Attached files
file | filename |
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EX-2.1 - CIB MARINE BANCSHARES INC | v184505_ex2-1.htm |
EX-31.1 - CIB MARINE BANCSHARES INC | v184505_ex31-1.htm |
EX-32.1 - CIB MARINE BANCSHARES INC | v184505_ex32-1.htm |
EX-31.2 - CIB MARINE BANCSHARES INC | v184505_ex31-2.htm |
EX-32.2 - CIB MARINE BANCSHARES INC | v184505_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
________________
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2010
|
|
or
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition
period from __________ to
________
|
Commission
file number 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)
|
(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 þ No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer o
|
Accelerated filer
o
|
Non-accelerated
filer o
|
Smaller reporting
company þ
|
(Do
not check if a smaller reporting
company)
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
þ
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 þ No
o
As of
April 30, 2010 there were 18,346,442 shares issued and 18,135,395 shares
outstanding of the registrant’s common stock, $1.00 par value per
share.
EXPLANATORY
NOTE
This
document is intended to speak as of March 31, 2010, 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 March 31, 2010 and December 31, 2009
|
3
|
|
Consolidated
Statements of Operations for the Quarters Ended March 31, 2010 and
2009
|
4
|
|
Consolidated
Statements of Stockholders’ Equity for the Quarters Ended March 31, 2010
and 2009
|
5
|
|
Consolidated
Statements of Cash Flows for the Quarters Ended March 31, 2010 and
2009
|
6
|
|
Notes
to Unaudited Consolidated Financial Statements
|
7
|
|
Item
2 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
26
|
|
Item
3 Quantitative and Qualitative Disclosures About Market
Risk
|
44
|
|
Item
4T Controls and Procedures
|
45
|
|
Part
II – Other Information
|
||
Item
1 Legal Proceedings
|
45
|
|
Item
1A Risk Factors
|
46
|
|
Item
6 Exhibits
|
46
|
|
Signatures
|
47
|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CIB
MARINE BANCSHARES, INC.
Consolidated
Balance Sheets
March 31,
2010
(Unaudited)
|
December 31,
2009
|
|||||||
(Dollars in thousands, except share data)
|
||||||||
Assets
|
||||||||
Cash
and cash equivalents:
|
||||||||
Cash
and due from banks
|
$ | 54,513 | $ | 30,235 | ||||
Reverse
repurchase securities
|
— | 5,000 | ||||||
Federal
funds sold
|
500 | 500 | ||||||
Total
cash and cash equivalents
|
55,013 | 35,735 | ||||||
Securities
available for sale
|
171,263 | 182,971 | ||||||
Loans
held for sale
|
8,684 | 13,451 | ||||||
Loans
|
450,544 | 470,668 | ||||||
Allowance
for loan losses
|
(16,954 | ) | (16,240 | ) | ||||
Net
loans
|
433,590 | 454,428 | ||||||
Federal
Home Loan Bank stock
|
11,555 | 11,555 | ||||||
Premises
and equipment, net
|
4,941 | 5,047 | ||||||
Accrued
interest receivable
|
2,697 | 2,847 | ||||||
Foreclosed
properties
|
748 | 830 | ||||||
Assets
of company held for disposal
|
1,171 | 1,171 | ||||||
Other
assets
|
2,061 | 1,822 | ||||||
Total
assets
|
$ | 691,723 | $ | 709,857 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
demand
|
$ | 50,283 | $ | 52,750 | ||||
Interest-bearing
demand
|
31,915 | 32,325 | ||||||
Savings
|
121,929 | 117,589 | ||||||
Time
|
378,714 | 386,786 | ||||||
Total
deposits
|
582,841 | 589,450 | ||||||
Short-term
borrowings
|
7,597 | 12,572 | ||||||
Long-term
borrowings
|
13,000 | 18,000 | ||||||
Accrued
interest payable
|
1,058 | 1,204 | ||||||
Liabilities
of company held for disposal
|
1,171 | 1,171 | ||||||
Other
liabilities
|
2,580 | 2,765 | ||||||
Total
liabilities
|
608,247 | 625,162 | ||||||
Commitments
and contingent liabilities (Note 12)
|
— | — | ||||||
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;18,346,442 issued
shares; 18,135,395 outstanding shares at March 31, 2010 and December 31,
2009
|
18,346 | 18,346 | ||||||
Capital
surplus
|
158,492 | 158,682 | ||||||
Accumulated
deficit
|
(138,980 | ) | (136,621 | ) | ||||
Accumulated
other comprehensive income (loss) related to available for sale
securities
|
136 | (1,290 | ) | |||||
Accumulated
other comprehensive loss related to non-credit other-than-temporary
impairments
|
(4,989 | ) | (4,893 | ) | ||||
Accumulated
other comprehensive loss, net
|
(4,853 | ) | (6,183 | ) | ||||
Treasury
stock shares at cost; 218,499 at March 31, 2010 and December 31,
2009
|
(529 | ) | (529 | ) | ||||
Total
stockholders’ equity
|
83,476 | 84,695 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 691,723 | $ | 709,857 |
See accompanying Notes to
Unaudited
Consolidated Financial
Statements
3
CIB
MARINE BANCSHARES, INC.
Consolidated
Statements of Operations
(Unaudited)
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands, except share
and per share data)
|
||||||||
Interest
and Dividend Income
|
||||||||
Loans
|
$ | 5,857 | $ | 7,288 | ||||
Loans
held for sale
|
4 | 9 | ||||||
Securities:
|
||||||||
Taxable
|
2,246 | 3,629 | ||||||
Tax-exempt
|
3 | 4 | ||||||
Federal
funds sold
|
20 | 111 | ||||||
Total
interest and dividend income
|
8,130 | 11,041 | ||||||
Interest
Expense
|
||||||||
Deposits
|
2,487 | 4,825 | ||||||
Short-term
borrowings
|
9 | 66 | ||||||
Long-term
borrowings
|
157 | 279 | ||||||
Junior
subordinated debentures
|
— | 2,189 | ||||||
Total
interest expense
|
2,653 | 7,359 | ||||||
Net
interest income
|
5,477 | 3,682 | ||||||
Provision
for loan losses
|
2,672 | 3,043 | ||||||
Net
interest income after provision for loan losses
|
2,805 | 639 | ||||||
Noninterest
Income
|
||||||||
Loan
fees
|
23 | 29 | ||||||
Deposit
service charges
|
218 | 221 | ||||||
Other
service fees
|
26 | 27 | ||||||
Other
income
|
27 | 1 | ||||||
Net
gains on sale of securities
|
95 | 551 | ||||||
Net
gain on sale of assets
|
115 | 28 | ||||||
Total
noninterest income
|
504 | 857 | ||||||
Noninterest
Expense
|
||||||||
Compensation
and employee benefits
|
2,603 | 4,017 | ||||||
Equipment
|
218 | 309 | ||||||
Occupancy
and premises
|
547 | 574 | ||||||
Data
processing
|
194 | 258 | ||||||
Federal
deposit insurance
|
530 | 333 | ||||||
Professional
services
|
561 | 859 | ||||||
Write
down and losses on assets
|
142 | — | ||||||
Other
expense
|
873 | 934 | ||||||
Total
noninterest expense
|
5,668 | 7,284 | ||||||
Loss
from continuing operations before income taxes
|
(2,359 | ) | (5,788 | ) | ||||
Income
tax expense
|
— | — | ||||||
Loss
from continuing operations
|
(2,359 | ) | (5,788 | ) | ||||
Income
from discontinued operations
|
— | — | ||||||
Net
Loss
|
(2,359 | ) | (5,788 | ) | ||||
Preferred
stock dividends
|
— | — | ||||||
Net
loss attributable to common stockholders
|
$ | (2,359 | ) | $ | (5,788 | ) | ||
Loss
Per Share
|
||||||||
Basic
loss from continuing operations
|
$ | (0.13 | ) | $ | (0.32 | ) | ||
Diluted
loss from continuing operations
|
$ | (0.13 | ) | $ | (0.32 | ) | ||
Weighted
average shares-basic
|
18,127,943 | 18,333,779 | ||||||
Weighted
average shares-diluted
|
18,127,943 | 18,333,779 |
See
accompanying Notes to Unaudited Consolidated Financial
Statements
4
CIB
MARINE BANCSHARES, INC.
Consolidated
Statements of Stockholders’ Equity
(Unaudited)
Common Stock
|
Accumulated
Other
|
Stock
Receivables
and
|
||||||||||||||||||||||||||||||
`
|
Shares
|
Par
Value
|
Preferred
Stock
|
Capital
Surplus
|
Accumulated
Deficit
|
Comprehensive
Income (Loss)
|
Treasury
Stock
|
Total
|
||||||||||||||||||||||||
(Dollars in thousands, except share data) | ||||||||||||||||||||||||||||||||
Balance
at January 1, 2009
|
18,346,442 | $ | 18,346 | $ | — | $ | 158,613 | $ | (150,346 | ) | $ | (11,598 | ) | $ | (213 | ) | $ | 14,802 | ||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Change
in unrealized gains/(losses) on securities available for sale, net of
reclassification
|
— | — | — | — | — | 614 | — | 614 | ||||||||||||||||||||||||
Realized
gains on available for sale securities
|
— | — | — | — | — | (551 | ) | — | (551 | ) | ||||||||||||||||||||||
Net
loss
|
— | — | — | — | (5,788 | ) | — | — | (5,788 | ) | ||||||||||||||||||||||
Total
comprehensive loss
|
(5,725 | ) | ||||||||||||||||||||||||||||||
Stock
option expense
|
— | — | — | 38 | — | — | — | 38 | ||||||||||||||||||||||||
Reduction
of receivables from sale of stock
|
— | — | — | — | — | — | 51 | 51 | ||||||||||||||||||||||||
Balance,
March 31, 2009
|
18,346,442 | $ | 18,346 | $ | — | $ | 158,651 | $ | (156,134 | ) | $ | (11,535 | ) | $ | (162 | ) | $ | 9,166 | ||||||||||||||
Balance,
January 1, 2010
|
18,346,442 | $ | 18,346 | $ | 51,000 | $ | 158,682 | $ | (136,621 | ) | $ | (6,183 | ) | $ | (529 | ) | $ | 84,695 | ||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Change
in unrealized gains/(losses) on securities available for sale, net of
reclassification
|
— | — | — | — | — | 1,425 | — | 1,425 | ||||||||||||||||||||||||
Realized
gains on available for sale securities
|
— | — | — | — | — | (95 | ) | — | (95 | ) | ||||||||||||||||||||||
Net
loss
|
— | — | — | — | (2,359 | ) | — | — | (2,359 | ) | ||||||||||||||||||||||
Total
comprehensive loss
|
(1,029 | ) | ||||||||||||||||||||||||||||||
Stock
option benefit
|
— | — | — | (190 | ) | — | — | — | (190 | ) | ||||||||||||||||||||||
Balance,
March 31, 2010
|
18,346,442 | $ | 18,346 | $ | 51,000 | $ | 158,492 | $ | (138,980 | ) | $ | (4,853 | ) | $ | (529 | ) | $ | 83,476 |
See
accompanying Notes to Unaudited Consolidated Financial
Statements
5
CIB
MARINE BANCSHARES, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss
|
(2,359 | ) | (5,788 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Deferred
loan fee amortization
|
26 | (22 | ) | |||||
Depreciation
and other amortization
|
9 | (79 | ) | |||||
Provision
for loan losses
|
2,672 | 3,043 | ||||||
Originations
of loans held for sale
|
(1,842 | ) | (3,943 | ) | ||||
Proceeds
from sale of loans held for sale
|
7,406 | 4,262 | ||||||
Net
gain on sale of assets
|
(115 | ) | (36 | ) | ||||
Net
gain on sale of securities
|
(95 | ) | (551 | ) | ||||
Write
down and losses on assets
|
142 | 8 | ||||||
Decrease
(increase) in interest receivable and other assets
|
(295 | ) | 271 | |||||
Increase
(decrease) in accrued interest payable and other
liabilities
|
(310 | ) | 2,613 | |||||
Net
cash provided by (used in) operating activities
|
5,239 | (222 | ) | |||||
Cash
Flows from Investing Activities
|
||||||||
Maturities
of securities available for sale
|
325 | 25,158 | ||||||
Purchase
of securities available for sale
|
— | (9,648 | ) | |||||
Proceeds
from sale of securities available for sale
|
714 | 13,308 | ||||||
Repayments
of asset and mortgage-backed securities available for sale
|
12,236 | 17,608 | ||||||
Net
decrease in other investments
|
17 | 29 | ||||||
Net
decrease in loans
|
17,390 | 12,303 | ||||||
Premises
and equipment disposals
|
3 | — | ||||||
Premises
and equipment expenditures
|
(45 | ) | (50 | ) | ||||
Net
cash provided by investing activities
|
30,640 | 58,708 | ||||||
Cash
Flows from Financing Activities
|
||||||||
Decrease
in deposits
|
(6,626 | ) | (657 | ) | ||||
Net
decrease in short-term borrowings
|
(4,975 | ) | (43,695 | ) | ||||
Repayment
of long-term borrowings
|
(5,000 | ) | — | |||||
Net
decrease in receivables from sale of stock
|
— | 51 | ||||||
Net
cash used in financing activities
|
(16,601 | ) | (44,301 | ) | ||||
Net
increase in cash and cash equivalents
|
19,278 | 14,185 | ||||||
Cash
and cash equivalents, beginning of period
|
35,735 | 57,231 | ||||||
Cash
and cash equivalents, end of period
|
$ | 55,013 | $ | 71,416 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
expense
|
$ | 2,799 | $ | 5,286 | ||||
Income
taxes
|
182 | — | ||||||
Supplemental
Disclosures of Noncash Activities
|
||||||||
Transfer
of loans to loans held for sale
|
750 | — | ||||||
Transfer
of loans to foreclosed properties
|
— | 929 |
See
accompanying Notes to Unaudited Consolidated Financial
Statements
6
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 (“CIB Marine” or the “Company”) 2009 Annual Report on Form
10-K (“2009 Form 10-K”). References to “CIB Marine” include CIB Marine’s
subsidiaries unless otherwise specified. Effective June 26, 2009, CIB Marine’s
Wisconsin-chartered subsidiary bank, Marine Bank merged with and into its
Illinois-chartered subsidiary bank, Central Illinois Bank, and the combined bank
name was changed to CIB Marine Bank. On August 17, 2009 CIB Marine Bank changed
its name to CIBM Bank. 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 ended March
31, 2010 are not necessarily indicative of results for the entire year. 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.
The
preparation of financial statements in conformity with 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, 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 economic conditions, both locally
and nationally. Changes in these factors can significantly affect CIB Marine’s
net interest income and the value of its recorded assets and
liabilities.
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. The net income or loss
of companies which meet the criteria as discontinued operations are included in
income from discontinued operations for all periods presented. All intercompany
balances and transactions have been eliminated in the assets and liabilities of
companies held for disposal and net income or loss from discontinued operations
as presented on the consolidated financial statements.
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
In June
2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to
Accounting Standards Codification (“ASC”) Topic 810 which revised and changed
how CIB Marine would determine when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated.
The determination of whether CIB Marine is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and CIB Marine’s ability to direct the activities of the other entity that most
significantly impact the other entity’s economic performance. ASC 810 will also
require new disclosures regarding any involvement with variable interest
entities and significant changes to risk due to that involvement. The amendment
to ASC 810 was effective January 1, 2010 and the adoption did not have a
material impact on CIB Marine’s financial condition, results of operations or
liquidity.
7
In
January 2010, the FASB amended existing guidance to improve disclosure
requirements related to fair value measurements. New disclosures are required
for significant transfers in and out of Level 1 and Level 2 fair value
measurements and the reasons for the transfers. In addition, the FASB clarified
guidance related to disclosures for each class of assets and liabilities as well
as disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements that fall in
either Level 2 or Level 3. The impact of adoption on January 1, 2010 was not
material as it required only disclosures.
Note
2- Emergence from Chapter 11 Bankruptcy
As of
April 30, 2009, the Company was in default on each of its Junior Subordinated
Debentures (“Debentures”) issued in conjunction with four tranches of trust
preferred securities (“TruPS”) offerings by the Company between March 2000 and
September 2002 (see Note 8-Long-Term Borrowings). The holders of the TruPS (the
“TruPS Holders”) could have accelerated, at their discretion, the principal on
the Debentures. On July 16, 2009, CIB Marine filed a Current Report on Form 8-K
regarding a proposed pre-packaged Plan of Reorganization pursuant to Chapter 11
of the Bankruptcy Code (“the Plan”) that was presented to the TruPS Holders for
their approval. Under the Plan, approximately $105.3 million of principal and
accrued interest on the Debentures would be exchanged for two series of
preferred stock.
On
September 16, 2009, following receipt of approval of the Plan by the requisite
TruPS Holders, the
Company filed the Plan in the United States Bankruptcy Court (“Bankruptcy
Court”) for the Eastern District of Wisconsin (Case No. 09-33318) under Chapter
11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The
restructuring of the Company pursuant to the Plan had no direct impact on the
operations of CIBM Bank.
On
October 29, 2009, the Bankruptcy Court entered an order confirming the Plan (the
“Confirmation Order”). The Company substantially completed its financial
restructuring pursuant to the Plan on the effective date of December 30, 2009.
Under the Plan, the former TruPS Holders exchanged $107.2 million of cumulative
high-interest Debentures comprising $61.9 million principal and $45.3 million of
accrued interest, for shares of two series of CIB Marine preferred stock valued
at $51 million. In the exchange, 55,624 shares of Series A 7% fixed rate
noncumulative perpetual preferred stock with a stated value of $1,000 per share
(“Series A Preferred”) and 4,376 shares of Series B 7% fixed rate convertible
noncumulative perpetual preferred stock with a stated value of $1,000 per share
(“Series B Preferred” and together with Series A Preferred “CIB Marine
Preferred”) were issued. Each share of Series B Preferred is convertible into
4,000 shares of CIB Marine common stock only upon the consummation of a merger
transaction involving CIB Marine where CIB Marine is not the surviving entity.
The CIB Marine Preferred has no stated redemption date and holders have no right
to compel the redemption of any or all of the shares. Further, dividends are
noncumulative, and payable only to the extent CIB Marine declares a dividend, at
its discretion, subject to regulatory approval (see Note 9-Stockholders’
Equity).
On May 10, 2010, the Bankruptcy Court issued its Final Decree
thereby closing the Chapter 11 bankruptcy case for CIB Marine.
An
extraordinary gain of $54.5 million, net of amortization costs of $1.2 million
and reorganization costs of $0.5 million, was recorded in the fourth quarter of
2009 on the extinguishment of debt securities related to the
exchange.
Under the
Plan, holders of CIB Marine common stock survived the emergence from Chapter 11
bankruptcy. If all Series B Preferred shareholders were to convert their shares
in connection with a merger, they would own approximately 49% of the outstanding
common stock of CIB Marine.
Note
3-Securities Available for Sale
The
amortized cost, gross unrealized gains and losses and fair values of securities
at March 31, 2010 and December 31, 2009 are as follows:
8
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
U.S.
government agencies
|
$ | 18,592 | $ | 785 | $ | — | $ | 19,377 | ||||||||
States
and political subdivisions
|
29,797 | 1,185 | 93 | 30,889 | ||||||||||||
Trust
preferred collateralized debt obligations
|
8,518 | — | 5,000 | 3,518 | ||||||||||||
Other
debt obligation
|
150 | — | — | 150 | ||||||||||||
Residential
mortgage-backed securities (agencies)
|
61,092 | 2,791 | — | 63,883 | ||||||||||||
Residential
mortgage-backed securities (non-agencies (1))
|
57,632 | 130 | 4,701 | 53,061 | ||||||||||||
Equity
security
|
335 | 50 | — | 385 | ||||||||||||
Total
securities available for sale
|
$ | 176,116 | 4,941 | 9,794 | $ | 171,263 | ||||||||||
December
31, 2009
|
||||||||||||||||
U.S.
government agencies
|
$ | 18,588 | $ | 911 | $ | — | $ | 19,499 | ||||||||
States
and political subdivisions
|
30,126 | 858 | 238 | 30,746 | ||||||||||||
Trust
preferred collateral debt obligations
|
8,535 | — | 4,873 | 3,662 | ||||||||||||
Other
debt obligation
|
150 | — | — | 150 | ||||||||||||
Residential
mortgage-backed securities (agencies)
|
67,697 | 2,689 | — | 70,386 | ||||||||||||
Residential
mortgage-backed securities (non-agencies (1))
|
63,103 | 92 | 5,641 | 57,554 | ||||||||||||
Equity
security
|
955 | 19 | — | 974 | ||||||||||||
Total
securities available for sale
|
$ | 189,154 | $ | 4,569 | $ | 10,752 | $ | 182,971 |
(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 $100.6 million and $132.3 million at
March 31, 2010 and December 31, 2009, respectively, were pledged to secure
public deposits, Federal Home Loan Bank of Chicago (“FHLBC”) advances,
repurchase agreements, federal reserve discount window, a fed 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 at March 31, 2010, 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
|
$ | 11,618 | $ | 11,936 | ||||
Due
after one year through five years
|
13,953 | 14,889 | ||||||
Due
after five years through ten years
|
13,388 | 14,034 | ||||||
Due
after ten years
|
18,098 | 13,075 | ||||||
57,057 | 53,934 | |||||||
Residential
mortgage-backed securities (agencies)
|
61,092 | 63,883 | ||||||
Residential
mortgage-backed securities (non-agencies)
|
57,632 | 53,061 | ||||||
Equity
security
|
335 | 385 | ||||||
Total
securities available for sale
|
$ | 176,116 | $ | 171,263 |
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 March 31, 2010
and December 31, 2009:
9
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)
|
||||||||||||||||||||||||
March
31, 2010
|
||||||||||||||||||||||||
States
and political subdivisions
|
$ | 4,226 | $ | 38 | $ | 908 | $ | 55 | $ | 5,134 | $ | 93 | ||||||||||||
Trust
preferred collateralized debt obligations
|
— | — | 3,518 | 5,000 | 3,518 | 5,000 | ||||||||||||||||||
Residential
mortgage-backed securities (non-agencies)
|
11 | — | 39,856 | 4,701 | 39,867 | 4,701 | ||||||||||||||||||
Total
securities with unrealized losses
|
$ | 4,237 | $ | 38 | $ | 44,282 | $ | 9,756 | $ | 48,519 | $ | 9,794 | ||||||||||||
Securities
without unrealized losses
|
122,744 | |||||||||||||||||||||||
Total
securities available for sale
|
$ | 171,263 | ||||||||||||||||||||||
December
31, 2009
|
||||||||||||||||||||||||
States
and political subdivisions
|
$ | 6,595 | $ | 174 | $ | 899 | $ | 64 | $ | 7,494 | $ | 238 | ||||||||||||
Trust
preferred collateralized debt obligations
|
— | — | 3,662 | 4,873 | 3,662 | 4,873 | ||||||||||||||||||
Residential
mortgage-backed securities (non-agencies)
|
5,902 | 17 | 43,591 | 5,624 | 49,493 | 5,641 | ||||||||||||||||||
Total
securities with unrealized losses
|
$ | 12,497 | $ | 191 | $ | 48,152 | $ | 10,561 | $ | 60,649 | $ | 10,752 | ||||||||||||
Securities
without unrealized losses
|
122,322 | |||||||||||||||||||||||
Total
securities available for sale
|
$ | 182,971 |
For those
securities with fair value less than cost at March 31, 2010, because CIB Marine
does not intend to sell the investment and it is not 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 be other-than-temporarily impaired (“OTTI”); except
for the following: (1) two mortgage-backed securities (non-agency) (“Non-agency
MBS”) with $0.3 million credit-related OTTI during 2009 and (2) two structured
debt obligations collateralized by diversified pools of bank TruPS and
subordinated debt included in other notes and bonds collateralized debt
obligations with $0.07 million credit-related OTTI during 2009. No additional
OTTI was recognized during the first quarter of 2010.
Proceeds
from the sales of securities available for sale during the first quarter of 2010
and 2009 were $0.7 million and $13.3 million and CIB Marine realized a $0.1
million and $0.6 million gain on sale, respectively.
Net
unrealized losses on investment securities at March 31, 2010 were $4.9 million
compared to $6.2 million at December 31, 2009. At March 31, 2010, trust
preferred collateral debt obligations accounted for $5.0 million and Non-agency
MBS accounted for $4.6 million in net unrealized losses. The remaining
securities had net unrealized gains of $4.7 million at March 31,
2010.
States
and Political Subdivisions (“Municipal Securities”). At March 31, 2010
for those municipal securities rated by nationally recognized statistical rating
agencies, all were rated investment grade except one security rated B. That
security had a par value of $2.5 million and an unrealized loss of $0.03
million. 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 credit or non-credit
related OTTI on its municipal securities.
Trust
Preferred Collateralized Debt Obligations. At March 31, 2010, CIB Marine
held $8.7 million par value with an amortized cost of $8.5 million and $3.5
million fair value of structured debt obligations collateralized by diversified
pools of bank TruPS 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 TruPS or subordinated
debt issued by organizations in the financial industry are in the form of a
single-issuer debt obligation. The fair value of these securities was $3.7
million at December 31, 2009. 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, they also may be a security that is subordinated to more senior
classes as identified later in this section.
CIB
Marine evaluates for credit related OTTI by evaluating estimated discounted cash
flows and comparing this to the current amortized cost of each respective
security. When the estimated discounted cash flows are less than the current
amortized cost of a security, a credit related OTTI charge is recognized through
earnings.
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 3% and declining towards 0.25% by year 2014,
loss severity rates of approximately 85% and prepayment speeds of approximately
1% per annum. In addition, individual issuers within the collateral pool were
evaluated for potential default based on performance information, and those
amounts were compared to the current assessed level of defaults that would
reduce the yield through the maturity of the securities from the original yield
at acquisition. Resulting cash flows were projected considering the affects of
related subordinated securities and various waterfall rules applied to CIB
Marine’s security and those related to other securities that were issued and
that share a senior or subordinated interest in the collateral pool. From these
projected cash flows expected credit loss outcomes through maturity were derived
for CIB Marine’s security holdings.
10
CIB
Marine does not intend to sell nor is it more likely than not that it will be
required to sell any of its other notes and bonds before recovery of their
amortized cost bases, which may be at maturity. For information on these
securities see the table below titled “Structured Debt Obligations
Collateralized Primarily by Pooled Trust Preferred Securities.” For CIB Marine’s
holdings in PreTSL 23 and 26 at March 31, 2010 the deferrals and defaults of
issuers in the collateral pools have risen to a level that holders of these
securities began receiving “payments-in-kind” (“PIK”) at their last payment date
in June 2009 and are expected to continue to receive PIK rather than cash for an
extended period of time. Taken in combination with expanded expected future
deferrals and defaults given the deterioration in the financial industry these
two securities are considered to be OTTI. The cash that is received from
performing issuers in each respective collateral pools will be directed to pay
down the par values of certain classes senior to the class held by CIB Marine
thereby reducing the more senior classes’ par values and by this process itself
improving the collateral position of CIB Marine’s subordinated classes. In
effect, PIK acts like a compounding of interest for CIB Marine’s holdings and
will continue until such time as certain collateral thresholds are restored, if
they are restored, at which time payments in cash will resume. At this time CIB
Marine expects that the cash payments will be restored at some time in the
future and CIB Marine will be paid all amounts due under the contractual
arrangement except for $0.07 million in credit-related OTTI recorded during
2009. It is estimated for Class C-FP of PreTSL 23 and Class B-1 of PreTSL 26, it
would take an additional 12% and 18%, respectively, of currently performing
collateral to immediately defer or default for there to be a reduction in the
yield through the maturity of the securities from the original yield at
acquisition (a “Break in Yield”).
Due to
the uncertainties related to the timing and amounts of the future payments for
Class C-FP of PreTSL 23 and Class B-1 of PreTSL 26, CIB Marine considers them to
be OTTI and had recorded $0.07 million in credit-related OTTI during 2009, and
placed them on non-accrual. Further deterioration in the financial industry
beyond what is currently expected potentially could result in additional OTTI
related to credit loss that would be recognized through a reduction in earnings.
The $3.7 million of unrealized loss recorded in the accumulated other
comprehensive income (“AOCI”) as of March 31, 2010 is largely related to a
decline in prices in these securities over the course of the past few years due
to the lack of demand and liquidity in this security sector, the deteriorated
condition of the economy, capital markets and banking industry and the
perceptively higher risk today that losses in the collateral pools could be
higher than what is currently expected. With the exception of the contractual
PIK process described earlier in this section, all the respective securities
were performing as to full and timely payments at March 31, 2010 as permitted
under the contractual arrangements.
Additional
information as of March 31, 2010, related to these debt obligations and related
OTTI is provided in the table below:
Structured Debt Obligations Collateralized Primarily by Pooled Trust Preferred Securities
|
||||||||||||||||||||||
Deal
|
Class (1)
|
Amortized
Cost
|
Fair
Value
|
Total credit-
related OTTI
Recognized in
Earnings (2)
|
Total OTTI
Recognized
in AOCI (2)
|
Moody’s /
S&P /
Fitch Ratings
|
% of Current
Deferrals and
Defaults to Total
Current Collateral
Balances/
Break in Yield
(3)/Coverage (4)
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||
PreTSL
23
|
C-FP
|
$ | 747 | $ | 187 | $ | 67 | $ | (559 | ) |
C/NR/C
|
23/12/(17)
|
||||||||||
PreTSL
26
|
B-1 | 3,949 | 808 | — | (3,141 | ) |
Ca/NR/CC
|
28/18/(21)
|
||||||||||||||
PreTSL
27
|
A-1
|
1,878 | 1,210 | — | — |
A3/BBB(n)/A(n)
|
25/37/19
|
|||||||||||||||
PreTSL
28
|
A-1
|
1,945 | 1,313 | — | — |
A3/BBB(n)/A(n(
|
18/39/32
|
|
(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 the most
deeply subordinated.
|
|
(2)
|
Total
OTTI Recognized in Earnings and AOCI are since the acquisition date of the
securities by CIB Marine.
|
|
(3)
|
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 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.
|
|
(4)
|
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.
|
11
Mortgage-Backed
Securities (Non-agencies). The unrealized losses in Non-agency MBS were
primarily caused by deterioration in credit quality and financial market
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 March 31, 2010, CIB Marine
had Non-agency MBS holdings of $58.6 million par value with a fair value of
$53.1 million, down from holdings at December 31, 2009, of $64.2 million par
value with a fair value of $57.6 million. The decline of $5.6 million in par
value was primarily due to the repayment of principal. CIB Marine’s principal
and interest payments received on these securities from the purchase date
through March 31, 2010, have all been timely and in
full.
At the
time of purchase, where Moody’s, Standard and Poor’s or Fitch (“rating
agencies”) had rated one of CIB Marine’s Non-agency MBS they were rated AAA, and
in every case at least two of the rating agencies had rated each security. In no
case did any one of the rating agencies rate any security other than AAA at the
time of purchase. In addition, at March 31, 2010, all these securities were
performing with respect to the full and timely receipt of principal and interest
payments due to CIB Marine. At March 31, 2010 securities with a par value of
$26.7 million and unrealized losses of $4.1 million were below investment grade
compared to securities with a par value of $24.0 million and unrealized losses
of $4.1 at December 31, 2009. The table below displays the current composition
of the Non-agency MBS portfolio based on the lowest credit rating assigned by
any of the rating agencies.
Total Non-Agency Mortgage Backed Securities Credit Ratings
|
||||||||||||
Credit Rating
|
Par
|
Amortized
Cost
|
Unrealized
Gain (Loss)
|
|||||||||
(Dollars in thousands)
|
||||||||||||
AAA
|
$ | 19,409 | $ | 19,061 | $ | (161 | ) | |||||
AA
|
1,649 | 1,632 | (87 | ) | ||||||||
A
|
6,941 | 6,890 | (66 | ) | ||||||||
BBB
|
3,966 | 3,947 | (176 | ) | ||||||||
BB
or below (1)
|
26,669 | 26,102 | (4,081 | ) | ||||||||
Total
|
$ | 58,634 | $ | 57,632 | $ | (4,571 | ) |
|
(1)
|
BB
and lower credit ratings are considered to be below investment grade. All
the securities were originally rated
AAA.
|
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 both traditional and non-traditional underwriting qualities
(e.g., prime jumbo, conforming Alt-A and jumbo Alt-A each of which includes
reduced documentation types). All of CIB Marine’s Non-agency MBS are senior in
position to subordinated tranches of securities issued to absorb losses, to the
extent they are able, prior to CIB Marine’s securities. The securities are from
vintages between and including 2002 through 2006. At March 31, 2010, the
vintages from 2004 or earlier represented $22.6 million in amortized cost with a
market value of $21.9 million and an unrealized loss of $0.3 million, and the
vintages from 2005 through 2006 represented $35.4 million in amortized cost with
a market value of $31.1 million and an unrealized loss of $4.3 million. At March
31, 2010, the balance weighted mean and median percentages for each security,
respectively, of various delinquency and nonperformance measures to the total
mortgage loans collateralizing those securities were: (1) 4.8% and 2.0%,
respectively, for loans 60 or more days past due but not in foreclosure or
transferred to other real estate owned, (2) 3.4% and 1.6%, respectively, for
loans in foreclosure plus other real estate owned, and (3) 8.2% and 3.9%,
respectively, for the total of loans 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 32.7%. The State of California
represents the highest geographic concentration of loans with a range of loans
within each respective securities collateral pool ranging from 14% to 100% from
California but with the majority of the securities within 30% to
50%.
CIB
Marine does not intend to sell nor is it more likely than not that it will be
required to sell any of its Non-agency MBS before recovery of their amortized
cost bases, which may be maturity, except for two securities where CIB Marine
does not expect to recover the entire amortized cost of the securities. For
those two securities, OTTI recognized in earnings was $0.3 million during all of
2009 and none during the first quarter of 2010. Additional OTTI may be
recognized in the future if performance of the underlying collateral
deteriorates more or for a longer period than currently projected or if CIB
Marine decides to intend to sell, sells or more likely than not becomes required
to sell the securities prior to full recovery of their respective amortized cost
bases. Prior to 2009, all OTTI, credit and non-credit related, was required to
be recognized into earnings.
12
The table
below summarizes the Non-agency MBS in which OTTI has been recognized during the
current or prior periods. In making estimates of credit losses for those
securities with OTTI, some of the key assumptions for the underlying residential
mortgage loan collateral for the first quarter of 2010 included annualized
prepayment speeds ranging between 6% and 12%, future cumulative default rates
ranging between 31% and 42%, weighted average loss severity rates ranging
between 46% and 48%, and resulting future cumulative collateral loss rates
ranging between 14% and 20%. Resulting cash flows were projected considering the
affects of related securities sharing an interest in the same pool of collateral
to derive expected credit loss outcomes through maturity.
Total Non-Agency Mortgage Backed Securities with OTTI At March 31, 2010 | |||||||||||||||||||||||||||||
Credit Category
|
Amortized
Cost
|
Fair
Value
|
Total credit-
related OTTI
Recognized in
Earnings (2)
|
Total OTTI
Recognized
in AOCI
|
Range of
Nonperforming
Loans to Total
Loans (3)
|
Range of
Mean
Original
Loan to
Values (3)
|
Vintages
|
Range of
Current Levels
of Credit
Support from
Subordination
|
|||||||||||||||||||||
(dollars in thousands)
|
|||||||||||||||||||||||||||||
Investment
Grade
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 |
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||
Below
Investment Grade (1)
|
2,955 | 1,666 | (537 | ) | (1,289 | ) | 24 – 33 | % | 72 - 73 | % |
2006
|
1.1 – 2.6 | % | ||||||||||||||||
Total
|
$ | 2,955 | $ | 1,666 | $ | (537 | ) | $ | (1,289 | ) | 24 – 33 | % | 72 - 73 | % |
2006
|
1.1 – 2.6 | % |
(1)
|
BB
and lower credit ratings are considered to be below investment grade. All
the securities were originally AAA.
|
(2)
|
During
2008, $1.6 million of non credit related OTTI was recognized in earnings
as well. This was added back to retained earnings (but through earnings)
and transferred to AOCI on adoption of ASC 320-10-65 on January 1,
2009.
|
(3)
|
Ranges
represent the high and low measures for each security’s respective loan
collateral pool for securities with OTTI recognized. Nonperforming loans
here means past due 60 or more days, in foreclosure or held as real estate
owned. The full amount of nonperforming loans are not expected to
translate into a dollar for dollar loss to the collateral pool due to
borrower efforts to bring the loans current or sell the mortgage
residential properties or collection activities of the servicing agents
that includes liquidation of collateral and the pursuit of deficiencies
where available from the borrowers
|
Equity
Securities. At March 31, 2010 and December 31, 2009, CIB Marine held
marketable equity securities from a single issuer amounting to $0.3 million and
$1.0 million in cost basis and $0.4 million and $1.0 million in fair value,
respectively. During the first quarter of 2010, $0.6 million of these securities
were sold which resulted in a gain of $0.1 million.
Expectations
that CIB Marine’s other notes and bonds and non-agency mortgaged-backed
securities will continue to perform in accordance with their contractual terms,
except to the extent a credit loss exists and has been recognized, are based on
management assumptions which require the use of estimates and significant
judgments. It is possible that the underlying collateral of these investments
will perform worse than expected, resulting in adverse changes in cash flows and
OTTI 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.
Roll
forward of OTTI Related to Credit Loss. The following table is a roll
forward of the amount of OTTI related to credit losses that has been recognized
in earnings for which a portion of OTTI was recognized in AOCI for the quarters
ended March 31, 2010 and 2009:
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Beginning
of year balance of the amount related to credit losses on debt securities
held by the entity at the beginning of the period for which a portion of
OTTI was recognized in other comprehensive income
|
$ | 603 | $ | 202 | ||||
Additions
for the amount related to credit loss for which an OTTI was not previously
recognized
|
— | — | ||||||
Additional
increase to the amount related to the credit loss for which OTTI was
previously recognized when the entity does not intend to sell the security
and it is not more likely than not that the entity will be required to
sell the security before recovery of its amortized cost
basis
|
— | — | ||||||
Balance
at end of period of credit losses related to OTTI for which a portion was
recognized in other comprehensive income
|
$ | 603 | $ | 202 |
13
Note
4- Loans and Allowance for Loan Losses
The
components of loans were as follows:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Amount
|
% of
Total
|
Amount
|
% of
Total
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Commercial
|
$ | 63,687 | 14.2 | % | $ | 71,921 | 15.3 | % | ||||||||
Commercial
real estate
|
242,076 | 53.9 | 243,811 | 51.9 | ||||||||||||
Commercial
real estate construction
|
46,826 | 10.4 | 49,795 | 10.6 | ||||||||||||
Residential
real estate
|
17,239 | 3.8 | 19,322 | 4.1 | ||||||||||||
Home
equity loans
|
76,777 | 17.1 | 81,832 | 17.5 | ||||||||||||
Consumer
loans
|
2,704 | 0.6 | 2,701 | 0.6 | ||||||||||||
Gross
loans
|
449,309 | 100.0 | % | 469,382 | 100.0 | % | ||||||||||
Deferred
loan costs
|
1,235 | 1,286 | ||||||||||||||
Loans
|
450,544 | 470,668 | ||||||||||||||
Allowance
for loan losses
|
(16,954 | ) | (16,240 | ) | ||||||||||||
Loans,
net
|
$ | 433,590 | $ | 454,428 |
A
troubled debt restructured (“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. Once this
assurance is reached the TDR is classified as a restructured loan. As of March
31, 2010, there were $14.4 million TDR loans of which $13.6 million were
classified as nonaccrual and $0.8 million were classified as restructured
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. There were $2.0 million in loans to directors and principal
officers at December 31, 2009 and at March 31, 2010, there were no loans to
directors or principal officers due to a change in the board of
directors.
At both
March 31, 2010 and December 31, 2009, CIB Marine had $0.3 million in outstanding
principal balances on loans secured, or partially secured, by CIB Marine stock.
No specific reserves were allocated to these loans at March 31, 2010 or December
31, 2009.
The
following table lists information on nonperforming and certain past due
loans:
March 31,
2010
|
December 31,
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Nonaccrual-loans
|
$ | 50,152 | $ | 50,812 | ||||
Nonaccrual-loans
held for sale
|
2,994 | 7,056 | ||||||
Restructured
loans
|
827 | 831 | ||||||
90
days or more past due and still accruing-loans
|
— | — | ||||||
90
days or more past due and still accruing-loans held for
sale
|
— | — |
Information
on impaired loans is as follows:
March 31,
2010
|
December 31,
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Impaired
loans without a specific allowance
|
$ | 36,265 | $ | 36,205 | ||||
Impaired
loans with a specific allowance
|
14,452 | 15,168 | ||||||
Total
impaired loans
|
$ | 50,717 | $ | 51,373 | ||||
Specific
allowance related to impaired loans
|
$ | 4,859 | $ | 3,785 |
Impaired
loans declined $0.7 million and specific allowances related to impaired loans
increased by $1.1 million. Impaired loans without a specific allowance increased
$0.06 million while impaired loans with a specific allowance decreased $0.72
million. The increase in the specific allowance was related to the increase in
impairment of the impaired loans as determined by each impaired loan’s
respective impairment analysis including the level of expected discounted cash
flows and collateral valuations.
14
Changes
in the allowance for loan losses were as follows:
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Balance
at beginning of year
|
$ | 16,240 | $ | 19,242 | ||||
Charge-offs
|
(3,003 | ) | (5,347 | ) | ||||
Recoveries
|
1,045 | 268 | ||||||
Net
loan charge-offs
|
(1,958 | ) | (5,079 | ) | ||||
Provision
for loan losses
|
2,672 | 3,043 | ||||||
Balance
at end of period
|
$ | 16,954 | $ | 17,206 | ||||
Allowance
for loan losses as a percentage of loans
|
3.76 | % | 3.20 | % |
The
allowance for loan losses as a percentage of loans increased from 3.20% at March
31, 2009 and 3.45% at December 31, 2009, to 3.76% at March 31, 2010 as a result
of an increase in allowance for loan losses for commercial and commercial real
estate loans, partially offset by reductions in the allowance for loan losses
for home equity and construction loans due to charge-offs in loans previously
reserved for.
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 $1.4 million and $1.5 million at March 31, 2010 and December 31,
2009, respectively.
Note
5-Company Held for Disposal and Discontinued Operations
At March
31, 2010 and December 31, 2009, assets and liabilities of company 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 December 31, 2010.
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 March 31, 2010 and December 31, 2009, CIB Construction’s net carrying value
of its investment in Canron was zero.
Note
6-Federal Home Loan Bank Chicago (“FHLBC”)
As a
member of the FHLBC, CIBM Bank is required to maintain minimum amounts of FHLBC
stock as required by that institution.
In
October 2007, the FHLBC entered into a consensual Cease and Desist Order (the
“FHLBC C&D”) with its regulator, the Federal Housing Finance Board, now
known as the Federal Housing Finance Agency (the “FHFA”). Under the terms of the
FHLBC C&D, capital stock repurchases and redemptions, including redemptions
upon membership withdrawal or other termination, are prohibited unless the FHLBC
receives the prior approval of the Director of the Office of Supervision of the
FHFA ("OS Director"). In July of 2008, the FHFA amended the FHLBC C&D to
permit the FHLBC to repurchase or redeem newly-issued capital stock to support
new advances, subject to certain conditions set forth in the FHLBC C&D. The
Company’s FHLBC common stock is not newly-issued and is not affected by this
amendment. FHLBC stock is not publicly traded and is restricted in that it can
only be sold back at par to the FHLBC or another member institution, with the
FHLBC and FHFA’s approval. At both March 31, 2010, and December 31, 2009, CIB
Marine had $11.6 million in FHLBC stock, of which $0.9 million was required
stock holdings based on the total assets of CIBM Bank. Impairment in FHLBC stock
should be recognized if the investor concludes it is not probable that it will
recover the par value of its investment. Due to the long-term performance
outlook of the FHLBC, no impairment has been recorded on the FHLBC
stock.
15
Note
7-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. The
following is a summary of short-term borrowings:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Federal
funds purchased and securities sold under repurchase
agreements
|
$ | 7,429 | 0.47 | % | $ | 9,684 | 0.42 | % | ||||||||
Treasury,
tax, and loan note
|
168 | 0.00 | 2,888 | 0.00 | ||||||||||||
Total
short-term borrowings
|
$ | 7,597 | 0.46 | % | $ | 12,572 | 0.32 | % |
CIB
Marine is required to maintain qualifying collateral as security for both
short-term and long-term FHLBC 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 FHLBC, CIBM
Bank had assets pledged to create potential borrowings of $30.9 million and
$34.8 million at March 31, 2010 and December 31, 2009, respectively. These
assets consisted of securities with a fair value of $39.0 million and $61.8
million at March 31, 2010 and December 31, 2009, respectively. As a result,
additional borrowings available at the FHLBC at March 31, 2010 were $17.9
million based on $30.9 million in potential borrowings less $13.0 million in
outstanding borrowings. Similarly, $16.8 million was available at December 31,
2009, based on $34.8 in potential borrowings less $18.0 million in actual
outstanding borrowings.
Note
8-Long-term Borrowings
Long-term
borrowings consist of borrowings having an original maturity of greater than one
year.
Federal
Home Loan Bank of Chicago
The
following table presents information regarding amounts payable to the FHLBC. All
of the borrowings shown in the following table are fixed rate
borrowings.
March 31, 2010
|
December 31, 2009
|
Scheduled
Maturity
|
|||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
||||||||||||
(Dollars in thousands)
|
|||||||||||||||
$ | 3,000 | 4.54 | % | $ | 3,000 | 4.54 | % |
10/25/10
|
|||||||
— | — | 5,000 | 3.32 |
02/16/10
|
|||||||||||
5,000 | 3.95 | 5,000 | 3.95 |
08/15/11
|
|||||||||||
5,000 | 4.21 | 5,000 | 4.21 |
08/14/12
|
|||||||||||
$ | 13,000 | 4.19 | % | $ | 18,000 | 3.95 | % |
Junior
Subordinated Debentures
CIB
Marine had formed four statutory business trusts (“Trusts”) for the purpose of
issuing TruPS and investing the proceeds thereof in Debentures of CIB Marine.
The Trusts used the proceeds from the issuance of the TruPS and the issuance of
its common securities to CIB Marine to purchase the Debentures. Interest on the
Debentures and distributions on the TruPS were payable either quarterly or
semi-annually in arrears. CIB Marine had the right, at any time, as long as
there were 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. In 2004, CIB Marine entered into a Written
Agreement (“Written Agreement”) with the Federal Reserve Bank of Chicago
(“Federal Reserve Bank”) (see Note 9-Stockholders’ Equity). Among other items,
the Written Agreement required CIB Marine to obtain Federal Reserve Bank
approval before incurring additional borrowings or debt, or paying interest on
its Debentures. As a result of the Written Agreement, CIB Marine deferred all
such interest payments subsequent to December 31, 2003, and as a result the
Trusts deferred distributions on their respective TruPS. These deferral periods
all expired in the first quarter of 2009 and CIB Marine did not make the
required interest payments such that, by April 30, 2009, CIB Marine was in
default with respect to the Debentures issued to all four of the Trusts. On July
16, 2009, CIB Marine filed a Current Report on Form 8-K regarding a proposed
pre-packaged Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy
Code (the “Plan”) that was presented to the TruPS Holders for their approval. On
September 16, 2009 (the “Filing Date”), CIB Marine filed the Plan pursuant to
Chapter 11 of the Bankruptcy Code. As of the Filing Date and March 31, 2009, CIB
Marine had accrued interest payable on its $61.9 million Debentures of $43.5
million and $39.1 million, respectively. Under the Plan, $107.2 million of
cumulative high-interest indebtedness related to the TruPS was to be exchanged
for two series of preferred stock. The Plan was confirmed by the Bankruptcy
Court on October 29, 2009 and had an effective date of December 30, 2009. An
extraordinary gain of $54.5 million, net of amortization costs of $1.2 million
and reorganization costs of $0.5 million, was recorded in the fourth quarter of
2009 on the extinguishment of debt securities related to the exchange. See Note
2-Emergence from Chapter 11 Bankruptcy and Note 9-Stockholders’ Equity for more
information.
16
Note
9-Stockholders’ Equity
Preferred
Stock
On
December 30, 2009, CIB Marine issued CIB Marine Preferred in exchange for $107.2
million of indebtedness related to the TruPS (See also Note 8-Long-term
Borrowings and Note 2- Emergence from Chapter 11 Bankruptcy). The key terms of
the CIB Marine Preferred are as follows:
Series A
|
Series B
|
|||
Securities
issued
|
Stated
value of $47.3 million, 55,624 shares issued, par value-$1.00 and
liquidation value-$1,000 per share
|
Stated
value of $3.7 million, 4,376 shares issued, par value-$1.00 and
liquidation value-$1,000 per share
|
||
Convertibility
to common
|
None
|
Each
share convertible into 4,000 shares of common stock only upon consummation
of a merger transaction where CIB Marine is not the surviving entity and
where holders have voting rights
|
||
Dividends
|
7%
fixed rate noncumulative, payable quarterly and subject to regulatory
approval
|
7%
fixed rate noncumulative payable quarterly and subject to regulatory
approval
|
||
Redemption/maturity
|
No
stated redemption date and holders cannot compel
redemption
|
No
stated redemption date and holders cannot compel
redemption
|
||
Voting
rights
|
|
No
voting rights unless transaction (merger, share exchange or business
combination) would be prejudicial to holders
|
|
No
voting rights unless transaction (merger, share exchange or business
combination) would be prejudicial to
holders
|
Treasury
Stock
CIBM Bank
acquired certain 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 both March 31, 2010 and December 31, 2009, 7,452
shares of treasury stock were directly owned by CIBM Bank and thus were not
excluded from the number of shares outstanding.
17
Regulatory
Capital
CIB
Marine and CIBM Bank are subject to various regulatory capital requirements
administered by the banking agencies. Pursuant to federal bank holding company
and bank regulations, CIB Marine and CIBM Bank 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, banks 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. A bank’s 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, a bank must maintain total risk adjusted
capital, Tier 1 capital and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively, and is not subject to any written agreement order, capital
directives or prompt corrective action directive issued by the Federal Reserve
in the case of CIB Marine or the FDIC in the case of CIBM Bank.
There are
five capital categories defined in the regulations: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Classification of CIBM 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 both
March 31, 2010 and December 31, 2009, 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 its subsidiary bank, nonbank
subsidiaries and the consolidated organization. At December 31, 2009 and March
31, 2010, after the exchange of the Debentures for CIB Marine Preferred, and the
recording the extraordinary gain on the extinguishment of debt, CIB Marine’s
Tier 1 leverage ratio had increased to 12.08% and 12.60%, respectively, well
above the minimum capital requirement.
Effective
April 24, 2009, Marine Bank stipulated to a Cease and Desist Order (“C&D”)
with the Federal Deposit Insurance Corporation (“FDIC”) and the Wisconsin of
Department of Financial Institutions Division of Banking (“WDFI”). The C&D
required, among other things, Marine Bank to take certain corrective actions
which focused on reducing exposure to nonperforming loans, imposed restrictions
on lending to credits with existing nonperforming loans, and accruing interest
on certain delinquent loans in addition to charging-off previously accrued
interest on those loans. Key provisions also included a restriction on paying
dividends without regulatory approval, a requirement to maintain a minimum Tier
1 leverage ratio of 10%, 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
became effective, could have resulted in more severe restrictions and civil
monetary penalties. The C&D was re-affirmed by the FDIC upon the merger of
Marine Bank with and into Central Illinois Bank and continued to be applicable
to CIBM Bank. When Marine Bank merged with and into Central Illinois Bank, to
form CIBM Bank, the Illinois Department of Financial and Professional
Regulation, Division of Banking (“IDFPR”) assumed state regulatory authority.
CIBM Bank entered into a Consent Order with the FDIC and IDFPR in the second
quarter of 2010 that was similar to the order Marine Bank was subject to prior
to its merger with Central Illinois Bank, and included the following additional
provisions; the development of a management plan and the need to implement its
recommendations, the need for board compliance and monitoring of the provisions
of the Consent Order, and a plan for reducing and manage credit concentration.
Generally, enforcement actions such as the Consent Order can be lifted only
after subsequent examinations substantiate complete correction of the underlying
issues.
CIB
Marine continues to focus on the safety and soundness of CIBM Bank. CIB Marine
provided CIBM Bank with $4.0 million of capital during 2009. This is consistent
with CIB Marine’s goal of supporting strong capital and liquidity positions at
CIBM Bank and in keeping with its source of strength obligations under the Bank
Holding Company Act of 1956, as amended. Other capital management strategies
such as balance sheet management and investment portfolio sales can still be
employed by CIBM Bank to enhance its capital ratios.
Under the
definition of capital levels within the Consent Order, a bank is classified as
adequately capitalized if it is at or above the targeted level of capital
specified in the order. At March 31, 2010, CIBM Bank was adequately capitalized
under this definition. As a result of the Consent Order, the Bank is also
restricted from issuing or renewing brokered deposits unless it attains
permission from the FDIC to do so.
18
The
actual and required capital amounts and ratios (as defined in the regulations)
for CIB Marine and CIBM Bank are presented in the tables below.
Actual
|
For Capital
Adequacy Purposes
|
To Be Well
Capitalized Under
Prompt
Corrective
Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
March
31, 2010
|
||||||||||||||||||||||||
Total
capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 95,635 | 16.75 | % | $ | 45,663 | 8.00 | % | ||||||||||||||||
CIBM
Bank
|
76,702 | 13.77 | 44,575 | 8.00 | $ | 55,719 | 10.00 | % | ||||||||||||||||
Tier
1 capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 88,379 | 15.48 | % | $ | 22,831 | 4.00 | % | ||||||||||||||||
CIBM
Bank
|
69,616 | 12.49 | 22,288 | 4.00 | $ | 33,431 | 6.00 | % | ||||||||||||||||
Tier
1 leverage to average assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 88,379 | 12.60 | % | $ | 28,053 | 4.00 | % | ||||||||||||||||
CIBM
Bank (1)
|
69,616 | 10.12 | 27,504 | 4.00 | $ | 34,381 | 5.00 | % | ||||||||||||||||
December
31, 2009
|
||||||||||||||||||||||||
Total
capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 98,461 | 16.51 | % | $ | 47,715 | 8.00 | % | ||||||||||||||||
CIBM
Bank
|
79,120 | 13.59 | 46,566 | 8.00 | $ | 58,208 | 10.00 | % | ||||||||||||||||
Tier
1 capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 90,897 | 15.24 | % | $ | 23,858 | 4.00 | % | ||||||||||||||||
CIBM
Bank
|
71,735 | 12.32 | 23,283 | 4.00 | $ | 34,925 | 6.00 | % | ||||||||||||||||
Tier
1 leverage to average assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 90,897 | 12.08 | % | $ | 30,102 | 4.00 | % | ||||||||||||||||
CIBM
Bank (1)
|
71,735 | 9.79 | 29,317 | 4.00 | $ | 36,646 | 5.00 | % |
(1)
|
Pursuant
to the Consent Order, CIBM Bank is required to maintain a Tier 1 leverage
capital ratio of at least 10% of total assets. At March 31, 2010 and
December 31, 2009, CIBM Bank’s Tier 1 leverage capital ratio to total
assets at the end of the period was 10.26% and 10.31%,
respectively.
|
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
CIBM Bank during the first quarter of 2010 or in 2009. CIBM Bank 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 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
the CIB Marine Preferred has been paid in full for four consecutive
quarters.
Note
10-Loss Per Share
The
following provides a reconciliation of basic and diluted loss per
share:
For the Quarters Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands, except share and per share data)
|
||||||||
Loss
from continuing operations
|
$ | (2,359 | ) | $ | (5,788 | ) | ||
Preferred
stock dividends
|
— |
NA
|
||||||
Net
loss attributable to common stockholders
|
$ | (2,359 | ) | $ | (5,788 | ) | ||
Weighted
average shares outstanding:
|
||||||||
Weighted
average common shares outstanding
|
18,127,943 | 18,333,779 | ||||||
Effect
of dilutive stock options outstanding
|
— | — | ||||||
Basic
|
18,127,943 | 18,333,779 | ||||||
Assumed
conversion of Series B Preferred to common
|
— |
NA
|
||||||
Diluted
|
18,127,943 | 18,333,779 | ||||||
Loss
per share :
|
||||||||
Basic
loss from continuing operations
|
$ | (0.13 | ) | $ | (0.32 | ) | ||
Diluted
loss from continuing operations
|
$ | (0.13 | ) | $ | (0.32 | ) |
19
For each
of the quarters ended March 31, 2010 and 2009, options to purchase 762,137 and
1,091,534 shares, 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 March
31, 2010, 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 period ending March 31, 2010.
Note
11-Stock Option Plans
CIB
Marine has a nonqualified stock option and incentive plan for its employees and
directors. At March 31, 2010, options to purchase 1,003,223 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. At March
31, 2010, CIB Marine had $0.1 million of total unrecognized compensation cost
related to nonvested stock options. That cost is expected to be recognized over
a weighted-average period of 1.8 years.
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 Share
|
|||||||||||||
Shares
under option at January 1, 2010
|
834,320 | $ | 2.17-22.89 | $ | 5.24 | |||||||||||
Granted
|
— | $ | — | $ | — | $ | — | |||||||||
Lapsed
or surrendered
|
(222,397 | ) | 3.70-4.10 | 4.26 | ||||||||||||
Exercised
|
— | — | — | |||||||||||||
Shares
under option at March 31, 2010
|
611,923 | $ | 2.17-22.89 | $ | 6.46 | |||||||||||
Shares
exercisable at March 31, 2010
|
408,623 | $ | 2.17-22.89 | $ | 5.60 |
The
following table shows activity relating to nonvested stock options:
Nonvested
stock options at January 1, 2010
|
277,700 | |||
Granted
|
— | |||
Vested
|
(5,900 | ) | ||
Forfeited
|
(68,500 | ) | ||
Nonvested
stock options at March 31, 2010
|
203,300 |
Fair
value has been estimated using the Black-Scholes model as defined in the
accounting standards. No shares were granted in during the first quarter of 2010
or during the year ended 2009.
The fair
value method resulted in $(0.2) million of compensation benefit due to large
forfeitures in excess of estimates and $0.04 million of compensation expense for
the first quarters of 2010 and 2009, respectively. 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. With the 222,397 shares
under option that lapsed or surrendered during the first quarter of 2010, a
resulting benefit of $0.2 million was recorded in the consolidated statements of
operations.
20
Note
12-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.
March 31,
2010
|
December 31,
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Commitments to extend credit
|
$ | 39,722 | $ | 37,948 | ||||
Standby
letters of credit
|
2,105 | 2,142 | ||||||
Mortgage
related derivatives
|
— | 2,055 |
Lending
Related Commitments
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.
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 loan 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 was $2.1 million at both March 31, 2010 and December 31,
2009, with a weighted average term of approximately 10 months and 11 months at
March 31, 2010 and December 31, 2009, respectively. 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.
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
13-Fair Value
The
following tables present information about CIB Marine’s assets and liabilities
measured at fair value on a recurring basis as of March 31, 2010 and December
31, 2009, 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.
21
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)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S.
government agencies
|
$ | 19,377 | $ | — | $ | 19,377 | $ | — | ||||||||
States
and political subdivisions
|
30,889 | — | 30,889 | — | ||||||||||||
Trust
preferred securities collateralized debt obligations
|
3,518 | — | — | 3,518 | ||||||||||||
Other
debt obligations
|
150 | — | 150 | — | ||||||||||||
Residential
mortgage-backed securities (agencies)
|
63,883 | — | 63,883 | — | ||||||||||||
Residential
mortgage-backed securities (non-agencies)
|
53,061 | — | 53,061 | — | ||||||||||||
Equity
security
|
385 | 385 | — | — | ||||||||||||
Total
|
$ | 171,263 | $ | 385 | $ | 167,360 | $ | 3,518 | ||||||||
December
31, 2009
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S.
government agencies
|
$ | 19,499 | $ | — | $ | 19,499 | $ | — | ||||||||
States
and political subdivisions
|
30,746 | — | 30,746 | — | ||||||||||||
Trust
preferred securities collateralized debt obligations
|
3,662 | — | — | 3,662 | ||||||||||||
Other
debt obligations
|
150 | — | 150 | — | ||||||||||||
Residential
mortgage-backed securities (agencies)
|
70,386 | — | 70,386 | — | ||||||||||||
Residential
mortgage-backed securities (non-agencies)
|
57,554 | — | 57,554 | — | ||||||||||||
Equity
security
|
974 | — | 974 | — | ||||||||||||
Mortgage
forward sale agreement
|
5 | — | 5 | — | ||||||||||||
Mortgage
written options
|
17 | — | 17 | — | ||||||||||||
Total
|
$ | 182,993 | $ | — | $ | 179,331 | $ | 3,662 | ||||||||
Liabilities
|
||||||||||||||||
Mortgage
interest rate lock commitments
|
$ | 17 | $ | — | $ | 17 | $ | — | ||||||||
Total
|
$ | 17 | $ | — | $ | 17 | $ | — |
The
following table presents a roll forward for the quarter ended March 31, 2010, of
fair values measured on a recurring basis using significant unobservable inputs
(Level 3).
Fair Values Measured on a Recurring Basis with Significant Unobservable Inputs (Level 3)
|
||||
March 31, 2010
|
||||
(dollars in thousands)
|
||||
Available
for Sale Securities (1)
|
||||
Beginning
of period balance at January 1, 2010
|
$ | 3,662 | ||
Total
gains or losses (realized/unrealized)
|
||||
Included
in earnings (or changes in net assets)
|
— | |||
Included
in other comprehensive income
|
(136 | ) | ||
Purchases,
issuances and settlements
|
(8 | ) | ||
Transfers
in and/or out of Level 3
|
— | |||
Balance
at March 31, 2010
|
$ | 3,518 | ||
The
amount of total gains or losses for the period included in other
comprehensive income attributable to the change in unrealized gains or
losses relating to assets still held at March 31, 2010
|
$ | 136 |
(1)
Trust
preferred securities collateralized debt obligations.
Gains and
losses (realized and unrealized), included in earnings (or changes in net
assets) for the quarter ended March 31, 2010 (above) are reported in other
revenues as follows:
22
Other
Revenues
|
||||
(Dollars
in thousands)
|
||||
Total
gains or losses in earnings (or changes in net assets) for the period
(above)
|
$ | — | ||
Change
in unrealized gains or losses relating to assets still held at reporting
date
|
(136 | ) |
The
following table presents information about CIB Marine’s assets and liabilities
measured at fair value on a non-recurring basis as of March 31,
2010.
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) in
Period (2)
|
|||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
March
31, 2010
|
||||||||||||||||||||
Assets
|
||||||||||||||||||||
Loans
held for sale
|
$ | 8,684 | $ | — | $ | — | $ | 8,684 | $ | 52 | ||||||||||
Impaired
loans (1)
|
32,745 | — | 32,745 | — | (3,244 | ) | ||||||||||||||
Foreclosed
properties
|
748 | — | 748 | — | (82 | ) | ||||||||||||||
Total
|
$ | 42,177 | $ | — | $ | 33,493 | $ | 8,684 | $ | (3,274 | ) | |||||||||
December
31, 2009
|
||||||||||||||||||||
Assets
|
||||||||||||||||||||
Loans
held for sale
|
$ | 13,451 | $ | — | $ | 300 | $ | 13,151 | $ | (1,775 | ) | |||||||||
Impaired
loans (1)
|
34,735 | — | 34,735 | — | (5,055 | ) | ||||||||||||||
Foreclosed
properties
|
830 | — | 830 | — | (196 | ) | ||||||||||||||
Other
equity investments
|
65 | — | — | 65 | — | |||||||||||||||
Total
|
$ | 49,081 | $ | — | $ | 35,865 | $ | 13,216 | $ | (7,026 | ) |
|
(1)
|
Impaired
loans gains (losses) in period include only those attributable to the
loans represented in the fair value measurements for March 31, 2010 and
December 31, 2009. Total impaired loans at March 31, 2010 and December 31,
2009 were $50.7 million and $51.4 million,
respectively.
|
|
(2)
|
Total
gains (losses) in the quarter ended March 31, 2009 was none for loans held
for sale, $(372) loss for impaired loans, $(8) loss for foreclosed
properties and none for other equity
investments.
|
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 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 U.S.
dollar London InterBank Offered Rate (“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, 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 trust preferred securities
collateralized debt obligations 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. The credit and liquidity premium spreads used in the discount rates
and the credit factors used in deriving cash flows represent significant
unobservable inputs.
23
Loans
Held for Sale. The fair value of loans held for sale, consisting
primarily of commercial mortgage and residential mortgage loans is estimated
based indicative and general sale price levels for commercial mortgages of
similar quality and current prices for similar residential mortgage loans
offered by mortgage correspondent banks. Residential mortgage loans originated
as held for sale are valued using predominantly Level 2 inputs, including loan
prices as provided by correspondent mortgage banks which are closely correlated
with broader market prices for newly originated residential mortgage loans
subject to Fannie Mae underwriting guidelines. 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.
The impairment loss is based on a 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
Foreclosed
Properties. Foreclosed property fair value estimates are derived using
the market approach to valuation using Level 2 inputs, including primarily the
appraised value of the real estate with certain other market correlated or
corroborated information.
The table
below summarizes fair value of financial assets and liabilities at March 31,
2010 and December 31, 2009.
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 55,013 | $ | 55,013 | $ | 35,735 | $ | 35,735 | ||||||||
Loans
held for sale
|
8,684 | 8,684 | 13,451 | 13,451 | ||||||||||||
Securities
available for sale
|
171,263 | 171,263 | 182,971 | 182,971 | ||||||||||||
Loans,
net
|
433,590 | 432,510 | 454,428 | 449,584 | ||||||||||||
Accrued
interest receivable
|
2,697 | 2,697 | 2,847 | 2,847 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
582,841 | 594,784 | 589,450 | 595,001 | ||||||||||||
Short-term
borrowings
|
7,597 | 7,597 | 12,572 | 12,572 | ||||||||||||
Long-term
borrowings
|
13,000 | 13,637 | 18,000 | 18,696 | ||||||||||||
Accrued
interest payable
|
1,058 | 1,058 | 1,204 | 1,204 |
March 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
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
|
$ | 39,722 | $ | — | $ | — | $ | 37,948 | $ | (17 | ) | $ | (17 | ) | ||||||||||
Standby
letters of credit
|
2,105 | (7 | ) | (7 | ) | 2,142 | (6 | ) | (6 | ) | ||||||||||||||
Mortgage
related derivatives
|
— | — | — | 2,055 | (21 | ) | (21 | ) |
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 hold most of its financial
instruments to maturity. Therefore, it is not probable that the fair values
shown will be realized in a current transaction.
24
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.
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.
Loans
Receivable. The fair values of loans receivable were estimated using the
income approach to valuation 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 of loans receivable is
net of the allowance for loan losses.
Federal
Home Loan Bank. There is no market for Federal Home Loan Bank stock and
it may only be sold back to the FHLBC or another member institution at par with
the FHLBC and FHFA’s approval. As a result its cost, also its par amount at this
time, represents its carrying amount. The carrying amount of FHLBC stock was
$11.6 million at both March 31, 2010 and December 31,
2009.
Accrued
Interest Receivable. The carrying amounts of accrued interest approximate
its fair value.
Deposit
Liabilities. The carrying value of deposits with no stated maturity
approximates their fair value as they are payable on demand. The fair value of
fixed time deposits were estimated using the income approach to valuation by
discounting expected future cash flows. 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. Borrowed funds with a maturity greater than three
months for which quoted prices were not available were valued using the income
approach to valuation by discounting expected future cash flows 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 fair market value of long-term borrowings payable were
based on discounted cash flows using current quoted rates as the discount
rate.
Accrued
Interest Payable. The carrying amount of accrued interest is used to
approximate its fair value.
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.
25
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
The
following is a discussion and analysis that presents CIB Marine’s consolidated
financial condition as of March 31, 2010 and its changes in financial condition
and results of operations for the quarters ended March 31, 2010 and March 31,
2009. This discussion should be read in conjunction with the consolidated
financial statements and notes contained in Part I, Item 1 of this Form 10-Q, as
well as CIB Marine’s 2009 Form 10-K.
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q contains statements 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 words and phrases such as
“may,” “project,” “are confident,” “should be,” “predict,” “believe,” “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.
There are
inherent difficulties in predicting factors that may affect the accuracy of
forward-looking statements. These factors include those referenced in Part I,
Item 1A-Risk Factors of CIB Marine’s 2009 Form 10-K, and as may be described
from time to time in CIB Marine’s subsequent Securities and Exchange Commission
(“SEC”) filings, and such factors are incorporated herein by reference. See also
Part II, Item 1-Legal Proceedings of this Form 10-Q.
Shareholders
should note that many factors, some of which are discussed elsewhere in this
Form 10-Q and in the documents that are incorporated by reference, could affect
the future financial results of CIB Marine and could cause those results to
differ materially from those expressed in forward-looking statements contained
or incorporated by reference in this document. These factors, many of which are
beyond CIB Marine’s control, but are not limited to, the risk factors set forth
below:
·
|
operating,
legal, and regulatory
risks;
|
·
|
economic,
political, and competitive forces affecting CIB Marine’s banking
business;
|
·
|
impact
on net interest income from changes in monetary policy and general
economic conditions;
|
·
|
the
risk that CIB Marine’s analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful; and
|
·
|
other
factors discussed under Item 1A, “Risk Factors” below and elsewhere
herein.
|
These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements. Forward-looking
statements speak only as of the date they are made. CIB Marine undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. 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.
Overview
The
following discussion and analysis is presented to assist in the understanding
and evaluation of CIB Marine’s financial condition and results of operations. It
is intended to complement the unaudited consolidated financial statements,
footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q
and should be read in conjunction therewith.
26
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 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.
The critical accounting policies are discussed directly with the Audit Committee
of the Company’s Board of Directors.
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 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. 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
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. 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.
Measurement
of Fair Value. A portion of CIB Marine’s assets and liabilities are
carried at fair value on the Consolidated Balance Sheets, with changes in fair
value recorded either through earnings or other comprehensive income in
accordance with applicable GAAP. These include CIB Marine’s available for sale
securities and other equity securities. The estimation of fair value also
affects certain other loans held for sale, which are not recorded at fair value
but at the lower of cost or market. The determination of fair value is important
for certain other assets, including impaired loans, and other real estate owned
that are periodically evaluated for impairment using fair value
estimates.
27
Fair
value is generally defined as the amount at which an asset or liability could be
exchanged in a current transaction between willing, unrelated parties, other
than in a forced or liquidation sale. Fair value is based on quoted market
prices in an active market, or if market prices are not available, is estimated
using models employing techniques such as matrix pricing or discounting expected
cash flows. The significant assumptions used in the models, which include
assumptions for interest rates, discount rates, prepayments and credit losses,
are independently verified against observable market data where possible. Where
observable market data is not available, the estimate of fair value becomes more
subjective and involves a high degree of judgment. In this circumstance, fair
value is estimated based on management’s judgment regarding the value that
market participants would assign to the asset or liability. This valuation
process takes into consideration factors such as market illiquidity. Imprecision
in estimating these factors can impact the amount recorded on the balance sheet
for a particular asset or liability with related impacts to earnings or other
comprehensive income.
Securities
Available for Sale. Available for sale securities are carried at fair
value with unrealized net gains and losses reported in other comprehensive
income (loss) in stockholders’ equity. Management evaluates securities for OTTI
at least on a quarterly basis and more frequently when economic or market
conditions warrant. 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
OTTI, 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, whether or not CIB Marine intends to sell or it is more
likely than not CIB Marine will be required to sell the security prior to a
period of time sufficient to allow for any anticipated recovery of fair value,
and other factors as detailed in Note 3-Securities Available for Sale to the
consolidated financial statements appearing in this Form
10-Q.
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
Internal Revenue Service (“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.
Results
of Operations
Results
of Operations-Summary
Net loss
from continuing operations for the first quarter of 2010 was $2.4 million or an
improvement of $3.4 million compared to the loss of $5.8 million in the first
quarter of 2009. The reduction in the net loss between periods was due to the
positive impact of the emergence from bankruptcy, which eliminated the interest
on the junior subordinated debentures and lowered legal and accounting expenses,
a reduction in the provision for loan losses as a result of decreased
charge-offs between periods, and a 22% decline in noninterest expense. Interest
expense related to the Debentures was $2.2 million for the first quarter of
2009. The current year provision for loan losses was $0.4 million lower than the
first quarter of 2009 due primarily to lower charge-offs which did not require
the allowance for loan losses to be replenished. Included in the provision for
loan losses for the quarters ended March 31, 2010 and 2009 is $0.3 million and
$2.9 million, respectively, related to two home equity pools.
28
The
following table sets forth selected unaudited consolidated financial data. The
selected unaudited consolidated financial data should be read in conjunction
with the Unaudited Consolidated Financial Statements, including the related
notes.
Selected
Unaudited Consolidated Financial Data
At or for the Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands, except share and per share data)
|
||||||||
Selected
Statements of Operations Data
|
||||||||
Interest
and dividend income
|
$ | 8,130 | $ | 11,041 | ||||
Interest
expense
|
2,653 | 7,359 | ||||||
Net
interest income
|
5,477 | 3,682 | ||||||
Provision
for loan losses
|
2,672 | 3,043 | ||||||
Net
interest income after provision for loan losses
|
2,805 | 639 | ||||||
Noninterest
income (1)
|
504 | 857 | ||||||
Noninterest
expense
|
5,668 | 7,284 | ||||||
Loss
from continuing operations before income taxes
|
(2,359 | ) | (5,788 | ) | ||||
Income
tax expense
|
— | — | ||||||
Net
loss from continuing operations
|
(2,359 | ) | (5,788 | ) | ||||
Net
income from discontinued operations
|
— | — | ||||||
Net
loss
|
$ | (2,359 | ) | $ | (5,788 | ) | ||
Common
Share Data
|
||||||||
Basic
and diluted loss from continuing operations
|
$ | (0.13 | ) | $ | (0.32 | ) | ||
Net
loss
|
(0.13 | ) | (0.32 | ) | ||||
Dividends
|
— | — | ||||||
Book
value per share
|
$ | 1.30 | $ | 0.50 | ||||
Weighted
average shares outstanding-basic
|
18,127,943 | 18,333,779 | ||||||
Weighted
average shares outstanding-diluted
|
18,127,943 | 18,333,779 | ||||||
Financial
Condition Data
|
||||||||
Total
assets excluding assets of company held for disposal
|
$ | 690,552 | $ | 858,076 | ||||
Loans
|
450,544 | 536,918 | ||||||
Allowance
for loan losses
|
(16,954 | ) | (17,206 | ) | ||||
Securities
available for sale
|
171,263 | 234,943 | ||||||
Deposits
|
582,841 | 694,018 | ||||||
Borrowings,
including junior subordinated debentures
|
20,597 | 107,968 | ||||||
Stockholders’
equity
|
83,476 | 9,166 | ||||||
Financial
Ratios and Other Data
|
||||||||
Performance
ratios:
|
||||||||
Net
interest margin (2)
|
3.18 | % | 1.73 | % | ||||
Net
interest spread (3)
|
2.82 | 1.38 | ||||||
Noninterest
income to average assets (4)
|
0.24 | 0.14 | ||||||
Noninterest
expense to average assets
|
3.28 | 3.33 | ||||||
Efficiency
ratio (5)
|
96.30 | 182.65 | ||||||
Loss
on average assets (6)
|
(1.36 | ) | (2.65 | ) | ||||
Loss
on average equity (7)
|
(11.15 | ) | (194.87 | ) | ||||
Asset
quality ratios:
|
||||||||
Nonaccrual
loans, restructured loans and loans 90 days or more past due and still
accruing to total loans (8)
|
11.31 | % | 4.11 | % | ||||
Nonperforming
assets and loans 90 days or more past due and still accruing to total
assets (8)
|
7.49 | 2.79 | ||||||
Allowance
for loan losses to total loans
|
3.76 | 3.20 | ||||||
Allowance
for loan losses to nonaccrual loans, restructured loans and loans 90 days
or more past due and still accruing (8)
|
33.26 | 78.00 | ||||||
Net
charge-offs annualized to average loans
|
1.72 | 3.78 | ||||||
Capital
ratios:
|
||||||||
Total
equity to total continuing assets
|
12.09 | % | 1.07 | % | ||||
Total
risk-based capital ratio
|
16.75 | 8.06 | ||||||
Tier
1 risk-based capital ratio
|
15.48 | 4.03 | ||||||
Leverage
capital ratio
|
12.60 | 3.06 | ||||||
Other
data:
|
||||||||
Number
of employees (full-time equivalent)
|
164 | 172 | ||||||
Number
of banking facilities
|
17 | 17 |
(1)
|
Noninterest
income from continuing operations includes pretax gains on investment
securities of $0.1 million and $0.6 million for the quarters ended March
31, 2010 and 2009, respectively.
|
(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 quarters
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 March 2010 and 2009 had
been shown on a tax-equivalent basis of 35%, the net interest margin would
have been 3.18% and 1.73%,
respectively.
|
(3)
|
Net
interest rate spread is the yield on average interest-earning assets less
the rate on average interest-bearing
liabilities.
|
29
(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 from continuing operations divided by
average total assets.
|
(7)
|
Loss
on average equity is net loss from continuing operations 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.
|
Net
Interest Income
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.
Quarter Ended March 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Interest-earning
assets
|
||||||||||||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||||||
Taxable
(1)
|
$ | 189,455 | $ | 2,246 | 4.74 | % | $ | 280,896 | $ | 3,629 | 5.17 | % | ||||||||||||
Tax-exempt
(2)
|
231 | 3 | 5.19 | 314 | 4 | 5.10 | ||||||||||||||||||
Total
securities available for sale
|
189,686 | 2,249 | 4.74 | 281,210 | 3,633 | 5.17 | ||||||||||||||||||
Loans
held for sale (1)
|
10,233 | 4 | 0.16 | 4,811 | 9 | 0.76 | ||||||||||||||||||
Loans
(1)(3):
|
||||||||||||||||||||||||
Commercial
|
70,878 | 871 | 4.98 | 78,274 | 986 | 5.11 | ||||||||||||||||||
Commercial
real estate (4)
|
296,096 | 3,486 | 4.77 | 347,096 | 4,393 | 5.13 | ||||||||||||||||||
Consumer
|
94,727 | 1,500 | 6.42 | 119,399 | 1,909 | 6.48 | ||||||||||||||||||
Total
loans
|
461,701 | 5,857 | 5.14 | 544,769 | 7,288 | 5.43 | ||||||||||||||||||
Federal
funds sold, reverse repo and interest-earning due from
banks
|
33,440 | 20 | 0.24 | 28,493 | 111 | 1.58 | ||||||||||||||||||
Federal
Home Loan Bank Stock
|
11,555 | — | — | 11,555 | — | — | ||||||||||||||||||
Total
interest-earning assets
|
695,060 | 8,130 | 4.73 | 859,283 | 11,041 | 5.19 | ||||||||||||||||||
Noninterest-earning
assets
|
||||||||||||||||||||||||
Cash
and due from banks
|
10,650 | 29,638 | ||||||||||||||||||||||
Premises
and equipment
|
4,997 | 5,740 | ||||||||||||||||||||||
Allowance
for loan losses
|
(15,877 | ) | (17,770 | ) | ||||||||||||||||||||
Receivables
from sale of stock
|
— | (51 | ) | |||||||||||||||||||||
Accrued
interest receivable and other assets
|
6,484 | 10,459 | ||||||||||||||||||||||
Total
noninterest-earning assets
|
6,254 | 28,016 | ||||||||||||||||||||||
Total
assets
|
$ | 701,314 | $ | 887,299 | ||||||||||||||||||||
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
Interest-bearing
demand deposits
|
$ | 32,010 | $ | 25 | 0.32 | % | $ | 34,036 | $ | 35 | 0.42 | % | ||||||||||||
Money
market
|
111,846 | 276 | 1.00 | 117,374 | 440 | 1.52 | ||||||||||||||||||
Other
savings deposits
|
9,357 | 4 | 0.17 | 8,219 | 6 | 0.30 | ||||||||||||||||||
Time
deposits (4)
|
384,647 | 2,182 | 2.30 | 486,771 | 4,344 | 3.62 | ||||||||||||||||||
Total
interest-bearing deposits
|
537,860 | 2,487 | 1.88 | 646,400 | 4,825 | 3.03 | ||||||||||||||||||
Borrowings-short-term
|
8,483 | 9 | 0.43 | 44,005 | 66 | 0.61 | ||||||||||||||||||
Borrowings-long-term
|
15,556 | 157 | 4.09 | 27,000 | 279 | 4.19 | ||||||||||||||||||
Junior
subordinated debentures
|
— | — | — | 61,857 | 2,189 | 14.16 | ||||||||||||||||||
Total
borrowed funds
|
24,039 | 166 | 2.80 | 132,862 | 2,534 | 7.64 | ||||||||||||||||||
Total
interest-bearing liabilities
|
561,899 | 2,653 | 1.91 | 779,262 | 7,359 | 3.81 | ||||||||||||||||||
Noninterest-bearing
liabilities
|
||||||||||||||||||||||||
Noninterest-bearing
demand deposits
|
48,951 | 50,530 | ||||||||||||||||||||||
Accrued
interest and other liabilities
|
4,694 | 45,461 | ||||||||||||||||||||||
Total
noninterest-bearing liabilities
|
53,645 | 95,991 | ||||||||||||||||||||||
Total
liabilities
|
615,544 | 875,253 | ||||||||||||||||||||||
Stockholders’
equity
|
85,770 | 12,046 | ||||||||||||||||||||||
Total
liabilities and stockholders’ equity
|
$ | 701,314 | $ | 887,299 | ||||||||||||||||||||
Net
interest income and net interest spread (1)(5)
|
$ | 5,477 | 2.82 | % | $ | 3,682 | 1.38 | % | ||||||||||||||||
Net
interest-earning assets
|
$ | 133,161 | $ | 80,021 | ||||||||||||||||||||
Net
interest margin (1)(6)
|
3.18 | % | 1.73 | % | ||||||||||||||||||||
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
1.24 | 1.10 |
(1)
|
Balance
totals include respective nonaccrual
assets.
|
(2)
|
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 March 31, 2010 and 2009 no U.S. federal or state loss
carryback potential remains. Accordingly, 2010 and 2009 are not presented
on a tax-equivalent basis. If March 31, 2010 and 2009 had been shown on a
tax-equivalent basis of 35%, the net interest margin would have been 3.18%
and 1.73%, respectively.
|
30
(3)
|
Interest
earned on loans includes amortized loan fees of $0.03 million and $0.02
million for the quarters ended March 31, 2010 and 2009,
respectively.
|
(4)
|
Interest
rates and amounts include the effects of derivatives entered into for
interest rate risk management and accounted for as fair value
hedges.
|
(5)
|
Net
interest rate spread is the yield on average interest-earning assets less
the rate on interest-bearing
liabilities.
|
(6)
|
Net
interest margin is the ratio of net interest income, on a tax-equivalent
basis, to average interest-earning
assets.
|
Net
interest income increased $1.8 million, or 48.8%, from $3.7 million in the first
quarter of 2009 to $5.5 million in the first quarter of 2010. The increase was
mainly attributable to the elimination of interest expense related to the junior
subordinated debentures in the first quarter of 2010, from $2.2 million in the
first quarter of 2009, partially offset by the affects of the increases in
nonperforming assets. CIB Marine has various strategies to improve net interest
income, including growing loans extended to local commercial banking
relationships, reducing nonperforming loans, reducing interest costs by
improving the compositions of funding liabilities, 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 and adjusting deposit interest rates, which often lag key banking
indices when those indices change rapidly.
Total
interest income decreased $2.9 million, or 26.4%, from $11.0 million in the
first quarter of 2009 to $8.1 million in the first quarter of 2010. The decrease
was due to a $1.4 million, or 19.6% decrease in interest income on loans and a
$1.4 million, or 38.1% decrease in interest income on securities during the
first quarter of 2010 compared to the same period 2009. The decrease in interest
income on the loans resulted primarily from an $83.1 million reduction in
average loan balances and an increase in nonperforming loans. Most of the
balance decrease occurred in commercial real estate which in the table above
includes construction and development loans. The decrease in interest income on
securities resulted from a $91.5 million strategic reduction in average
securities balances.
Total
interest expense decreased $4.7 million, or 63.9%, from $7.4 million in the
first quarter of 2009 to $2.7 million in the first quarter of 2010. The decrease
was primarily due to a $2.2 million, or 100% decrease in interest expense on
junior subordinated debentures and a $2.2 million, or 49.8% decrease in interest
expense on time deposits during the first quarter of 2010 compared to the same
period in 2009. The decrease in interest expense on the junior subordinated
debentures was due to the restructuring. The decrease in interest expense on
time deposits was due to the 132 basis point decline in average interest costs
paid on time deposits and due to a $102.1 million strategic reduction in average
balances for time deposits. CIB Marine reduced time deposit and correspondingly
securities balances to reduce total assets as part of its capital management
strategy and consistent with its liquidity and interest rate risk management
strategies, and due to the limited earning opportunities from the difference in
rates paid on the time deposits versus the available interest rate paid on
government securities of comparable term.
CIB
Marine’s net interest margin, which is the ratio of net interest income to
average interest-earning assets, increased substantially by 145 basis points
from 1.73% during the first quarter of 2009 to 3.18% during the first quarter of
2010 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 144 basis points during the same period.
The net interest margin increase was primarily due to both the elimination of
interest expense on junior subordinated debentures due to the restructuring and
the 115 basis point decline in the average cost of interest-bearing deposits
versus the 46 basis point decline in the average yield on interest-earning
assets.
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.
31
Quarter Ended March 31, 2010 Compared to
Quarter Ended March 31, 2009 (2)
|
||||||||||||||||
Volume
|
Rate
|
Total
|
% Change
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Interest
Income
|
||||||||||||||||
Securities-taxable
|
$ | (1,167 | ) | $ | (216 | ) | $ | (1,383 | ) | (38.11 | )% | |||||
Securities-tax-exempt
(1)
|
(1 | ) | — | (1 | ) | (25.00 | ) | |||||||||
Total
securities
|
(1,168 | ) | (216 | ) | (1,384 | ) | (38.10 | ) | ||||||||
Loans
held for sale
|
5 | (10 | ) | (5 | ) | (55.56 | ) | |||||||||
Commercial
|
(91 | ) | (24 | ) | (115 | ) | (11.66 | ) | ||||||||
Commercial
real estate
|
(614 | ) | (293 | ) | (907 | ) | (20.65 | ) | ||||||||
Consumer
|
(391 | ) | (18 | ) | (409 | ) | (21.42 | ) | ||||||||
Total
loans (including fees)
|
(1,096 | ) | (335 | ) | (1,431 | ) | (19.64 | ) | ||||||||
Federal
funds sold, reverse repo and interest-bearing due from
banks
|
16 | (107 | ) | (91 | ) | (81.98 | ) | |||||||||
Federal
Home Loan Bank Stock
|
— | — | — | — | ||||||||||||
Total
interest income (1)
|
(2,243 | ) | (668 | ) | (2,911 | ) | (26.37 | ) | ||||||||
Interest
Expense
|
||||||||||||||||
Interest-bearing
demand deposits
|
(3 | ) | (7 | ) | (10 | ) | (28.57 | ) | ||||||||
Money
market
|
(20 | ) | (144 | ) | (164 | ) | (37.27 | ) | ||||||||
Other
savings deposits
|
— | (2 | ) | (2 | ) | (33.33 | ) | |||||||||
Time
deposits
|
(790 | ) | (1,372 | ) | (2,162 | ) | (49.77 | ) | ||||||||
Total
deposits
|
(813 | ) | (1,525 | ) | (2,338 | ) | (48.46 | ) | ||||||||
Borrowings-short-term
|
(43 | ) | (14 | ) | (57 | ) | (86.36 | ) | ||||||||
Borrowings-long-term
|
(115 | ) | (7 | ) | (122 | ) | (43.73 | ) | ||||||||
Junior
subordinated debentures
|
(2,189 | ) | — | (2,189 | ) | (100.00 | ) | |||||||||
Total
borrowed funds
|
(2,347 | ) | (21 | ) | (2,368 | ) | (93.45 | ) | ||||||||
Total
interest expense
|
(3,160 | ) | (1,546 | ) | (4,706 | ) | (63.95 | ) | ||||||||
Net
interest income (1)
|
$ | 917 | $ | 878 | $ | 1,795 | 48.75 | % |
(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 March 31, 2010 and 2009, no U.S. federal or state loss
carryback potential remains. Accordingly, 2010 and 2009 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.
|
Provision
for Credit Losses
The
provision for loan losses represents charges made to earnings in order to
maintain an allowance for loan losses and losses. The provision for loan losses
was $2.7 million and $3.0 million for the quarters ended March 31, 2010 and
March 31, 2009, respectively.
The
provision for loan losses continues to be adversely affected by the deteriorated
conditions for real estate and the economy in general. The $3.0 million
provision recorded in the first quarter of 2009 related primarily to the
deterioration in the credit quality of the home equity loan pools. The $2.7
million provision recorded in the first quarter of 2010 related primarily to
deterioration in credit quality of commercial real estate loans, and to a lesser
degree additional provisions for construction and development, commercial and
home equity loans. At March 31, 2010 and December 31, 2009, the remaining
balance of the home equity loan pools was $33.0 million and $35.1 million with
an allocated allowance of $2.8 million and $3.9 million or 8.5% and 11.0% of
remaining balances, respectively.
Noninterest
Income
The
following table presents the significant components of noninterest
income:
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Loan
fees
|
$ | 23 | $ | 29 | ||||
Deposit
service charges
|
218 | 221 | ||||||
Other
service fees
|
26 | 27 | ||||||
Other
income
|
27 | 1 | ||||||
Gain
on sale of securities
|
95 | 551 | ||||||
Net
gain on sale of assets
|
115 | 28 | ||||||
$ | 504 | $ | 857 |
Noninterest
income decreased $0.4 million from $0.9 million for the first quarter of 2009 to
$0.5 million for the first quarter of 2010. The decrease was mostly due to a
$0.5 million decrease in gain recognized on the sale of securities, offset by a
$0.1 million increase on net gain on sale of assets.
32
Noninterest
Expense
The
following table presents the significant components of noninterest
expense:
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Compensation
and employee benefits
|
$ | 2,603 | $ | 4,017 | ||||
Equipment
|
218 | 309 | ||||||
Occupancy
and premises
|
547 | 574 | ||||||
Data
processing
|
194 | 258 | ||||||
Federal
deposit insurance
|
530 | 333 | ||||||
Professional
services
|
561 | 859 | ||||||
Write
down and losses on assets
|
142 | — | ||||||
Other
expense:
|
||||||||
Communications
|
154 | 187 | ||||||
Insurance
|
182 | 100 | ||||||
Loan
servicing fees
|
51 | 79 | ||||||
Other
expense
|
486 | 568 | ||||||
Total
other expense
|
873 | 934 | ||||||
Total
noninterest expense
|
$ | 5,668 | $ | 7,284 |
Total
noninterest expense decreased $1.6 million, or 22.2%, from $7.3 million for the
first quarter of 2009 to $5.7 million for the first quarter of 2010. The
decrease was mostly the result of a $1.4 million decrease in compensation and
employee benefits expense during the first quarter of 2010 compared to the first
quarter of 2009 due to reduced payroll expense, bonuses and the reversal of
stock option expense.
Income
Taxes
No tax
benefit has been recognized on the consolidated net operating losses for 2010
and 2009 due to significant federal and state net operating loss carryforwards
on which the realization of related tax benefits is not “more likely than
not.”
Financial
Condition
Overview
On
December 30, 2009, CIB Marine emerged from Bankruptcy pursuant to the terms of
the Confirmation Order. Under the Plan, the former TruPS Holders exchanged
$107.2 million of cumulative high-interest indebtedness comprising $61.9 million
principal and $45.3 million of accrued interest, for shares of CIB Marine
Preferred valued at $51 million. An extraordinary gain of $54.5 million, net of
amortization costs of $1.2 million and reorganization costs of $0.5 million, was
recorded in the fourth quarter of 2009 on the extinguishment of debt securities
related to the exchange.
CIB
Marine’s total assets decreased $18.1 million from $709.9 million at December
31, 2009 to $691.7 million at March 31, 2010. The decrease in total assets was
mostly due to a $20.8 million decrease in net loans.
Securities
Available for Sale
Total
securities available for sale outstanding at March 31, 2010 were $171.3 million,
a decrease of $11.7 million, or 6.4%, from $183.0 million at December 31, 2009.
The decrease was primarily due to prepayments, repayments, maturities and sales
from the existing portfolio, the proceeds of which were used predominantly to
pay down borrowings and time deposits. In addition, at the CIB Marine parent
company, marketable equity securities with a cost basis of $0.6 million were
sold during the first quarter of 2010 for a gain of $0.1 million.
The net
unrealized loss on available for sale securities was $4.9 million at March 31,
2010, compared to $6.2 million at December 31, 2009. The net unrealized losses
are mainly in other notes and bonds and Non-agency MBS, resulting from adverse
credit quality and decreased liquidity for these securities.
At March
31, 2010, 11.3% of the securities portfolio consisted of U.S. government agency
securities compared to 10.7% at December 31, 2009, and at March 31, 2010, 68.3%
of the portfolio consisted of mortgage-backed securities compared to 69.9% at
December 31, 2009. Obligations of states and political subdivisions represented
18.0% of the portfolio at March 31, 2010, compared to 16.8% at December 31,
2009. The ratio of total securities to total assets was 24.8% and 25.8% at March
31, 2010 and December 31, 2009, respectively.
33
Loans
Held for Sale
Following
the sale of CIB Marine’s Florida banking subsidiary in 2008, the unsold loans
remained part of the portfolio of CIB Marine. During 2009, CIB Marine management
transferred $10.1 million of these loans to loans held for sale and accordingly
charged-off $3.9 million to the allowance for loan losses to reflect their
estimated fair value as a loan held for sale. CIB Marine is using a variety of
methods to sell these loans in an effort to increase its cash balances. During
the first quarter of 2010, CIB Marine sold loans totaling $7.4 million and
transferred another $0.8 million from loans to loans held for sale. At March 31,
2010 and December 31, 2009, loans held for sale were $8.7 million and $13.5
million, respectively. At March 31, 2010, four loans held for sale totaling $3.0
million were nonperforming on nonaccrual status and six loans held for sale
totaling $5.7 million were performing on accrual status.
Loans
Loans,
net of the allowance for loan losses, were $433.6 million at March 31, 2010, a
decrease of $20.8 million, or 4.6%, from $454.4 million at December 31, 2009,
and represented 62.7% and 64.0% of CIB Marine’s total assets at March 31, 2010
and December 31, 2009, respectively. The decrease in loans from December 31,
2009 to March 31, 2010 was primarily due to a decrease in commercial and home
equity loans predominantly reflecting repayments, collections, and for the
latter the impact of charge-offs.
Credit
Concentrations
At March
31, 2010 and December 31, 2009 CIB Marine had no secured borrowing relationships
(loans to one borrower or a related group of borrowers) that exceeded 25% of
stockholders’ equity.
Shown in
the table below are the concentrations in the loan portfolio classified by the
2007 North American Industry Classification System (“NAICS”) codes. At each of
March 31, 2010 and December 31, 2009, CIB Marine had credit relationships within
four industry groups with loans outstanding exceeding 25% of stockholders’
equity as follows:
INDUSTRY
|
Outstanding
Balance
|
% of
Loans
|
% of
Stockholders’
Equity
|
|||||||||
(Dollars in millions)
|
||||||||||||
March
31, 2010
|
||||||||||||
Real
Estate, Rental & Leasing
|
$ | 176.0 | 39 | % | 211 | % | ||||||
Construction
|
56.6 | 13 | 68 | |||||||||
Health
Care & Social Assistance
|
37.6 | 8 | 45 | |||||||||
Accommodation
& Food Services
|
23.2 | 5 | 28 | |||||||||
December
31, 2010
|
||||||||||||
Real
Estate, Rental & Leasing
|
$ | 181.3 | 39 | % | 214 | % | ||||||
Construction
|
63.9 | 14 | 75 | |||||||||
Health
Care & Social Assistance
|
41.1 | 9 | 47 | |||||||||
Accommodation
& Food Services
|
22.9 | 5 | 26 |
34
Allowance
for Loan Losses
CIB
Marine monitors and maintains an allowance for loan losses to absorb an estimate
of probable incurred 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
March 31, 2010, the allowance for loan losses increased to $17.0 million and
3.76% of total loans compared to $16.2 million, and 3.45% of total loans at
December 31, 2009. The increase was primarily related to increases in reserves
for commercial real estate and commercial loans partially offset by a smaller
loan portfolio from declines in balances primarily in commercial loans,
purchased home equity pools and construction and development loans and the
charging-off of portions of the home equity pools previously reserved for in the
allowance for loan losses at December 31, 2009. At March 31, 2010, the allowance
for loan losses excluding those for the home equity pools increased $1.8 million
to $14.2 million or 3.4% of total loans excluding the home equity pools, from
$12.4 or 2.9% of total loans excluding the home equity pools at December 31,
2009. Total charge-offs for the first quarter of 2010 were $3.0 million, while
recoveries were $1.0 million, compared to $5.3 million and $0.3 million,
respectively, for the first quarter of 2009. Net charge-offs from the purchased
home equity loan pools decreased from $3.5 million during the first quarter of
2009 to $1.3 million during the first quarter of 2010. The home equity pools
totaled $33.0 million at March 31, 2010, compared to $35.1 million at December
31, 2009. The allowance for loan losses for the home equity loan pools was $2.8
million or 8.5% of remaining balances at March 31, 2010 and $3.9 million or
11.0% of remaining balances at December 31, 2009, the decline was related to the
decline in outstanding balances as well as charge-offs of loans in the pools
prior reserved for at December 31, 2009. Although CIB Marine believes that the
allowance for loan losses is adequate to absorb probable incurred losses on
existing loans that may become uncollectible, given the conditions of the real
estate markets and 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.
The ratio
of the allowance for loan losses to nonperforming loans excluding those held for
sale was 33% and 31% at March 31, 2010 and December 31, 2009, respectively. The
ratio of the allowance for loan losses to nonperforming loans excluding those
held for sale and excluding impaired loans whose impairments have been
charged-off was 115% and 105% at March 31, 2010 and December 31, 2009,
respectively.
The
following table summarizes changes in the allowance for loan
losses:
Quarter Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Balance
at beginning of period
|
$ | 16,240 | $ | 19,242 | ||||
Loans
charged-off
|
||||||||
Commercial
|
(20 | ) | (388 | ) | ||||
Commercial
real estate
|
(655 | ) | (27 | ) | ||||
Commercial
real estate construction
|
(593 | ) | (1,245 | ) | ||||
Residential
real estate
|
— | (161 | ) | |||||
Home
equity
|
(1,734 | ) | (3,524 | ) | ||||
Consumer
|
(1 | ) | (2 | ) | ||||
Total
loans charged-off
|
(3,003 | ) | (5,347 | ) | ||||
Recoveries
of loans charged-off
|
||||||||
Commercial
|
1 | 200 | ||||||
Commercial
real estate
|
— | — | ||||||
Commercial
real estate construction
|
778 | — | ||||||
Residential
real estate
|
— | 6 | ||||||
Home
equity
|
263 | 61 | ||||||
Consumer
|
3 | 1 | ||||||
Total
loan recoveries
|
1,045 | 268 | ||||||
Net
loans charged-off
|
(1,958 | ) | (5,079 | ) | ||||
Provision
for loan losses
|
||||||||
Commercial
|
420 | (180 | ) | |||||
Commercial
real estate
|
1,465 | 25 | ||||||
Commercial
real estate construction
|
489 | 143 | ||||||
Residential
real estate
|
(14 | ) | 153 | |||||
Home
equity
|
300 | 2,919 | ||||||
Consumer
|
12 | (17 | ) | |||||
Total
provision for loan losses
|
2,672 | 3,043 | ||||||
Ending
balance
|
$ | 16,954 | $ | 17,206 | ||||
Total
loans
|
$ | 450,544 | $ | 536,918 | ||||
Average
total loans
|
461,701 | 544,769 | ||||||
Ratios
|
||||||||
Allowance
for loan losses to total loans
|
3.76 | % | 3.20 | % | ||||
Allowance
for loan losses to nonaccrual loans, restructured loans and loans 90 days
or more past due and still accruing
|
33.26 | 78.00 | ||||||
Net
charge-offs annualized to average total loans:
|
||||||||
Commercial
|
0.11 | 0.97 | ||||||
Commercial
real estate and commercial real estate construction
|
0.64 | 1.49 | ||||||
Residential
real estate, home equity and consumer
|
6.29 | 12.29 | ||||||
Total
loans
|
1.72 | 3.78 | ||||||
Ratio
of recoveries to loans charged-off
|
34.80 | 5.01 |
35
In
determining the adequacy of the allowance for loan losses, management considers
a number of factors to assess the risk and determine the amount of loan loss in
the portfolio at the measurement date. The tables below presents certain
statistics that are indicators of credit risk by loan segment and provides some
supplemental information that, together with the previous discussion, is
intended to assist in obtaining some understanding of the current credit risks
that are in each loan portfolio segment.
Commercial
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 63,689 | 100.0 | % | $ | 71,921 | 100.0 | % | ||||||||
Nonperforming
loans
|
2,674 | 4.2 | 2,642 | 3.7 | ||||||||||||
Nonaccrual
|
2,674 | 4.2 | 2,642 | 3.7 | ||||||||||||
Renegotiated,
accrual
|
— | — | — | — | ||||||||||||
30
or more days past due, accrual
|
597 | 0.9 | 633 | 0.9 | ||||||||||||
Allowance
for loan losses
|
3,172 | 5.0 | 2,771 | 3.9 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
60,877 | 95.6 | 69,304 | 96.4 | ||||||||||||
Allowance
for loan losses for groups of loans
|
1,570 | 2.6 | (1) | 1,513 | 2.2 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
2,811 | 4.4 | 2,617 | 3.6 | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
1,602 | 57.0 |
(1)
|
1,258 | 48.1 |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
119 | % | 105 | % | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
125 |
(2)
|
111 |
(2)
|
As of
March 31, 2010, commercial loans were largely distributed to customers located
in Wisconsin (42%), Illinois (32%), Indiana (19%) and Arizona (7%).
Nonperforming commercial loans were largely distributed to customers located in
Illinois (86%) and Wisconsin (10%). As of December 31, 2009, commercial loans
were largely distributed to customers located in Wisconsin (43%), Illinois
(30%), Indiana (20%) and Arizona (7%). Nonperforming commercial loans were
largely distributed to customers located in Illinois (88%) and Wisconsin
(10%).
Commercial Real Estate
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 242,076 | 100.0 | % | $ | 243,811 | 100.0 | % | ||||||||
Nonperforming
loans
|
19,468 | 8.0 | 19,649 | 8.1 | ||||||||||||
Nonaccrual
|
19,468 | 8.0 | 19,649 | 8.1 | ||||||||||||
Renegotiated,
accrual
|
— | — | — | — | ||||||||||||
30
or more days past due, accrual
|
4,510 | 1.9 | 955 | 0.4 | ||||||||||||
Allowance
for loan losses
|
8,167 | 3.4 | 6,579 | 2.7 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
222,658 | 92.0 | 224,216 | 92.0 | ||||||||||||
Allowance
for loan losses for groups of loans
|
5,222 | 2.3 |
(1)
|
4,417 | 2.0 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
19,418 | 8.0 | 19,595 | 8.0 | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
2,945 | 15.2 |
(1)
|
2,162 | 11.0 |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
42 | % | 33 | % | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
88 |
(2)
|
64 |
(2)
|
As of
March 31, 2010, commercial real estate loans were largely distributed to
customers with properties located in Illinois (48%), Wisconsin (21%), Arizona
(17%) and Indiana (7%). Nonperforming commercial real estate loans were largely
distributed to customers located in Arizona (62%), Wisconsin (32%), Indiana (5%)
and Illinois (1%). As of December 31, 2009, commercial real estate loans were
largely distributed to customers with properties located in Illinois (48%),
Wisconsin (20%), Arizona (17%) and Indiana (7%). Nonperforming commercial real
estate loans were largely distributed to customers located in Arizona (61%),
Wisconsin (32%), Indiana (5%) and Illinois (1%).
As of
March 31, 2010, commercial real estate loans comprise owner occupied real estate
properties ($60.3 million) and non-owner occupied real estate properties ($181.8
million); with non-owner occupied property loan types concentrated in office
space ($49.1 million), retail space ($30.0 million), multifamily residential
($23.8 million), hospitals and clinics ($12.4 million), and hospitality ($15.6
million). As of December 31, 2009, commercial real estate loans comprise owner
occupied real estate properties ($71.0 million) and non-owner occupied real
estate properties ($172.8 million); with non-owner occupied property loan types
concentrated in office space ($48.2 million), retail space ($23.6 million),
multifamily residential ($23.3 million), hospitals and clinics ($20.4 million),
and hospitality ($15.7 million).
36
In April
2010, a $2.8 million participation loan, which was in Loans balance in the table
above and accruing interest at the recent quarter end, was placed on nonaccrual
status. At this time, CIB Marine believes there is sufficient collateral value
supporting the loan such that the reversal of interest income and any change to
the provision for loan losses as a result of placing the loan on nonaccrual
status is not expected to have a material impact on the consolidated statements
of operations.
Construction and Development Loans
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 46,826 | 100.0 | % | $ | 49,795 | 100.0 | % | ||||||||
Nonperforming
loans
|
23,943 | 51.1 | 24,678 | 49.6 | ||||||||||||
Nonaccrual
|
23,943 | 51.1 | 24,678 | 49.6 | ||||||||||||
Renegotiated,
accrual
|
— | — | — | — | ||||||||||||
30
or more days past due, accrual
|
839 | 1.8 | 372 | 0.7 | ||||||||||||
Allowance
for loan losses
|
1,349 | 2.9 | 1,454 | 2.9 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
22,918 | 48.9 | 25,155 | 50.5 | ||||||||||||
Allowance
for loan losses for groups of loans
|
1,324 | 5.8 |
(1)
|
1,428 | 5.7 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
23,907 | 51.1 | 24,640 | 49.5 | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
25 | 0.1 |
(1)
|
25 | 0.1 |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
6 | % | 6 | % | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
639 |
(2)
|
677 |
(2)
|
As of
March 31, 2010, construction and development loans were largely distributed to
customers with properties located in Illinois (38%), Wisconsin (23%), Arizona
(15%), Nevada (13%) and Indiana (10%). Nonperforming construction and
development loans were largely distributed to customers located in Illinois
(43%), Nevada (25%), Arizona (13%), Wisconsin (12%) and Indiana (7%). As of
December 31, 2009, construction and development loans were largely distributed
to customers with properties located in Illinois (39%), Wisconsin (21%), Arizona
(14%), Nevada (12%) and Indiana (11%). Nonperforming construction and
development loans were largely distributed to customers located in Illinois
(44%), Nevada (24%), Arizona (14%), Wisconsin (9%) and Indiana
(7%).
As of
March 31, 2010, construction and development loans primarily comprise loans for
properties with vacant land held for future commercial or residential
development ($28.0 million or 60%) and non-owner occupied construction loans
($16.7 million or 35%) with the majority of the latter concentrated in
condominium and townhome property types ($15.9 million). As of December 31,
2009, construction and development loans primarily comprise loans for properties
with vacant land held for future commercial or residential development ($28.5
million or 57%) and non-owner occupied construction loans ($20.2 million or 41%)
with the majority of the latter concentrated in condominium and townhome
property types ($16.5 million).
Residential (1-4 Family First Lien)
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 17,239 | 100.0 | % | $ | 19,322 | 100.0 | % | ||||||||
Nonperforming
loans
|
3,222 | 18.7 | 3,083 | 16.0 | ||||||||||||
Nonaccrual
|
3,079 | 17.9 | 3,083 | 16.0 | ||||||||||||
Renegotiated,
accrual
|
143 | 0.8 | — | — | ||||||||||||
30
or more days past due, accrual
|
503 | 2.9 | 72 | 0.4 | ||||||||||||
Allowance
for loan losses
|
440 | 2.6 | 454 | 2.4 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
14,103 | 81.8 | 16,318 | 84.5 | ||||||||||||
Allowance
for loan losses for groups of loans
|
251 | 1.8 |
(1)
|
268 | 1.6 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
3,135 | 18.2 | 3,005 | 15.6 | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
189 | 6.0 |
(1)
|
186 | 6.2 |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
14 | % | 15 | % | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
45 |
(2)
|
55 |
(2)
|
As of
March 31, 2010, 1-4 family residential loans were largely distributed to
customers with properties located in Illinois (39%), Wisconsin (30%), Indiana
(20%) and Arizona (10%). As of December 31, 2009, 1-4 family residential loans
were largely distributed to customers with properties located in Illinois (38%),
Wisconsin (29%), Indiana (23%) and Arizona (9%).
37
Home Equity Loans (Line and Term Loans)
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 76,777 | 100.0 | % | $ | 81,832 | 100.0 | % | ||||||||
Nonperforming
loans
|
1,670 | 2.2 | 1,591 | 1.9 | ||||||||||||
Nonaccrual
|
987 | 1.3 | 760 | 0.9 | ||||||||||||
Renegotiated,
accrual
|
683 | 0.9 | 831 | 1.0 | ||||||||||||
30
or more days past due, accrual
|
1,784 | 2.3 | 1,917 | 2.3 | ||||||||||||
Allowance
for loan losses
|
3,750 | 4.9 | 4,920 | 6.0 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
75,344 | 98.1 | 80,315 | 98.1 | ||||||||||||
Allowance
for loan losses for groups of loans
|
3,659 | 4.9 |
(1)
|
4,766 | 5.9 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
1,433 | 1.9 | 1,517 | 1.9 | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
92 | 6.4 |
(1)
|
154 | 10.2 |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
225 | % | 309 | % | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
225 |
(2)
|
309 |
(2)
|
As of
March 31, 2010, home equity loans include two purchased home equity pools
totaling $33.0 million or 43% of the loan segment balances at quarter-end 2010.
Remaining loans in the pools were distributed across the United States, with the
largest concentrations in Texas (14%), California (9%), Virginia (6%), Georgia
(5%), Washington (4%) and Minnesota (4%). The remainder of the home equity loans
not part of the purchased home equity pools were largely distributed to
customers with properties located in Illinois (22%), Wisconsin (22%), Indiana
(10%) and Arizona (3%). As of December 31, 2009, home equity loans include two
purchased home equity pools totaling $35.1 million or 43% of the loan segment
balances at year-end 2009. Remaining loans in the pools were distributed across
the United States, with the largest concentrations in Texas (14%), California
(10%), Virginia (6%) and Georgia (5%). The remainder of the home equity loans
not part of the purchased home equity pools were largely distributed to
customers with properties located in Illinois (16%), Wisconsin (17%), Indiana
(7%) and Arizona (6%).
Consumer Loans
|
March 31, 2010
|
December 31, 2009
|
||||||||||||||
Balances
|
% of Balances
|
Balances
|
% of Balances
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Loans
|
$ | 2,704 | 100.0 | % | $ | 2,701 | 100.0 | % | ||||||||
Nonperforming
loans
|
— | — | — | — | ||||||||||||
Nonaccrual
|
— | — | — | — | ||||||||||||
Renegotiated,
accrual
|
— | — | — | — | ||||||||||||
30
or more days past due, accrual
|
22 | 0.8 | 8 | 0.3 | ||||||||||||
Allowance
for loan losses
|
76 | 2.8 | 63 | 2.3 | ||||||||||||
Loans
assessed in groups of loans for allowance for loan losses
|
2,693 | 99.6 | 2,701 | 100.0 | ||||||||||||
Allowance
for loan losses for groups of loans
|
70 | 2.6 |
(1)
|
63 | 2.3 |
(1)
|
||||||||||
Loans
assessed individually for allowance for loan losses
|
11 | 0.4 | — | — | ||||||||||||
Allowance
for loan losses for individually impaired loans
|
6 | 51.7 |
(1)
|
— | — |
(1)
|
||||||||||
Allowance
for loan losses/nonperforming loans
|
NA
|
% |
NA
|
% | ||||||||||||
Allowance
for loan losses/nonperforming loans less charged down impaired
loans
|
NA
|
(2) |
NA
|
(2) |
As of
March 31, 2010, consumer loans were largely distributed to customers located in
Wisconsin (49%), Illinois (20%), Indiana (22%) and Arizona (9%). As of December
31, 2009, consumer loans were largely distributed to customers located in
Wisconsin (51%), Illinois (23%), Indiana (18%) and Arizona (8%).
|
(1)
|
%
of respective ALLL assessment
group.
|
|
(2)
|
Nonperforming
loans less those that are impaired and have been fully charged down to
their estimated impairment value and have no additional reserves allocated
to them at this time.
|
38
Nonperforming
Assets and Loans 90 Days or More Past Due and Still Accruing Interest
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 accounted for as troubled debt restructured
(“TDR”) 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. 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.
Once this assurance is reached the TDR is classified as a restructured loan. As
of March 31, 2010, there were $14.4 million TDR loans of which $13.6 million
were classified as nonaccrual and $0.8 million were classified as restructured
loans. 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.
March 31, 2010
|
December 31, 2009
|
March 31, 2009
|
||||||||||
(Dollars in thousands)
|
||||||||||||
Nonperforming
Assets
|
||||||||||||
Nonaccrual
loans:
|
||||||||||||
Commercial
|
$ | 3,647 | $ | 3,615 | $ | 1,323 | ||||||
Commercial
real estate
|
18,496 | 18,676 | 4,016 | |||||||||
Commercial
real estate construction
|
23,943 | 24,678 | 14,874 | |||||||||
Residential
real estate
|
3,079 | 3,083 | 1,702 | |||||||||
Home
equity
|
987 | 760 | — | |||||||||
Consumer
|
— | — | — | |||||||||
50,152 | 50,812 | 21,915 | ||||||||||
Loans
held for sale
|
2,994 | 7,056 | 2,025 | |||||||||
Total
nonaccrual loans
|
53,146 | 57,868 | 23,940 | |||||||||
Foreclosed
properties
|
748 | 830 | 1,901 | |||||||||
Restructured
loans
|
827 | 831 | 143 | |||||||||
Total
nonperforming assets
|
$ | 54,721 | $ | 59,529 | $ | 25,984 | ||||||
Loans
90 Days or More Past Due and Still Accruing
|
||||||||||||
Loans
held for sale
|
$ | — | $ | — | $ | 2,180 | ||||||
Allowance
for loan losses
|
$ | 16,954 | $ | 16,240 | $ | 17,206 | ||||||
Total
loans
|
$ | 450,544 | $ | 470,668 | $ | 536,918 | ||||||
Ratios:
|
||||||||||||
Nonaccrual
loans to total loans (2)
|
11.13 | % | 10.80 | % | 4.08 | % | ||||||
Foreclosed
properties to total assets (1)
|
0.11 | 0.12 | 0.22 | |||||||||
Nonperforming
assets to total assets (1) (2)
|
7.49 | 7.40 | 2.79 | |||||||||
Nonaccrual
loans, restructured loans and loans 90 days or more past due and still
accruing to total loans (2)
|
11.31 | 10.97 | 4.11 | |||||||||
Nonperforming
assets and loans 90 days or more past due and still accruing to total
assets (1)(2)
|
7.49 | 7.40 | 2.79 |
|
(1)
|
For
comparative purposes, all periods presented exclude the assets of company
held for disposal.
|
|
(2)
|
Excludes
loans held for sale from nonaccrual
loans.
|
Excluding
loans held for sale, nonaccrual loans decreased $0.7 million from $50.8 million
at December 31, 2009 to $50.1 million at March 31, 2010. The ratio of nonaccrual
loans to total loans was 11.1% at March 31, 2010, compared to 10.8% at December
31, 2009.
At March
31, 2010, CIB Marine had twelve 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 twelve relationships
accounted for $39.7 million, or 79.2%, of nonaccrual loans excluding those held
for sale. At December 31, 2009, CIB Marine had twelve relationships with
nonaccrual balances in excess of $1.0 million and they accounted for $40.4
million in balances, or 79.5% of nonaccrual loans at that date. As of March 31,
2010, all but one of the nonaccrual credit relationships were commercial real
estate and these relationships were geographically distributed as
follows:
|
·
|
$16.3
million in Arizona and Nevada consisting of five
relationships
|
|
·
|
$12.6
million in Illinois consisting of three
relationships
|
|
·
|
$9.0
million in Wisconsin consisting of three
relationships
|
|
·
|
$1.7
million in Indiana consisting of one
relationship
|
39
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.
Foreclosed
properties were $0.7 million and consisted of four properties at March 31, 2010
compared to $0.8 million and four properties at December 31, 2009. During the
first quarter of 2010 CIB Marine recorded a $0.1 million write-down on one
property. One property accounted for $0.5 million or 71.1% or the total
foreclosed property balance at March 31, 2010. This property was acquired in
2009 and is located in Florida.
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. Impaired loans decreased
$0.7 million from $51.4 million at December 31, 2009 to $50.7 million at March
31, 2010. The decrease was primarily due to $0.7 million in payments, $0.8
million in charge-offs and $0.8 million transferred to loans held for sale,
offset by $1.7 million of additional loans added to impaired loans. The decline
in performance of loans, and in particular those classified as nonaccrual loans,
caused an increase in impaired loans. The increase reflects the adverse impact
of the current commercial and residential real estate environment, including
slower sales, higher vacancy rates and reduced prices. The specific allowances
related to impaired loans increased by an amount that was less than
proportionate to the increase in impaired loans. This is due to charge-offs
related to loans and their respective impairment amounts and due to each new
impaired loan’s respective impairment analysis, including the level of expected
discounted cash flows and collateral valuations.
The
following table sets forth information regarding impaired loans:
March 31, 2010
|
December 31, 2009
|
March 31, 2009
|
||||||||||
(Dollars in thousands)
|
||||||||||||
Impaired
loans without a specific allowance
|
$ | 36,265 | $ | 36,205 | $ | 8,040 | ||||||
Impaired
loans with a specific allowance
|
14,452 | 15,168 | 13,322 | |||||||||
Total
impaired loans
|
50,717 | 51,373 | 21,362 | |||||||||
Specific
allowance related to impaired loans
|
$ | 4,859 | $ | 3,785 | $ | 3,460 |
Potential
Problem Loans
The level
of potential problem commercial, commercial real estate and construction and
development loans (“Potential Problem Loans”) is another factor in determining
the level of risk in the portfolio and in determining the level of the allowance
for loan loss. Potential Problem Loans are those rated as substandard by
management, but not in a nonperforming status, and where the circumstances of
the borrower presents enough doubt as to the ability of the borrower to comply
with the contractual repayment terms of the loans. The Potential Problem Loans
cover a diverse range of businesses and real estate property types. At March 31,
2010, Potential Problem Loans totaled $10.3 million compared to $12.0 million at
December 31, 2009. The composition at March 31, 2010 was $2.6 million and $7.7
million in commercial real estate and construction and development loans,
respectively, compared to $2.3 million and $8.6 million at December 31, 2009.
The continued elevated level of Potential Problem Loans highlights management’s
heightened level of uncertainty of the pace, magnitude and duration at which a
commercial credit and any related collateral may deteriorate.
Company
Held for Disposal
See Note
5-Company Held for Disposal and Discontinued Operations included in Part I, Item
1 of this Form 10-Q for information.
40
Deposit
Liabilities
Total
deposits, were $582.8 million at March 31, 2010 and $589.5 million at December
31, 2009. Time deposits represent the largest component of deposits. The
percentage of time deposits to total deposits was 65.0% at March 31, 2010 and
65.6% at December 31, 2009, reflecting CIB Marine’s reliance on time deposits as
a primary source of funding. At March 31, 2010 time deposits of $100,000 or more
amounted to $113.3 million, or 29.9%, of total time deposits, compared to $112.9
million, or 29.2%, at December 31, 2009. The Bank has in the past accepted
brokered time deposits to meet short-term funding needs and/or when their
related costs are at or below those being offered on other deposits at this time
CIBM Bank has not been granted authority to accept or renew brokered deposits.
Brokered time deposits were $3.0 million, or 0.8%, of total time deposits at
March 31, 2010, and $8.0 million, or 2.1%, of total time deposits at December
31, 2009.
Borrowings
CIB
Marine uses 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 decreased $10.0 million from $30.6 million at
December 31, 2009 to $20.6 million at March 31, 2010. The decrease was
attributable to a $5.0 million reduction of short-term borrowings and a $5.0
million reduction of long-term FHLBC borrowings during the first quarter of
2010.
During
the first quarter of 2010, the availability of federal funds purchased by the
Bank with correspondent banks continued to be contingent on the Bank’s ability
to pledge fixed income investment securities as collateral for such
borrowings.
Liquidity
CIB
Marine monitors and manages its liquidity position so that funds will be
available at a reasonable cost to meet financial commitments, to finance
business expansion and to take advantage of unforeseen opportunities. Liquidity
management involves projecting funding requirements and maintaining sufficient
capacity to meet those needs and accommodate fluctuations in asset and liability
levels due to changes in business operations or unanticipated
events.
CIB
Marine manages liquidity at two levels, the CIB Marine parent company and CIBM
Bank. The management of liquidity at both levels is essential because the parent
company and the Bank have different funding needs and sources, and are subject
to certain regulatory guidelines and requirements. The Asset-Liability
Management Committee is responsible for establishing a liquidity policy,
approving operating and contingency procedures and monitoring liquidity on an
ongoing basis. In order to maintain adequate liquidity through a wide range of
potential operating environments and market conditions, CIB Marine conducts
liquidity management and business activities in a manner designed to preserve
and enhance funding stability, flexibility and diversity of funding sources. Key
components of this operating strategy include a strong focus on customer-based
funding, maximizing secured borrowing capacity, maintaining relationships with
wholesale market funding providers, and maintaining the ability to liquidate
certain assets if conditions warrant.
The
objective of liquidity risk management at CIBM Bank is to ensure that it has
adequate funding capacity for commitments to extend credit, deposit account
withdrawals, maturities of borrowings and other obligations in a timely manner.
The liquidity position of CIBM Bank is actively managed by estimating, measuring
and monitoring its sources and uses of funds. CIBM Bank’s primary source of
funds are from deposits, loan repayments and investment payments and maturities.
CIBM Bank also makes use of noncore funding sources in a manner consistent with
its 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 CIBM Bank include federal funds purchased,
securities sold under agreements to repurchase, short-term borrowings from the
FHLBC and short-term brokered and negotiable time deposits. CIBM Bank has also
established and maintained secured guidance lines with the Federal Reserve Bank
and nonaffiliated banks. Long-term funding sources, other than core deposits,
include long-term time deposits and long-term borrowings from the FHLBC.
Additional sources of liquidity include cash and cash equivalents, federal funds
sold, sale of loans held for sale and the sale of securities. During the first
quarter of 2010, the availability of federal funds purchased for CIBM Bank with
correspondent banks continued to be contingent on pledges of fixed income
securities. Additionally, pursuant to the aforementioned agreement between CIB
Marine and the Federal Reserve Bank, the CIB Marine parent company, excluding
its subsidiaries, must obtain Federal Reserve Bank approval before incurring
additional borrowing or debt.
41
CIB
Marine’s most readily available source of liquidity is its cash and cash
equivalents which increased from $35.7 million at December 31, 2009 to $55.0
million at March 31, 2010.
Another
source of liquidity available to CIBM Bank either as a liquid asset or as
collateral to be pledged for borrowings is its investment portfolio. Investment
securities available for sale totaled $171.3 million and $183.0 million at March
31, 2010 and December 31, 2009, respectively. At March 31, 2010, $29.3 million
pledged liabilities and contingent liabilities were outstanding, included $13.0
million to the FHLBC, $7.4 million to repurchase agreement customers and $8.9
million combined to public deposit customers, treasury tax and loan notes, and
guarantees of letters of credit issued for our customers by a correspondent
bank. Required pledged securities totaled $33.8 million in fair market value to
collateralize these current outstanding liabilities and contingent liabilities.
Pledged securities of $66.9 million at March 31, 2010 are in excess of pledging
requirements and are generally available for pledge release and in many cases
they provide borrowing availability used by CIBM Bank for managing its
liquidity. At December 31, 2009, $35.4 million pledged liabilities and
contingent liabilities were outstanding requiring pledged securities with a
market value of $50.5 million.
Deposits
originating from within CIB Marine’s markets are CIBM Bank’s primary source of
funding. Total deposits less brokered and pledged deposits, totaled $579.8
million and $581.4 million at March 31, 2010 and December 31, 2009,
respectively.
Traditionally,
a main source of cash for the CIB Marine parent company is dividend payments
received from its subsidiaries. Limitations imposed by the state regulators
currently prohibit CIBM Bank from paying a dividend to CIB Marine without the
prior written approval of the regulators. The CIB Marine parent company did not
receive any dividend payments from CIBM Bank during the first quarter of 2010
and, at March 31, 2010, CIBM Bank did not have any retained earnings available
for the payment of dividends to CIB Marine without first obtaining the consent
of its regulators. During the first quarter of 2010, the CIB Marine parent
company received a $2.0 million return of capital from its non-bank subsidiary,
CIB Marine Capital, LLC. At March 31, 2010, the CIB Marine parent company had
$6.0 million in total cash and cash equivalents, and $0.4 million in marketable
securities. In addition, a subsidiary of the parent company had $1.4 million in
cash and due from banks, $8.3 million in loans held for sale and $1.4 million in
net loans at March 31, 2010. According to the Bank Holding Company Act of 1956,
as amended, “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 CIBM Bank. During
2009, CIB Marine provided $4.0 million in capital to CIBM Bank to support CIBM
Bank in maintaining an “adequately-capitalized” position and to ensure that its
Tier 1 leverage ratio exceeded the regulatory mandate. CIB Marine monitors the
relationship between cash obligations and available cash resources, and
believes, at this time, that the parent company has sufficient liquidity to meet
its currently anticipated short and long-term needs.
Capital
CIB
Marine and CIBM Bank 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:
March 31, 2010
|
December 31, 2009
|
|||||||
(Dollars in thousands)
|
||||||||
Risk-weighted
assets
|
$ | 570,786 | $ | 596,438 | ||||
Average
assets(1)
|
$ | 701,313 | $ | 752,541 | ||||
Capital
components
|
||||||||
Stockholders’
equity
|
$ | 83,476 | $ | 84,695 | ||||
Add:
unrealized loss on securities
|
4,853 | 6,183 | ||||||
Less:
unrealized income on equities
|
50 | 19 | ||||||
Tier
1 capital
|
88,379 | 90,897 | ||||||
Allowable
allowance for loan losses
|
7,256 | 7,564 | ||||||
Tier
2 capital
|
7,256 | 7,564 | ||||||
Total
risk-based capital
|
$ | 95,635 | $ | 98,461 |
42
Actual
|
Minimum Required To
be Adequately
Capitalized
|
|||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
Total
capital to risk weighted assets
|
$ | 95,635 | 16.75 | % | $ | 45,663 | 8.00 | % | ||||||||
Tier
1 capital to risk weighted assets
|
88,379 | 15.48 | 22,831 | 4.00 | ||||||||||||
Tier
1 leverage to average assets
|
88,379 | 12.60 | 28,053 | 4.00 | ||||||||||||
December
31, 2009
|
||||||||||||||||
Total
capital to risk weighted assets
|
$ | 98,461 | 16.51 | % | $ | 47,715 | 8.00 | % | ||||||||
Tier
1 capital to risk weighted assets
|
90,897 | 15.24 | 23,858 | 4.00 | ||||||||||||
Tier
1 leverage to average assets
|
90,897 | 12.08 | 30,102 | 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.
|
As shown
in the table above, at March 31, 2010 and December 31, 2009, CIB Marine’s ratios
exceeded the minimum capital adequacy requirements.
At both
March 31, 2010 and December 31, 2009, 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 its subsidiary bank, nonbank
subsidiaries and the consolidated organization. As of March 31, 2009, CIB
Marine’s Tier 1 leverage ratio had declined to 3.06% and was below the 4.0%
required by the Written Agreement. At December 31, 2009, after the emergence
from Bankruptcy and the issuance of the CIB Marine Preferred in exchange for the
Debentures, and the related gain on the extinguishment of debt, CIB Marine’s
Tier 1 leverage ratio had increased to 12.08%, well above the minimum capital
requirement. At March 31, 2010, the Tier 1 leverage ratio increased to 12.60%.
Depending on the overall size of its balance sheet and respective risk
weightings for those assets, as wells as the extent of continuing losses
incurred by CIB Marine in future periods including those resulting from security
and loan related credit losses, write-downs in loans held for sale or other real
estate owned, or non-credit related OTTI from securities, CIB Marine’s capital
ratios could decline in the future.
Marine
Bank stipulated to a C&D, effective April 2009. Key provisions included a
restriction on paying dividends without regulatory approval and a requirement to
maintain a minimum Tier 1 leverage ratio of 10%. Failure to adhere to the
requirements of the actions mandated by the C&D, once it became effective,
could have resulted in more severe restrictions and civil monetary penalties.
When Marine Bank merged with and into Central Illinois Bank, to form CIBM Bank,
the IDFPR assumed state regulatory authority. CIBM Bank entered into
a Consent Order with the FDIC and IDFPR in the second quarter of 2010 that was
similar to the order Marine Bank was subject to prior to its merger with Central
Illinois Bank, and included the following additional provisions; the development
of a management plan and the need to implement its recommendations, the need for
board compliance and monitoring of the provisions of the Consent Order, and a
plan to reduce and manage credit concentrations. CIB Marine and CIBM Bank remain
committed to maintaining adequate capital levels at CIBM Bank. Generally,
enforcement actions such as the Consent Order can be lifted only after
subsequent examinations substantiate complete correction of the underlying
issues. At March 31, 2010, CIBM Bank’s Tier 1 leverage capital ratio to total
assets at the end of the period was 10.26%.
CIB
Marine continues to focus on the safety and soundness of CIBM Bank. CIB Marine
provided CIBM Bank with $4.0 million of capital during 2009. Other capital
management strategies such as balance sheet management and investment portfolio
sales can still be employed by CIB Marine and CIBM Bank to enhance its capital
ratios.
CIB
Marine’s stockholders’ equity was $83.5 million at March 31, 2010 compared to
$84.7 million at December 31, 2009. The decrease in 2010 was primarily the
result of a net loss from continuing operations of $2.4 million. Additionally,
in 2010, stockholders’ equity was positively impacted by a $1.3 million
reduction in accumulated other comprehensive loss.
43
The
emergence from Bankruptcy and the implementation of the Plan aided CIB Marine
for the following reasons:
|
·
|
The
exchange of the high-interest indebtedness for CIB Marine Preferred
provided CIB Marine with a more stable capital
structure;
|
|
·
|
The
elimination of $107.2 million of indebtedness from CIB Marine’s balance
sheet significantly improved its regulatory capital
position;
|
|
·
|
The
interest expense related to the Debentures as reflected in the
Consolidated Statements of Income was $2.2 million for the first quarter
of 2009 and $6.3 million for the full year 2009. No interest expense on
the Debentures will be reflected in 2010 operating
results;
|
|
·
|
The
Plan allowed for the substitution of noncumulative 7% dividends on the CIB
Marine Preferred for higher-rate cumulative interest on the Debentures,
thereby improving operating
results.
|
By
eliminating the Debentures and thus improving its balance sheet, regulatory
capital position and operating results, CIB Marine positioned itself to seek a
business combination transaction on terms that could be more advantageous to CIB
Marine and result in greater value for both its CIB Marine Preferred and its
common shareholders. Subsequent to the emergence from Bankruptcy, CIB Marine
engaged Stifel Nicholas and Company, Incorporated to assist management in
identifying and contacting other bank holding companies regarding a possible
merger or business combination involving the Company.
Off-Balance
Sheet Arrangements
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.
The
Company utilizes a variety of financial instruments in the normal course of
business to meet the financial 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. A discussion of the Company’s lending-related commitments and
contingent liabilities is included in Note 12-Commitments, Off-Balance Sheet
Arrangements, and Contingent Liabilities, of the notes to the consolidated
financial statements included in Part I, Item 1 of this Form 10-Q.
Impact
of Inflation and Changing Prices
CIB
Marine’s consolidated financial statements and notes contained in Part I, Item 1
of this Form 10-Q 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
On May
10, 2010, the Bankruptcy Court issued its Final Decree thereby closing the
Chapter 11 bankruptcy case for CIB Marine.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since
December 31, 2009, CIB Marine’s market risk profile has not changed
significantly and net interest income over the next year continues to favor
declining interest rates over rising interest rates. For additional information
regarding CIB Marine’s market risk, refer to the 2009 Form 10-K, which is on
file with the SEC.
The
following table illustrates the period and cumulative interest rate sensitivity
gap as of March 31, 2010.
44
Repricing
Interest Rate Sensitivity Analysis
0-3
Months
|
4-6
Months
|
7-12
Months
|
2-5
Years
|
Over 5
Years
|
Total
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||
Loans
|
$ | 228,314 | $ | 29,553 | $ | 44,016 | $ | 146,688 | $ | 1,973 | $ | 450,544 | ||||||||||||
Securities
|
27,856 | 11,935 | 27,189 | 75,211 | 29,072 | 171,263 | ||||||||||||||||||
Loans
held for sale
|
8,684 | — | — | — | — | 8,684 | ||||||||||||||||||
Reverse
repurchase securities and federal funds sold
|
500 | — | — | — | — | 500 | ||||||||||||||||||
Total
interest-earning assets
|
265,354 | 41,488 | 71,205 | 221,899 | 31,045 | 630,991 | ||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Time
deposits
|
85,595 | 62,473 | 126,958 | 103,498 | 190 | 378,714 | ||||||||||||||||||
Savings
and interest-bearing demand deposits
|
153,844 | — | — | — | — | 153,844 | ||||||||||||||||||
Short-term
borrowings
|
7,597 | — | — | — | — | 7,597 | ||||||||||||||||||
Long-term
borrowings
|
— | — | 3,000 | 10,000 | — | 13,000 | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 247,036 | $ | 62,473 | $ | 129,958 | $ | 113,498 | $ | 190 | $ | 553,155 | ||||||||||||
Interest
sensitivity gap (by period)
|
18,318 | (20,985 | ) | (58,753 | ) | 108,401 | 30,855 | 77,836 | ||||||||||||||||
Interest
sensitivity gap (cumulative)
|
18,318 | (2,667 | ) | (61,420 | ) | 46,981 | 77,836 | 77,836 | ||||||||||||||||
Cumulative
gap as a % of total assets
|
2.65 | % | (0.39 | )% | (8.88 | )% | 6.79 | % | 11.25 | % |
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 rates 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 March
31, 2010 and December 31, 2009, except that downward rate changes are limited
across the yield curves by a floor of 0.25% for purposes of performing the
analysis.
Basis point changes
|
||||||||||||||||
+200
|
+100
|
-100
|
-200
|
|||||||||||||
Net
interest income change over one year:
|
||||||||||||||||
March
31, 2010
|
(5.05 | )% | (2.30 | )% | (4.70 | )% | (6.94 | )% | ||||||||
December
31, 2009
|
1.03 | % | 0.97 | % | (5.52 | )% | (10.52 | )% |
ITEM
4T. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
CIB
Marine’s management, under the supervision and with the participation of its
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of CIB Marine’s disclosure controls and procedures
as of March 31, 2010. Based on this evaluation, CIB Marine’s Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of March 31, 2010.
(b)
Changes in Internal Control over Financial Reporting
There
were no changes in CIB Marine's internal control over financial reporting during
the quarter ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, CIB Marine's internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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 since the filing of the 2009 Form
10-K.
45
ITEM
1A. RISK FACTORS
Shareholders
or potential investors should carefully consider the risks and uncertainties
described in Part I, Item 1A. Risk Factors in CIB Marine’s 2009 Form 10-K and
the updated risk factors below as well as the other information in its
subsequent filings with the SEC, including this Quarterly Report on Form 10-Q.
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.
CIBM
Bank is subject to a formal enforcement action with regulatory
authorities.
Under
applicable laws, the FDIC, as CIBM Bank’s primary federal regulator and deposit
insurer, and the IDFPR, as CIBM Bank’s chartering authority, have the ability to
impose additional sanctions, restrictions and requirements on CIBM Bank if they
determine, upon examination or otherwise, violations of laws with which CIBM
Bank 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. CIBM Bank entered into a
Consent Order with the FDIC and IDFPR in the second quarter of 2010. Key
provisions included a restriction on paying dividends without regulatory
approval, a requirement to maintain a minimum Tier 1 leverage ratio of 10%,
retain qualified management, revise lending policies and procedures focused on
documentation, maintain an appropriate loan review and grading system, adopt a
comprehensive budget, develop a management plan and the need to implement its
recommendations, develop the need for board compliance and monitoring of the
provisions of the Consent Order, and develop a plan for reducing and managing
credit concentration. Generally, enforcement actions such as the Consent Order
can be lifted only after subsequent examinations substantiate complete
correction of the underlying issues. Failure to adhere to the requirements of
the actions mandated by the Consent Order can result in more severe restrictions
and civil monetary penalties.
The
purchased home equity loan pools creates special risks which may cause
charge-offs and the allowance for loan losses to increase.
The
determination of the level of the allowance for loan losses for the purchased
home equity loan pools is based on various factors including, but not limited
to, historical charge-off for the pool of loans, the level of current
delinquencies in the portfolio and their corresponding loss estimates, the
qualitative factors regarding credit risks, expected future pay downs and
prepayments, and environmental factors. Since 2008, CIB Marine has charged-off
the full amount of outstanding individual loan balances in the home equity loan
pools once the respective loan became 90 days past due. An estimate of future
losses within the home equity loan pools is included in the allowance for loan
losses and monitored monthly to ensure that the actual charge-offs are tracking
against loss expectations. If necessary, and as with other loan assets,
adjustments are made to the allowance for loan loss to account for further
deterioration in credit quality. There can be no assurance that future losses
will match the loss expectations, which could result in increased levels of loan
loss provisions and charge-offs, negatively impacting the consolidated results
of operations.
ITEM
6. EXHIBITS
Exhibit
2.1-Final Decree by the United States Bankruptcy Court for the Eastern District
of Wisconsin.
Exhibit
10.1-Services Agreement with Daniel J. Rasmussen (incorporated by reference to
Exhibit 99.1 to Current Report on Form 8-K dated January 8, 2010).
Exhibit
31.1-Certification of John P. Hickey, Jr., Chief Executive Officer, under Rule
13a-14(a)/15d-14(a).
Exhibit
31.2-Certification of Edwin J. Depenbrok, Chief Financial Officer, under Rule
13a-14(a)/15d-14(a).
Exhibit
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 the Sarbanes-Oxley
Act of 2002.
Exhibit
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 the Sarbanes-Oxley
Act of 2002.
46
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CIB
MARINE BANCSHARES, INC.
|
||
(Registrant)
|
||
Date:
May 13, 2010
|
By:
|
/s/
EDWIN J. DEPENBROK
|
Edwin
J. Depenbrok
|
||
Chief
Financial Officer
|
47