted assets
CIB Marine Bancshares, Inc.	$	68,839		17.27	%	$	15,941		4.00	%
CIBM Bank		57,193		14.44			15,841		4.00		$	23,761		6.00	%

Tier 1 leverage to average assets
CIB Marine Bancshares, Inc.	$	68,839		13.80	%	$	19,956		4.00	%
CIBM Bank		57,193		11.52			19,860		4.00		$	24,825		5.00	%	$	49,651		10.00	%

December 31, 2011
Total capital to risk-weighted assets
CIB Marine Bancshares, Inc.	$	73,566		16.93	%	$	34,772		8.00	%
CIBM Bank		61,489		14.26			34,489		8.00		$	43,111		10.00	%	$	51,733		12.00	%

Tier 1 capital to risk-weighted assets
CIB Marine Bancshares, Inc.	$	67,999		15.64	%	$	17,386		4.00	%
CIBM Bank		55,969		12.98			17,244		4.00		$	25,867		6.00	%

Tier 1 leverage to average assets
CIB Marine Bancshares, Inc.	$	67,999		13.15	%	$	20,685		4.00	%
CIBM Bank		55,969		10.93			20,473		4.00		$	25,592		5.00	%	$	51,184		10.00	%

Pursuant to the Written Agreement and throughout such time as the Written Agreement remains in effect, CIB Marine may not declare or pay dividends without first obtaining the consent of the Federal Reserve Bank. CIB Marine is also prohibited from paying any dividends on its common stock unless the quarterly dividend on its preferred stock has been paid in full for four consecutive quarters. No dividends have been declared or paid to date on CIB Marine’s preferred stock.

Note 9-Income (Loss) per Share

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

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Income (loss) from continuing operations	$	941		$	(1,870	)	$	830		$	(3,215	)
Income from discontinued operations		—			379			—			379
Net income (loss)		941			(1,491	)		830			(2,836	)
Preferred stock dividends		—			—			—			—
Net income (loss) attributable to common stockholders	$	941		$	(1,491	)	$	830		$	(2,836	)
Weighted average shares outstanding:
Total weighted average common shares outstanding		18,135,344			18,135,344			18,135,344			18,135,344
Shares owned by CIBM Bank		(7,452	)		(7,452	)		(7,452	)		(7,452	)
Weighted average common shares outstanding		18,127,892			18,127,892			18,127,892			18,127,892
Effect of dilutive stock options outstanding		—			—			—			—
Basic		18,127,892			18,127,892			18,127,892			18,127,892
Assumed conversion of Series B preferred to common		17,504,000			—			17,504,000			—
Diluted		35,631,892			18,127,892			35,631,892			18,127,892

Income (loss) per share :
Basic loss from continuing operations	$	0.05		$	(0.10	)	$	0.04		$	(0.18	)
Discontinued operations		—			0.02			—			0.02
Basic net income (loss)		0.05			(0.08	)		0.04			(0.16	)

Diluted loss from continuing operations		0.03			(0.10	)		0.02			(0.18	)
Discontinued operations		—			0.02			—			0.02
Diluted net income (loss)	$	0.03		$	(0.08	)	$	0.02		$	(0.16	)

Options to purchase 398,000 and 451,068 shares of common stock for the quarters and 399,978 and 451,388 shares of common stock for the six months ended June 30, 2012 and 2011, respectively, were excluded from the calculation of diluted loss per share because the exercise price of the outstanding stock options was greater than the average market price of the common shares (anti-dilutive options).

At June 30, 2012 and December 31, 2011, the assumed conversion of Series B Preferred represents a potential common stock issuance of 17.5 million shares. The effect of the potential issuance of common stock associated with the Series B Preferred was deemed to be anti-dilutive and, therefore, was excluded from the calculation of diluted loss per share for the quarter and six-month periods ended June 30, 2011.

Note 10-Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities

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

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Commitments to extend credit:
Fixed	$	1,673	$	1,724
Variable		32,450		30,110
Standby letters of credit		2,292		2,385

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 except for overdraft lines of credit, which a fixed maturity date is not established. 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. The interest rates range between 2.24% and 18.00% with a weighted average of 4.30%. The maturity dates range between July 2012 and open dated, the latter is related to overdraft protection accounts. Loan commitments to commercial customers totaled $24.4 million, with the maturity dates ranging between July 2012 and August 2022 and a weighted average term of seven months.

Lending-Related and Other Commitments

Standby letters of credit are conditional commitments that CIB Marine issues to guarantee the performance of a customer to a third-party. The maximum potential future payments guaranteed by CIB Marine under standby letter of credit arrangements was $2.3 million at June 30, 2012 and December 31, 2011, with a weighted average term of approximately 15 months and 11 months at June 30, 2012 and December 31, 2011, respectively.

Contingent Liabilities

CIB Marine and CIBM Bank engage in legal actions and proceedings, both as plaintiffs and defendants, from time to time in the ordinary course of business. In some instances, such actions and proceedings involve substantial claims for compensatory or punitive damages or involve claims for an unspecified amount of damages. There are, however, presently no proceedings pending or contemplated which, in CIB Marine’s opinion, would have a material adverse effect on its consolidated financial position.

Note 11-Fair Value

The following tables present information about CIB Marine’s assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques used 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.

			Fair Value for Measurements Made on a Recurring Basis
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
June 30, 2012
Assets
U.S. government agencies (SBA loan-backed)	$	5,777	$	—	$	5,777	$	—
States and political subdivisions		28,117		—		28,117		—
Trust preferred securities collateralized debt obligations		3,761		—		—		3,761
Other debt obligations		150		—		150		—
Residential mortgage-backed securities (agencies)		35,019		—		35,019		—
Residential mortgage-backed securities (non-agencies) ⁽¹⁾		5,946		—		5,946		—
Total securities available for sale		78,770		—		75,009		3,761
Trading securities ⁽²⁾		11,242		—		—		11,242
Total securities	$	90,012	$	—	$	75,009	$	15,003

December 31, 2011
Assets
U.S. government agencies	$	7,071	$	—	$	7,071	$	—
States and political subdivisions		29,944		—		29,944		—
Trust preferred securities collateralized debt obligations		3,234		—		—		3,234
Other debt obligations		150		—		150		—
Residential mortgage-backed securities (agencies)		26,510		—		26,510		—
Residential mortgage-backed securities (non-agencies)		22,100		—		22,100		—
Total securities	$	89,009	$	—	$	85,775	$	3,234

(1)

Securities of $11.2 million were transferred to trading securities at June 30, 2012.

(2)

Non-agency MBS below investment grade were transferred from Level 2 to Level 3 in the second quarter of 2012. Fair value estimates for the securities transferred into Level 3 is now based on market approach with significant unobservable inputs and significant adjustments.

Selected additional information regarding the model inputs and assumptions used to value certain Level 3 Inputs include the following at June 30, 2012:

	Fair Value		Valuation Technique(s)		Unobservable Input		Range (Weighted Average)
	(Dollars in Thousands)
TPCDOs	$	3,761		Discounted cash flow		Constant prepayment rate		1.0%-1.0% (1.0	)%
						Probability of default, cumulative		7.9%-8.4% (8.2	)%
						Loss severity		85%-85% (85	)%
Trading securities		11,242		Market Approach		Securities prices		$60-$100 ($82	)
Loans held for sale		385		Market approach		Loan prices		13%-50% (19	)%

The following table present information about CIB Marine’s assets and liabilities measured at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011.

	Fair Value for Measurements Made on a Nonrecurring Basis
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) for the Quarter Ended June 30, 2012			Total Gains (Losses) for the Six Months Ended June 30, 2012
	(Dollars in thousands)
June 30, 2012
Loans held for sale:
Commercial real estate	$	155	$	—	$	—	$	155	$	—		$	—
Construction and development		230		—		—		230		—			2
Impaired loans (1)
Commercial		433		—		433		—		(7	)		33
Commercial real estate		5,916		—		5,916		—		463			(334	)
Construction and development		1,520		—		1,520		—		(90	)		(758	)
Residential real estate		289		—		289		—		6			(27	)
Home equity		443		—		443		—		—			(17	)
Purchased home equity pools		—		—		—		—		—			—
Other consumer		67		—		67		—		—			(63	)
Total impaired loans		8,668		—		8,668		—		372			(1,166	)
Other real estate owned:
Commercial		—		—		—		—		59			65
Commercial real estate		52		—		52		—		—			—
Construction and development		6,712		—		6,712		—		(414	)		(701	)
Residential real estate		1,277		—		1,277		—		3			(42	)
Total	$	17,094	$	—	$	16,709	$	385	$	20		$	(1,842	)

			Fair Value for Measurements Made on a Nonrecurring Basis
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Year-to-Date
	(Dollars in thousands)
December 31, 2011
Assets
Loans held for sale:
Commercial real estate	$	166	$	—	$	—	$	166	$	818
Construction and development		1,954		—		—		1,954		(139	)
Impaired loans (1)
Commercial		—		—		—		—		848
Commercial real estate		6,126		—		6,126		—		(2,406	)
Construction and development		4,752		—		4,752		—		(474	)
Residential real estate		43		—		43		—		18
Home equity		259		—		259		—		(71	)
Purchased home equity pools		—		—		—		—		—
Other consumer		111		—		111		—		(31	)
Total impaired loans		11,291		—		11,291		—		(2,116	)
Other real estate owned:
Commercial		41		—		41		—		(47	)
Commercial real estate		5,688		—		5,688		—		(1,594	)
Construction and development		1,359		—		1,359		—		—
Residential real estate		—		—		—		—		(69	)
Total	$	20,499	$	—	$	18,379	$	2,120	$	(3,147	)

(1)

Impaired loans gains (losses) include only those attributable to the loans represented in the fair value measurements for June 30, 2012 and December 31, 2011. Total impaired loans at June 30, 2012 and December 31, 2011 were $25.6 million and $36.3 million, respectively.

The following table presents a roll forward of fair values measured on a recurring and nonrecurring basis using significant unobservable inputs (Level 3) for the periods presented.

	Quarters Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Loans held for Sale
Balance at beginning of period	$	678		$	6,320		$	2,120		$	6,628
Write down		—			(38	)		—			(38	)
Gain on sale		—			—			2			—
Settlements		(293	)		(61	)		(1,737	)		(369	)
Balance at end of period	$	385		$	6,221		$	385		$	6,221

Other Equity Investments
Balance at beginning of period	$	—		$	65		$	—		$	65
Write down		—			(65	)		—			(65	)
Gain on sale		—			—			—			—
Settlements		—			—			—			—
Balance at end of period	$	—		$	—		$	—		$	—

Trading Securities
Balance at beginning of period	$	—		$	—		$	—		$	—
Transfer from available for sale securities		11,242			—			11,242			—
Balance at end of period	$	11,242		$	—		$	11,242		$	—

Available for Sale Securities
Balance at beginning of period	$	3,520		$	3,406		$	3,234		$	2,985
Total gains or losses (realized/unrealized):
Included in earnings		—			—			—			—
Included in other comprehensive income		244			109			532			537
Settlements		(3	)		(7	)		(5	)		(14	)
Balance at end of period	$	3,761		$	3,508		$	3,761		$	3,508

Gains and losses (realized and unrealized) for assets and liabilities reported at fair value on a recurring basis included in earnings for the quarters and six months ended June 30, 2012 and 2011 (above) are reported in other revenues as follows:

	Quarters Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Dollars in thousands
Other Revenues
Total gains or losses in earnings (or changes in net assets) for the period	$	—	$	—	$	—	$	—
Change in unrealized gains or losses relating to assets still held at reporting date		244		109		532		537

The following section describes the valuation methodologies used to measure financial instruments at fair value, including the classification of related pricing inputs.

Trading Securities. The fair values of trading securities are Level 3 inputs and were all non-investment grade Non-agency MBS with fair values measured using the market approach, with significant unobservable and adjusted inputs. The credit and liquidity premium spreads used in the discount rates and the credit factors used in deriving cash flows represent significant unobservable 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. Securities classified under Level 2 inputs include those 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 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 and using a market approach to valuation include U.S. government agency and government sponsored enterprise issued securities and mortgage-backed securities, certain corporate or foreign sovereign debt securities, non-agency 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 TPCDOs 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 consisting 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.

Loans Held for Sale. The fair value of loans held for sale, consisting primarily of commercial real estate loans are carried at the lower of cost or fair value, which is estimated based on indicative and general sale price levels for commercial real estate loans of similar quality and current prices for similar residential real estate loans offered by mortgage correspondent banks. Due to limited market activity in specific loan assets, all other loans designated as held for sale are valued predominantly using unobservable inputs classified under Level 3 inputs. These inputs include indicative prices, loan discount rates and general loan market price level information for loans of similar type and quality. A market approach is the primary valuation technique used to measure the fair value of loans held for sale.

Impaired Loans. Impairment losses are included in the allowance for loan losses. At the time a loan is considered impaired it is valued at the lower of cost or fair value. The impairment loss is based on Level 2 quoted market price inputs, 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 loans that are carried at their fair value and at this time would only include those with an impairment loss either reserved for as a specific reserve or charged-off where that impairment loss was determined using a market approach to valuation based upon a fair value estimate of the collateral. For real estate collateral, that is done using an appraised value of the real estate with certain other market correlated or corroborated information.

Other Real Estate Owned. The fair value of OREO is generally determined based upon outside appraisals using observable market data for the same or similar real estate (Level 2). Adjustments to the appraised values are largely related to market correlated or corroborated information such as observed changes in local real estate prices and broker costs. These were deemed to be Level 2 inputs since in general, the market-based information was considered to be the primary determinant of the value after market correlated and corroborated information and the brokerage costs are largely fixed percentages that do not vary or change other than nominally. The carrying value of a foreclosed asset is immediately adjusted down when new information is obtained. This new information may include a new appraisal, a potentially acceptable offer, the sale of a similar property in the vicinity of one of CIB Marine’s assets and/or a change in the price the property is being listed for based on market forces.

The table below summarizes fair value of financial assets and liabilities at June 30, 2012 and December 31, 2011.

			Fair Value Measurement
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
At June 30, 2012
Financial assets:
Cash and cash equivalents	$	65,836	$	65,836	$	—	$	—	$	65,836
Loans held for sale		385		—		—		385		385
Securities available for sale		78,770		—		75,009		3,761		78,770
Trading securities		11,242		—		—		11,242		11,242
Loans, net		318,512		—		8,668		298,737		307,405
Accrued interest receivable		1,434		—		483		951		1,434
Financial liabilities:
Deposits		412,411		242,480		173,123		—		415,603
Short-term borrowings		8,420		—		8,420		—		8,420
Federal Home Loan Bank advances		5,000		—		5,026		—		5,026
Accrued interest payable		311		—		311		—		311

	Carrying Amount		Estimated Fair Value
	(Dollars in thousands)
At December 31, 2011
Financial assets:
Cash and cash equivalents	$	44,828	$	44,828
Loans held for sale		2,120		2,120
Securities available for sale		89,009		89,009
Loans, net		341,504		325,945
Accrued interest receivable		1,648		1,648
Financial liabilities:
Deposits		422,586		425,559
Short-term borrowings		9,784		9,784
Federal Home Loan Bank advances		5,000		5,130
Accrued interest payable		376		376

	At June 30, 2012								At December 31, 2011
	Contractual or Notional Amount		Carrying Amount			Estimated Fair Value			Contractual or Notional Amount		Carrying Amount			Estimated Fair Value
	(Dollars in thousands)
Off-balance sheet items:
Commitments to extend credit
Fixed	$	1,673	$	—		$	—		$	1,724	$	—		$	—
Variable		32,450		—			—			30,110		—			—
Standby letters of credit		2,292		(3	)		(3	)		2,385		(6	)		(6	)

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.

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.

Cash and Cash Equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximates their fair value and are classified as Level 1 for due from accounts held at the Federal Reserve Bank or investment grade correspondent banks and Level 2 for Federal Funds sold and repurchase agreements.

Loans Receivable. The fair value of loans receivable are either Level 2 or Level 3. Fair values of certain impaired loans are evaluated at Level 2 described above under the previous table “Fair Value for Measurements Made on a Nonrecurring Basis.” The fair value of all other loans are evaluated at Level 3 and estimated using the income approach to valuation by discounting the expected future cash flows using current interest rates with credit and quality discounts for similar and comparable, but not identical, loans. The credit and quality discounts as well as the prepayment speeds used in deriving the cash flows representing significant unobservable inputs. The carrying value of loans receivable is net of the allowance for loan losses. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is described in the preceding table.

Federal Home Loan Bank. There is no market for FHLBC stock and it may only be sold back to the FHLBC or another member institution at par with the FHLBC and the Federal Housing Finance Agency’s (“FHFA”) approval. As a result, its cost and par amounts represent its carrying amount. The carrying amount of FHLBC stock was $4.7 million and $11.6 million at June 30, 2012 and December 31, 2011, respectively.

Accrued Interest Receivable. The carrying amount of accrued interest receivable approximates its fair value resulting in a Level 2 or 3 classification consistent with the respective asset.

Deposit Liabilities. The carrying value of deposits with no stated maturity approximates their fair value, a

CIB MARINE BANCSHARES INC 10-Q