Attached files
file | filename |
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EX-32.2 - CIB MARINE BANCSHARES INC | v166063_ex32-2.htm |
EX-31.2 - CIB MARINE BANCSHARES INC | v166063_ex31-2.htm |
EX-31.1 - CIB MARINE BANCSHARES INC | v166063_ex31-1.htm |
EX-32.1 - CIB MARINE BANCSHARES INC | v166063_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from __________ to
________
|
Commission
file number 000-24149
CIB
MARINE BANCSHARES, INC.
(Exact
name of registrant as specified in its charter)
Wisconsin
|
37-1203599
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
N27
W24025 Paul Court, Pewaukee, Wisconsin
|
53072
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(262)
695-6010
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes R No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company R
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
R
As of
October 31, 2009 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 September 30, 2009, 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 September 30, 2009 and December 31,
2008
|
3
|
Consolidated
Statements of Operations for the Three and Nine Months Ended September 30,
2009 and 2008
|
4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Nine Months Ended
September 30, 2009 and 2008
|
5
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008
|
6
|
Notes
to Unaudited Consolidated Financial Statements
|
7
|
Item
2 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
31
|
Item
3 Quantitative and Qualitative Disclosures About Market
Risk
|
54
|
Item
4 Controls and Procedures
|
55
|
Part
II-Other Information
|
|
Item
1 Legal Proceedings
|
56
|
Item
1A Risk Factors
|
56
|
Item
3 Default upon Senior Securities
|
65
|
Item
6 Exhibits
|
65
|
Signatures
|
66
|
2
PART
I-FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CIB
MARINE BANCSHARES, INC.
(Debtor
in Possession)
Consolidated
Balance Sheets
September 30,
2009
(Unaudited)
|
December 31,
2008
|
|||||||
(Dollars in thousands, except share data)
|
||||||||
Assets
|
||||||||
Cash
and cash equivalents:
|
||||||||
Cash
and due from banks
|
$ | 61,060 | $ | 27,854 | ||||
Reverse
repurchase securities
|
— | 27,682 | ||||||
Federal
funds sold
|
— | 1,695 | ||||||
Total
cash and cash equivalents
|
61,060 | 57,231 | ||||||
Loans
held for sale
|
5,001 | 4,777 | ||||||
Securities
available for sale
|
197,085 | 280,452 | ||||||
Loans
|
510,794 | 555,207 | ||||||
Allowance
for loan losses
|
(20,358 | ) | (19,242 | ) | ||||
Net
loans
|
490,436 | 535,965 | ||||||
Premises
and equipment, net
|
5,190 | 5,794 | ||||||
Accrued
interest receivable
|
3,258 | 4,289 | ||||||
Foreclosed
properties
|
1,285 | 980 | ||||||
Assets
of companies held for disposal
|
1,207 | 988 | ||||||
Other
assets
|
15,139 | 15,920 | ||||||
Total
assets
|
$ | 779,661 | $ | 906,396 | ||||
Liabilities
and Stockholders’ Equity (Deficit)
|
||||||||
Company
(Debtor in Possession):
|
||||||||
Pre-petition
liabilities not subject to compromise
|
$ | 266 | $ | — | ||||
Post-petition
liabilities not subject to compromise
|
381 | — | ||||||
Subtotal
|
647 | — | ||||||
Liabilities
subject to compromise:
|
||||||||
Junior
subordinated debentures
|
61,857 | — | ||||||
Accrued
interest payable
|
45,332 | — | ||||||
Subtotal
|
107,189 | — | ||||||
Total
liabilities of the Company (Debtor in Possession)
|
107,836 | — | ||||||
Deposits:
|
||||||||
Noninterest-bearing
demand
|
53,966 | 48,060 | ||||||
Interest-bearing
demand
|
29,187 | 34,308 | ||||||
Savings
|
122,502 | 123,092 | ||||||
Time
|
435,714 | 489,172 | ||||||
Total
deposits
|
641,369 | 694,632 | ||||||
Short-term
borrowings
|
13,843 | 62,806 | ||||||
Long-term
borrowings
|
21,000 | 27,000 | ||||||
Junior
subordinated debentures
|
— | 61,857 | ||||||
Accrued
interest payable
|
1,731 | 41,377 | ||||||
Liabilities
of companies held for disposal
|
1,207 | 1,699 | ||||||
Other
liabilities
|
2,069 | 2,223 | ||||||
Total
liabilities
|
789,055 | 891,594 | ||||||
Stockholders’
Equity (Deficit)
|
||||||||
Preferred
stock, $1 par value; 5,000,000 shares authorized, none
issued
|
— | — | ||||||
Common
stock, $1 par value; authorized shares, 50,000,000; issued shares,
18,346,442; outstanding shares, 18,135,395 at September 30, 2009 and
18,341,231 at December 31, 2008
|
18,346 | 18,346 | ||||||
Capital
surplus
|
158,700 | 158,613 | ||||||
Accumulated
deficit
|
(180,395 | ) | (151,936 | ) | ||||
Accumulated
other comprehensive loss related to available for sale
securities
|
(913 | ) | (10,008 | ) | ||||
Accumulated
other comprehensive loss related to non-credit other-than-temporary
impairments
|
(4,603 | ) | — | |||||
Accumulated
other comprehensive loss, net
|
(5,516 | ) | (10,008 | ) | ||||
Receivables
from sale of stock
|
— | (51 | ) | |||||
Treasury
stock shares at cost; 218,499 at September 30, 2009 and 12,663 at December
31, 2008
|
(529 | ) | (162 | ) | ||||
Total
stockholders’ equity (deficit)
|
(9,394 | ) | 14,802 | |||||
Total
liabilities and stockholders’ equity
|
$ | 779,661 | $ | 906,396 |
See
accompanying Notes to Unaudited Consolidated Financial
Statements
3
CIB
MARINE BANCSHARES, INC.
(Debtor
in Possession)
Consolidated Statements of
Operations
(Unaudited)
Quarter Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars in thousands, except share and per share data)
|
||||||||||||||||
Interest
and Dividend Income
|
||||||||||||||||
Loans
|
$ | 6,630 | $ | 9,257 | $ | 20,876 | $ | 29,866 | ||||||||
Loans
held for sale
|
6 | 13 | 24 | 17 | ||||||||||||
Securities:
|
||||||||||||||||
Taxable
|
2,732 | 3,980 | 9,463 | 12,313 | ||||||||||||
Tax-exempt
|
4 | 8 | 12 | 34 | ||||||||||||
Dividends
|
— | 6 | — | 30 | ||||||||||||
Federal
funds sold
|
44 | 284 | 218 | 1,178 | ||||||||||||
Total
interest and dividend income
|
9,416 | 13,548 | 30,593 | 43,438 | ||||||||||||
Interest
Expense
|
||||||||||||||||
Deposits
|
4,110 | 5,233 | 13,452 | 17,726 | ||||||||||||
Short-term
borrowings
|
15 | 578 | 109 | 1,935 | ||||||||||||
Long-term
borrowings
|
216 | 215 | 726 | 489 | ||||||||||||
Junior
subordinated debentures (contractual interest not recorded of $380 for the
quarter and nine-months ended September 30, 2009)
|
1,853 | 2,193 | 6,283 | 6,561 | ||||||||||||
Total
interest expense
|
6,194 | 8,219 | 20,570 | 26,711 | ||||||||||||
Net
interest income
|
3,222 | 5,329 | 10,023 | 16,727 | ||||||||||||
Provision
for credit losses
|
10,029 | 10,141 | 19,230 | 19,501 | ||||||||||||
Net
interest loss after provision for credit losses
|
(6,807 | ) | (4,812 | ) | (9,207 | ) | (2,774 | ) | ||||||||
Noninterest
Income
|
||||||||||||||||
Loan
fees
|
21 | 86 | 116 | 153 | ||||||||||||
Deposit
service charges
|
247 | 231 | 709 | 744 | ||||||||||||
Other
service fees
|
36 | 27 | 96 | 100 | ||||||||||||
Other
income
|
6 | 162 | 9 | 349 | ||||||||||||
Gain
on sale of securities
|
— | — | 551 | — | ||||||||||||
Net
gain on sale of assets and deposits
|
38 | 4,155 | 115 | 4,186 | ||||||||||||
Total
noninterest income
|
348 | 4,661 | 1,596 | 5,532 | ||||||||||||
Noninterest
Expense
|
||||||||||||||||
Compensation
and employee benefits
|
2,945 | 4,266 | 9,955 | 13,080 | ||||||||||||
Equipment
|
379 | 425 | 1,039 | 1,551 | ||||||||||||
Occupancy
and premises
|
507 | 745 | 1,637 | 2,199 | ||||||||||||
Professional
services
|
1,346 | 1,509 | 3,440 | 3,247 | ||||||||||||
Reorganization
expense
|
122 | — | 122 | — | ||||||||||||
Write
down of assets
|
721 | — | 1,273 | — | ||||||||||||
Total
other-than-temporary impairment losses
|
186 | 525 | 4,354 | 525 | ||||||||||||
Portion
of losses recognized in other comprehensive income
|
— | — | (4,142 | ) | — | |||||||||||
Net
other-than-temporary impairment recognized in earnings
|
186 | 525 | 212 | 525 | ||||||||||||
Other
expense
|
1,960 | 2,409 | 5,372 | 8,893 | ||||||||||||
Total
noninterest expense
|
8,166 | 9,879 | 23,050 | 29,495 | ||||||||||||
Loss
from continuing operations before income taxes
|
(14,625 | ) | (10,030 | ) | (30,661 | ) | (26,737 | ) | ||||||||
Income
tax expense (benefit)
|
(1 | ) | 88 | 99 | 109 | |||||||||||
Loss
from continuing operations
|
(14,624 | ) | (10,118 | ) | (30,760 | ) | (26,846 | ) | ||||||||
Discontinued
Operations:
|
||||||||||||||||
Pretax
income from discontinued operations
|
711 | 493 | 711 | 493 | ||||||||||||
Income
tax expense
|
— | 1,571 | — | 1,631 | ||||||||||||
Income
(loss) from discontinued operations
|
711 | (1,078 | ) | 711 | (1,138 | ) | ||||||||||
Net
loss
|
$ | (13,913 | ) | $ | (11,196 | ) | $ | (30,049 | ) | $ | (27,984 | ) | ||||
Loss
Per Share
|
||||||||||||||||
Basic:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) | ||||
Discontinued
operations
|
0.04 | (0.06 | ) | 0.04 | (0.07 | ) | ||||||||||
Net
loss
|
$ | (0.77 | ) | $ | (0.61 | ) | $ | (1.65 | ) | $ | (1.53 | ) | ||||
Diluted:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) | ||||
Discontinued
operations
|
0.04 | (0.06 | ) | 0.04 | (0.07 | ) | ||||||||||
Net
loss
|
$ | (0.77 | ) | $ | (0.61 | ) | $ | (1.65 | ) | $ | (1.53 | ) | ||||
Weighted
average shares-basic
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 | ||||||||||||
Weighted
average shares-diluted
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 |
See
accompanying Notes to Unaudited Consolidated Financial Statements
4
CIB
MARINE BANCSHARES, INC.
(Debtor
in Possession)
Consolidated
Statements of Stockholders’ Equity (Deficit)
Accumulated
|
||||||||||||||||||||||||||||
Other
|
Stock
|
|||||||||||||||||||||||||||
Common Stock
|
Capital
|
Accumulated
|
Comprehensive
|
Receivables and
|
||||||||||||||||||||||||
Shares
|
Par Value
|
Surplus
|
Deficit
|
Income (Loss)
|
Treasury Stock
|
Total
|
||||||||||||||||||||||
(Dollars in thousands, except share data)
|
||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
18,346,442 | $ | 18,346 | $ | 158,398 | $ | (117,537 | ) | $ | 1,382 | $ | (283 | ) | $ | 60,306 | |||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
— | — | — | (27,984 | ) | — | — | (27,984 | ) | |||||||||||||||||||
Other
comprehensive loss:
|
||||||||||||||||||||||||||||
Unrealized
securities holding losses arising during the period
|
— | — | — | — | (6,643 | ) | — | (6,643 | ) | |||||||||||||||||||
Total
comprehensive loss
|
(34,627 | ) | ||||||||||||||||||||||||||
Stock
option expense
|
— | — | 176 | — | — | — | 176 | |||||||||||||||||||||
Reduction
in receivables from sale of stock
|
— | — | — | — | — | 70 | 70 | |||||||||||||||||||||
Balance,
September 30, 2008 (unaudited)
|
18,346,442 | $ | 18,346 | $ | 158,574 | $ | (145,521 | ) | $ | (5,261 | ) | $ | (213 | ) | $ | 25,925 | ||||||||||||
Balance,
December 31, 2008
|
18,346,442 | $ | 18,346 | $ | 158,613 | $ | (151,936 | ) | $ | (10,008 | ) | $ | (213 | ) | $ | 14,802 | ||||||||||||
Cumulative
effect of adoption of ASC 320-10-65-65-1 (1)
|
— | — | — | 1,590 | (1,590 | ) | — | — | ||||||||||||||||||||
Adjusted
Balance at beginning of period
|
18,346,442 | $ | 18,346 | $ | 158,613 | $ | (150,346 | ) | $ | (11,598 | ) | $ | (213 | ) | $ | 14,802 | ||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
— | — | — | (30,049 | ) | — | — | (30,049 | ) | |||||||||||||||||||
Other
comprehensive loss:
|
||||||||||||||||||||||||||||
Unrealized
securities holding gains arising during the period
|
— | — | — | — | 5,531 | — | 5,531 | |||||||||||||||||||||
Realized
gains due to sale of available for sale securities
|
— | — | — | — | 551 | — | 551 | |||||||||||||||||||||
Total
comprehensive loss
|
(23,967 | ) | ||||||||||||||||||||||||||
Stock
option expense
|
— | — | 87 | — | — | — | 87 | |||||||||||||||||||||
Purchase
205,836 shares from ESOP
|
— | — | — | — | — | (367 | ) | (367 | ) | |||||||||||||||||||
Reduction
in receivables from sale of stock
|
— | — | — | — | — | 51 | 51 | |||||||||||||||||||||
Balance,
September 30, 2009 (unaudited)
|
18,346,442 | $ | 18,346 | $ | 158,700 | $ | (180,395 | ) | $ | (5,516 | ) | $ | (529 | ) | $ | (9,394 | ) |
(1)
|
See
Note 6-Securities Available for Sale for additional information on CIB
Marine’s adoption of ASC 320-10-65-65-1 as of January 1,
2009.
|
See
accompanying Notes to Unaudited Consolidated Financial Statements
5
CIB
MARINE BANCSHARES, INC.
(Debtor
in Possession)
Consolidated
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in thousands)
|
||||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss from continuing operations
|
$ | (30,760 | ) | $ | (26,846 | ) | ||
Net
income (loss) from discontinued operations
|
711 | (1,138 | ) | |||||
Net
loss
|
(30,049 | ) | (27,984 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Deferred
loan fee amortization
|
(40 | ) | (275 | ) | ||||
Depreciation
and other amortization and accretion
|
(275 | ) | 331 | |||||
Provision
for credit losses
|
19,230 | 19,501 | ||||||
Net
gain on sale of assets and deposits
|
(115 | ) | (4,186 | ) | ||||
Gain
on sale of securities
|
(551 | ) | — | |||||
Write
down of assets
|
1,273 | — | ||||||
Net
other-than-temporary impairment recognized in earnings
|
212 | 525 | ||||||
Originations
of loans held for sale
|
(11,764 | ) | (2,938 | ) | ||||
Proceeds
from sale of loans held for sale
|
11,646 | 2,601 | ||||||
Reorganization
items
|
647 | — | ||||||
Decrease
in accrued interest receivable and other assets
|
463 | 3,907 | ||||||
Increase
in other accrued interest payable and other liabilities
|
6,169 | 8,457 | ||||||
Operating
cash flows of discontinued operations
|
(711 | ) | 2,279 | |||||
Net
cash provided by (used in) operating activities
|
(3,865 | ) | 2,218 | |||||
Cash
Flows from Investing Activities
|
||||||||
Maturities
of securities available for sale
|
28,173 | 55,606 | ||||||
Purchase
of securities available for sale
|
(9,648 | ) | (41,825 | ) | ||||
Proceeds
from sales of securities available for sale
|
13,308 | — | ||||||
Repayments
of asset-backed and mortgage-backed securities available for
sale
|
58,839 | 35,263 | ||||||
Purchase
of asset-backed and mortgage-backed securities available for
sale
|
— | (36,354 | ) | |||||
Net
increase in Federal Home Loan and Federal Reserve Bank
stocks
|
— | (598 | ) | |||||
Net
decrease in other investments
|
80 | 40 | ||||||
Net
decrease (increase) in loans
|
25,405 | (43,616 | ) | |||||
Proceeds
from sale of foreclosed properties
|
219 | 725 | ||||||
Proceeds
from sale of branches
|
— | 41,039 | ||||||
Premises
and equipment disposals
|
15 | 32 | ||||||
Premises
and equipment expenditures
|
(87 | ) | (197 | ) | ||||
Investing
cash flows of discontinued operations
|
— | (221 | ) | |||||
Net
cash provided by investing activities
|
116,304 | 9,894 | ||||||
Cash
Flows from Financing Activities
|
||||||||
Increase
(decrease) in deposits
|
(53,331 | ) | 24,904 | |||||
Net
(decrease) increase in short-term borrowings
|
(48,963 | ) | 2,643 | |||||
Deposits
sold (net of $3.0 million of cash deposit premium)
|
— | (83,704 | ) | |||||
Increase
(repayments) of long-term borrowings
|
(6,000 | ) | 15,000 | |||||
Purchase
of treasury stock
|
(367 | ) | — | |||||
Decrease
in receivables from sale of stock
|
51 | — | ||||||
Net
cash used in financing activities
|
(108,610 | ) | (41,157 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
3,829 | (29,045 | ) | |||||
Cash
and cash equivalents, beginning of period
|
57,231 | 74,841 | ||||||
Cash
and cash equivalents, end of period
|
$ | 61,060 | $ | 45,796 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
paid (received) during the period for:
|
||||||||
Interest
expense-continuing operations
|
$ | 14,884 | $ | 20,716 | ||||
Income
taxes
|
— | (1,434 | ) | |||||
Supplemental
Disclosures of Noncash Activities
|
||||||||
Transfer
of loans to foreclosed properties
|
934 | 405 | ||||||
Transfer
of loans to loans held for sale
|
— | 4,010 | ||||||
Fair
value of equity stock received in conjunction with sale of branch
deposits
|
— | 955 |
See
accompanying Notes to Unaudited Consolidated Financial Statements
6
CIB
MARINE BANCSHARES, INC.
Notes
to Unaudited Consolidated Financial Statements
Note
1-Basis of Presentation
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”) 2008 Annual Report on Form
10-K (“2008 Form 10-K”). 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. In preparation of these statements and in
accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 855 (“ASC 855-10”) (see New Accounting
Pronouncements below), CIB Marine has reviewed and evaluated subsequent events
through the date this Form 10-Q was filed. The results of operations for the
quarter and nine months ended September 30, 2009 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 U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities including the allowance for loans 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 both local and
national economic conditions. Changes in these factors can significantly affect
CIB Marine’s results of operations and the value of its recorded assets and
liabilities.
Assets
and liabilities of companies held for disposal are carried at the lower of cost
or current fair value, less estimated selling costs and 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.
CIB
Marine has determined it has one reportable continuing business segment. CIB
Marine, through the branch network of its subsidiary bank, CIBM Bank (the
“Bank”), provides a broad range of financial services to businesses and
individuals in Illinois, Wisconsin, Indiana and Arizona. These services include
commercial and retail lending and accepting deposits.
As
discussed in Note 2-Pre-packaged Plan of
Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, CIB Marine has
filed a pre-packaged Plan of Reorganization and also filed as Current Report on
Form 8-K dated November 5, 2009 (the “Plan”) under Chapter 11 of the United
States Bankruptcy Code (“Chapter 11”). FASB ASC 852 Reorganizations, which is
applicable to companies operating under Chapter 11, generally does not
change the manner in which financial statements are prepared. However, ASC 852
does require that the financial statements for periods subsequent to the filing
of a Chapter 11 petition distinguish transactions and events that are
directly associated with the reorganization from the ongoing operations of the
business, as well as additional disclosures. CIB Marine is the sole debtor in
the bankruptcy case. Where the term “Company,” “CIB Marine” or “Debtor” is used
in this Form 10-Q to describe any bankruptcy related events, such reference only
describes events effecting the Company and not the Bank or any other
subsidiary.
7
CIB
Marine adopted ASC 852 for its debtor financial statements effective September
15, 2009 (the “Filing Date”) and prepared its financial statements in accordance
with the requirements of ASC 852. The restructuring of the Company will have no
direct impact on the operations of the Bank, which is regulated separately from
the Company by both federal and state regulators and whose accounts are insured
by the FDIC. Revenues, expenses, realized gains and losses and provisions for
losses that can be directly associated with the reorganization are reported
separately as reorganization items in CIB Marine’s statements of operations. The
balance sheet distinguishes pre-petition liabilities subject to compromise both
from those pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by the Plan are
reported at the amounts expected to be allowed by the United States Bankruptcy
Court for the Eastern District of Wisconsin (the “Bankruptcy Court”), although
they may ultimately be settled for different amounts. In addition, cash provided
by or used for reorganization items is disclosed separately in CIB Marine’s
statement of cash flows. See Note 3-Company Financial Statements (Debtor
Financials) for further information about CIB Marine’s financial statement
presentation under ASC 852.
As a
result of CIB Marine’s inability to make the required payments on its junior
subordinated debentures (“Debentures”), as further discussed in Note
12-Pre-petition Debt (Junior Subordinated Debentures), continued losses, and in
consideration of existing regulatory matters, as also stated in the 2008 Form
10-K, there is substantial doubt about CIB Marine’s ability to continue as a
going concern. CIB Marine’s financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. CIB Marine’s ability to meet its
obligations as they come due is substantially dependent on the successful
execution of its capital plan outlined in its 2007 Annual Report on Form 10-K
(the “2007 Form 10-K”) and updated in the 2008 Form 10-K and the Company’s
emergence from bankruptcy reorganization. See the “Liquidity and Capital Plan
Update” later in this Form 10-Q for a further update on the capital plan. CIB
Marine’s interim financial statements do not include any adjustments that may be
necessary should its capital plan be unsuccessful.
New
Accounting Pronouncements
On July
1, 2009, the FASB issued the ASC which became the single source of authoritative
nongovernmental U.S. GAAP. The ASC, which became effective in the third quarter
of 2009, did not have a material financial impact on CIB Marine’s financial
statements as the statement was not intended to change GAAP, but rather to
change references in financial statements and accounting policies.
In
September 2006, FASB issued a standard, ASC 820 Fair Value Measurements and
Disclosures, which established a single authoritative definition of fair
value, set out a framework for measuring fair value and provided a hierarchal
disclosure framework for assets and liabilities measured at fair value. In 2008,
CIB Marine partially adopted ASC 820-10-65 with respect to financial assets and
liabilities and elected to defer adoption of ASC 820-10-65 on assets and
liabilities that met the criteria of ASC 820-10-15. ASC 820-10-15 allowed
deferral of ASC 820-10-65 with respect to nonfinancial assets and liabilities
not measured at fair value on an ongoing basis but subject to fair value
adjustments in certain circumstances (for example, assets that have been deemed
to be impaired). During the first quarter of 2009, CIB Marine adopted ASC
820-10-65 with respect to assets and liabilities that had met the deferral
criteria of ASC 820-10-15. These included foreclosed properties and assets and
liabilities of companies held for disposal. The adoption of ASC 820-10-65 with
respect to nonrecurring, nonfinancial assets and liabilities did not have a
material impact on CIB Marine’s consolidated financial statements. See Note
4-Fair Value of Financial Instruments for ASC 820-10-65
disclosures.
In April
2009, the FASB issued an amendment to ASC 320 Investments-Debt and Equity
Securities and to ASC 820 Fair Value Measurements and
Disclosures. CIB Marine elected early adoption of ASC 320-10-65 and, as
discussed above, ASC 820-10-65 in the first quarter of 2009. See Note
6-Securities Available for Sale for further information of ASC
320-10-65.
Also in
April 2009, the FASB issued an amendment to ASC 825 Financial Instruments. This
amended statement requires disclosures about fair value of financial instruments
in all interim financial statements as well as in annual financial statements.
See Note 4-Fair Value of Financial Instruments for additional disclosure
requirements regarding fair value.
The FASB,
through an amendment to ASC 820-10-65, also provided guidance on determining
fair value when there is no active market or where the price inputs being used
represent distressed sales. Based on the guidance of this standard, if an entity
determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value in
accordance with ASC 820-10-15. Adoption of ASC 820-10-65 in the first quarter of
2009 did not have a material impact on CIB Marine’s consolidated financial
statements.
8
The FASB
also amended ASC 320 Investments-Debt and Equity
Securities which applies to investments in debt securities for which
other-than-temporary impairments (“OTTI”) may be recorded. If an entity’s
management asserts that it does not have the intent to sell a debt security and
it is more likely than not that it will not have to sell the security before
recovery of its cost basis, then an entity may separate OTTI into two
components: (1) the amount related to credit losses (recorded in earnings), and
(2) all other amounts (recorded in accumulated other comprehensive income
(“AOCI”)). During the period of adoption of ASC 320-10-65, management is
required to separately identify whether OTTI charges recognized in periods prior
to adoption on securities held at the beginning of the period of adoption were
related to credit losses or other non-credit factors at the measurement date of
impairment. Upon adoption, the cumulative effect of any previously recorded OTTI
losses related to non-credit factors are recognized as an adjustment to the
opening balance of retained earnings with a corresponding adjustment to AOCI.
During 2008, CIB Marine recognized $1.8 million in OTTI losses on debt
securities held at January 1, 2009 (the beginning of the period of adoption of
the ASC 320-10-65). Management determined, based on the present value of
expected cash flows in accordance with applicable guidance, that $1.6 million of
the $1.8 million previously recognized OTTI losses related to non-credit
factors. CIB Marine does not intend to sell these impaired securities and it is
not more likely than not that CIB Marine will be required to sell these
securities before recovery of the amortized cost basis of each of these
securities. Accordingly, the cumulative effect of adopting ASC 320-10-65 during
the first quarter of 2009 was a $1.6 million reduction to the January 1, 2009
accumulated deficit with a $1.6 million increase to accumulated other
comprehensive losses.
In May
2009, the FASB issued an amendment to ASC 855 Subsequent Events, setting
forth the period after the balance sheet date during which management shall
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, and the circumstances under which
entities shall recognize such events after the balance sheet date in its
financial statements. Adoption of this standard and the required disclosures did
not have a material impact on CIB Marine’s consolidated financial statements. In
preparation of these financial statements and in accordance with ASC 855-10, CIB
Marine has reviewed and evaluated subsequent events through the date this Form
10-Q was filed.
Note
2-Pre-packaged Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy
Code
CIB
Marine is the sole debtor in the bankruptcy case. Where the term “Company,” “CIB
Marine” or “Debtor” is used in this Form 10-Q to describe any bankruptcy related
events, such reference only describes events effecting the Company and not the
Bank or any other subsidiary.
On
September 15, 2009, the requisite beneficial owners of CIB Marine’s trust
preferred securities (“TruPS”) gave approval
to the Plan which paved the way for the Company to file the Plan in Bankruptcy
Court (Case No. 09-33318) under Chapter 11 of the Bankruptcy Code. The
restructuring of the Company pursuant to the Plan will have no direct impact on
the operations of the Bank, which is regulated separately from the Company by
both federal and state regulators and whose accounts are insured by the FDIC.
The Company continues to operate its business as a “debtor in possession” under
the jurisdiction and supervision of the Bankruptcy Court. CIB Marine is
continuing normal business operations during the bankruptcy process and
continues to take steps to reduce costs, increase revenue, and resolve loan
credit issues with the intention of making, CIB Marine a stronger and more
viable company upon emergence from bankruptcy. The direct effects of the Plan on
CIB Marine will be to improve earnings by eliminating the interest burden
associated with its TruPS-related indebtedness, and to significantly improve the
capital position at the Company.
On
September 16, 2009, the Bankruptcy Court approved certain first-day motions in
the Chapter 11 case including, without limitation, orders authorizing the
process of payment of suppliers, professionals and certain operating
expenses.
Plan
of Reorganization
The
primary purpose of the Plan is to effectuate the restructuring and substantial
de-leveraging of CIB Marine’s capital structure and to enhance its regulatory
capital position. The Plan will allow CIB Marine to continue its businesses in
the ordinary course and provides for full payment of allowed unsecured claims as
defined in the Plan. The funds expected to be generated by CIB Marine’s
operations will not be sufficient to meet its debt service requirements and
satisfy its debt obligations without this restructuring.
9
Under the
Plan, approximately $107.2 million of cumulative high-interest indebtedness of
the TruPS will be exchanged for 55,624 shares of Series A 7% fixed rate
preferred noncumulative perpetual 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”). 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. CIB Marine
Preferred will have no stated redemption date and the holders will not have the
right to compel the redemption of any or all of the shares. Further, dividends
are noncumulative and payable only to the extent CIB Marine declared a dividend,
at its discretion and subject to regulatory approval.
In
connection with developing the Plan, CIB Marine reviewed its current business
operations and compared its prospects as an ongoing business enterprise with the
estimated recoveries of claims and equity interests in various liquidation
scenarios. As a result, CIB Marine concluded that the recovery for holders of
allowed claims and equity interests as defined in the Plan would be maximized by
continuing to operate as a going concern. CIB Marine believes that its
businesses and assets have significant value that would not be realized in
liquidation, either in whole or in substantial part. Consistent with the
liquidation analysis included in the Plan, the value of CIB Marine’s assets
would be considerably greater if CIB Marine operates as a going concern instead
of liquidating.
Continuation
as a Going Concern
CIB
Marine’s financial statements have been prepared on a going-concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. As a result of the Company
bankruptcy filing, such realization of assets and liquidation of liabilities is
subject to uncertainty. While the Company operates as a debtor in possession
under the protection of Chapter 11 of the Bankruptcy Code, the Company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those recorded in its financial statements, subject to Bankruptcy
Court approval or as otherwise permitted in the ordinary course of business. CIB
Marine’s financial statements as of September 30, 2009 do not give effect to all
the adjustments to the carrying value of assets and liabilities that may become
necessary as a consequence of the Company’s reorganization.
CIB
Marine’s continuation as a going concern is contingent upon its ability to
manage to the extent possible the Risk Factors outlined in Part II, Item 1A of
this Form 10-Q. Although steps are being taken to achieve these objectives,
there is no assurance that success will be achieved or that any measures that
are achievable will result in sufficient improvement to CIB Marine’s financial
position. Accordingly, there is substantial doubt about CIB Marine’s ability to
continue as a going concern.
Liabilities Subject to
Compromise
As
required by ASC 825, the Company has recorded liability amounts for the claims
that can be reasonably estimated and which CIB Marine believes are probable of
being allowed by the Bankruptcy Court. Liabilities subject to compromise may
change due to reclassifications, settlements or reorganization activities that
give rise to new claims or increases in existing claims. Liabilities subject to
compromise in the consolidated balance sheet at September 30, 2009 of $107.2
million consisted of principal on the Debentures of $61.9 million and accrued
interest on those borrowings of $45.3 million.
As of the
Filing Date, CIB Marine discontinued recording additional interest expense on
the Debentures. On a consolidated basis, contractual interest that was not
recorded as interest expense amounted to $0.4 million for both the quarter and
the nine month period ended September 30, 2009.
Reorganization
Items
Professional
advisory fees and other costs directly associated with the Plan are reported
separately as reorganization expense pursuant to ASC 825. Reorganization items
may also include provisions and adjustments to record the carrying value of
certain pre-petition liabilities at their estimated allowable claim amounts as a
result of the Company’s bankruptcy proceedings. For both the quarter and the
nine-month periods ended September 30, 2009, $0.1 million of professional fees
associated with the Bankruptcy have been recorded in the statements of
operations. No reorganization expenses were incurred in 2008.
10
Bankruptcy
Reporting Requirements
The
Company began to submit monthly operating reports to the Bankruptcy Court in
October 2009. These monthly reports are prepared according to the requirements
of federal bankruptcy law. While CIB Marine believes that these reports will
provide then-current information required under federal bankruptcy law, they
will nonetheless be unconsolidated, unaudited, prepared in a format different
from that used in CIB Marine’s consolidated financial statements filed under the
securities laws and would be prepared for the unconsolidated holding company
only. Accordingly, CIB Marine believes that the substance and format of the
materials will not allow meaningful comparison with its regular publicly
disclosed consolidated financial statements. Moreover, the materials filed with
the Bankruptcy Court will not be prepared for the purpose of providing a basis
for an investment decision relating to CIB Marine’s securities or for comparison
with other financial information filed with the Securities and Exchange
Commission.
Additional
information on the Chapter 11 filing is available at http://www.cibm-reorgdocs.com.
Note
3-Company Financial Statements (Debtor Financials)
The
unaudited unconsolidated condensed financial statements of the Company only, are
presented as follows:
Condensed
Balance Sheets
(Debtor
in Possession)
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
|
|||||||
(Dollars
in thousands)
|
||||||||
Assets
|
||||||||
Cash
and due from affiliated banks
|
$ | 3,527 | $ | 13,237 | ||||
Investments
in subsidiaries
|
90,903 | 99,894 | ||||||
Loans
to subsidiaries
|
604 | 604 | ||||||
Premises
and equipment, net
|
294 | 512 | ||||||
Investment
in subsidiaries held for disposal
|
24 | (687 | ) | |||||
Other
investments
|
851 | 885 | ||||||
Income
tax receivable
|
358 | 789 | ||||||
Other
assets
|
1,881 | 1,871 | ||||||
Total
assets
|
$ | 98,442 | $ | 117,105 | ||||
Liabilities
|
||||||||
Pre-petition
liabilities not subject to compromise
|
$ | 266 | $ | — | ||||
Post-petition
liabilities not subject to compromise
|
381 | — | ||||||
Total
|
647 | — | ||||||
Liabilities
subject to compromise:
|
||||||||
Junior
subordinated debentures
|
61,857 | — | ||||||
Accrued
interest payable on junior subordinated debentures
|
45,332 | — | ||||||
Total
liabilities subject to compromise
|
107,189 | — | ||||||
Loans
to subsidiaries-subscribed stock
|
— | 51 | ||||||
Accrued
interest payable on junior subordinated debentures
|
— | 39,090 | ||||||
Junior
subordinated debentures
|
— | 61,857 | ||||||
Other
liabilities
|
— | 1,305 | ||||||
Total
liabilities
|
107,836 | 102,303 | ||||||
Stockholders’
Equity (Deficit)
|
||||||||
Preferred
stock, $1 par value; 5,000,000 shares authorized, none
issued
|
— | — | ||||||
Common
stock, $1 par value; authorized shares, 50,000,000; issued shares,
18,346,442; outstanding shares, 18,135,395 at September 30, 2009 and
18,341,231 at December 31, 2008
|
18,346 | 18,346 | ||||||
Capital
surplus
|
158,700 | 158,613 | ||||||
Accumulated
deficit
|
(180,395 | ) | (151,936 | ) | ||||
Accumulated
other comprehensive loss, net
|
(5,516 | ) | (10,008 | ) | ||||
Receivables
from sale of stock
|
— | (51 | ) | |||||
Treasury
stock shares at cost; 218,499 at September 30, 2009 and 12,663 at December
31, 2008
|
(529 | ) | (162 | ) | ||||
Total
stockholders’ equity (deficit)
|
(9,394 | ) | 14,802 | |||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 98,442 | $ | 117,105 |
11
Condensed
Statements of Operations (Unaudited)
(Debtor
in Possession)
Quarter
Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Interest
and Dividend Income
|
||||||||||||||||
Dividends
from subsidiaries
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Loan
and other interest from subsidiaries
|
7 | 68 | 23 | 296 | ||||||||||||
Total
interest and dividend income
|
7 | 68 | 23 | 296 | ||||||||||||
Interest
Expense
|
||||||||||||||||
Junior
subordinated debentures (contractual interest not recorded of $380 for the
quarter and nine months ended September 30, 2009)
|
1,853 | 2,193 | 6,283 | 6,561 | ||||||||||||
Total
interest expense
|
1,853 | 2,193 | 6,283 | 6,561 | ||||||||||||
Net
interest loss
|
(1,846 | ) | (2,125 | ) | (6,260 | ) | (6,265 | ) | ||||||||
Noninterest
income (loss)
|
||||||||||||||||
Equity
in undistributed loss of subsidiaries
|
(9,983 | ) | (6,944 | ) | (18,436 | ) | (14,970 | ) | ||||||||
Fees
from subsidiaries
|
— | 1,205 | 1,541 | 3,960 | ||||||||||||
Other
income
|
1 | 458 | 2 | 581 | ||||||||||||
Total
noninterest loss
|
(9,982 | ) | (5,281 | ) | (16,893 | ) | (10,429 | ) | ||||||||
Noninterest
expense
|
||||||||||||||||
Compensation
and employee benefits
|
7 | 1,645 | 2,849 | 5,323 | ||||||||||||
Equipment
|
67 | 117 | 236 | 375 | ||||||||||||
Occupancy
and premises
|
6 | 149 | 209 | 475 | ||||||||||||
Professional
services
|
1,057 | 993 | 2,257 | 1,886 | ||||||||||||
Reorganization
expense
|
122 | — | 122 | — | ||||||||||||
Write
down of assets
|
711 | 79 | 822 | 78 | ||||||||||||
Other
|
214 | 807 | 680 | 4,369 | ||||||||||||
Total
noninterest expense
|
2,184 | 3,790 | 7,175 | 12,506 | ||||||||||||
Loss
before income taxes
|
(14,012 | ) | (11,196 | ) | (30,328 | ) | (29,200 | ) | ||||||||
Income
tax benefit
|
(99 | ) | — | (279 | ) | (1,216 | ) | |||||||||
Net
loss
|
$ | (13,913 | ) | $ | (11,196 | ) | $ | (30,049 | ) | $ | (27,984 | ) |
Condensed
Statement of Cash Flows (Unaudited)
(Debtor
in Possession)
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in thousands)
|
||||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (30,049 | ) | $ | (27,984 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Equity
in undistributed loss of subsidiaries
|
18,436 | 14,970 | ||||||
Depreciation
and amortization
|
151 | 232 | ||||||
Write
down of assets
|
822 | 78 | ||||||
Deferred
tax benefit
|
— | (3,297 | ) | |||||
Reorganization
items, net of payments
|
647 | — | ||||||
Decrease
in interest receivable and other assets
|
(4,221 | ) | (3,454 | ) | ||||
Increase
in interest payable junior subordinated debentures
|
6,242 | 6,519 | ||||||
Increase
(decrease) in other interest payable and other liabilities
|
(657 | ) | 6,950 | |||||
Net
cash used in operating activities
|
(8,629 | ) | (5,986 | ) | ||||
Cash
Flows from Investing Activities:
|
||||||||
Net
(increase) decrease in loans
|
(51 | ) | 4 | |||||
Capital
expenditures
|
(3 | ) | (29 | ) | ||||
Increase
(decrease) in investment in subsidiaries held for disposal
|
(711 | ) | 1,189 | |||||
Net
cash (used in) provided by investing activities
|
(765 | ) | 1,164 | |||||
Cash
Flows from Financing Activities:
|
||||||||
Purchase
of treasury stock
|
(367 | ) | — | |||||
Reduction
in receivable from the sale of stock
|
51 | — | ||||||
Net
cash used in financing activities
|
(316 | ) | — | |||||
Net
decrease in cash and cash equivalents
|
(9,710 | ) | (4,822 | ) | ||||
Cash
and cash equivalents, beginning of period
|
13,237 | 25,747 | ||||||
Cash
and cash equivalents, end of period
|
$ | 3,527 | $ | 20,925 |
12
Note
4-Fair Value of Financial Instruments
The
following table presents information about CIB Marine’s assets and liabilities
measured at fair value on a recurring basis as of September 30, 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.
Fair Value for Measurements Made on a Recurring Basis
|
||||||||||||||||
Description
|
September 30, 2009
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Available
for sale securities
|
$ | 197,085 | $ | — | $ | 192,781 | $ | 4,304 | ||||||||
Loans
held for sale
|
4,821 | — | 4,821 | — | ||||||||||||
Interest
rate lock commitments
|
5 | — | 5 | — | ||||||||||||
Total
|
$ | 201,911 | $ | — | $ | 197,607 | $ | 4,304 | ||||||||
Liabilities
|
||||||||||||||||
OTC
written options
|
$ | 5 | $ | — | $ | 5 | $ | — | ||||||||
Mortgage
forward sale agreements
|
4 | — | 4 | — | ||||||||||||
Total
|
$ | 9 | $ | — | $ | 9 | $ | — |
The
following table presents information about CIB Marine’s assets and liabilities
measured at fair value on a non-recurring basis as of September 30, 2009 and
indicates the fair value hierarchy of the valuation techniques used to determine
such fair value, as defined by ASC 820-10-65.
Fair Value for Measurements Made on a Nonrecurring Basis
|
||||||||||||||||||||
Description
|
September 30, 2009
|
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
Third Quarter
2009
|
|||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Impaired
loans (1)
|
$ | 21,544 | $ | — | $ | 21,544 | $ | — | $ | (1,857 | ) | |||||||||
Foreclosed
properties
|
1,285 | — | 1,285 | — | (1 | ) | ||||||||||||||
Other
equity investments
|
65 | — | — | 65 | — | |||||||||||||||
Total
|
$ | 22,894 | $ | — | $ | 22,829 | $ | 65 | $ | (1,858 | ) |
(1)
|
Impaired
loans gains (losses) in the period include only those attributable to the
loans represented at fair value measurements for September 30, 2009. Total
impaired loans at September 30, 2009 were $46.6
million.
|
The
following table presents a rollforward for the quarter and nine months ended
September 30, 2009, 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)
|
||||||||
September
30, 2009
|
||||||||
Quarter ended
|
Nine months ended
|
|||||||
(dollars
in thousands)
|
||||||||
Available for Sale Securities
(1)
|
||||||||
Beginning
of period balance
|
$ | 3,983 | $ | 3,254 | ||||
Total
gains or losses (realized/unrealized)
|
||||||||
Included
in earnings (or changes in net assets)
|
(67 | ) | (67 | ) | ||||
Included
in other comprehensive income
|
395 | 1,146 | ||||||
Purchases,
issuances and settlements
|
(7 | ) | (29 | ) | ||||
Transfers
in and/or out of Level 3
|
— | — | ||||||
Balance
at September 30, 2009
|
$ | 4,304 | $ | 4,304 | ||||
The
amount of total gains or losses for the period included in earnings (or
changes in net assets) attributable to the change in unrealized gains or
losses relating to assets still held at September 30, 2009
|
$ | 328 | $ | 1,079 |
|
(1)
|
Structured
debt obligations collateralized by pooled TruPS in Other Notes and
Bonds.
|
13
Gains and
losses (realized and unrealized), included in earnings (or changes in net
assets) for the nine months ended September 30, 2009 (above) are reported in
trading revenues and in other revenues as follows:
Trading Revenues
|
Other Revenues
|
|||||||
(Dollars
in thousands)
|
||||||||
Total
gains or losses in earnings (or changes in net assets) for the period
(above)
|
$ | — | $ | (67 | ) | |||
Change
in unrealized gains or losses relating to assets still held at reporting
date
|
$ | — | $ | 1,146 |
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 LIBOR swap yield curves,
where market quoted volatilities are used, and where correlated or market
corroborated inputs are used such as prepayment speeds, expected default and
loss severity rates. Securities with predominantly Level 2 inputs include U.S.
government agency and government sponsored enterprise issued securities and
mortgage-backed securities, certain corporate or foreign sovereign debt
securities, private issue mortgage-backed securities, other asset-backed
securities, equity securities with quoted market prices but low or infrequent
trades and debt obligations of states and political subdivisions. Where Level 1
or Level 2 inputs are either not available, or are significantly adjusted, the
securities are classified under Level 3 inputs. The available-for-sale
securities using Level 3 inputs were pooled TruPS 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.
Interest Rate Lock Commitments, OTC
Written Options and Mortgage Forward Sale Agreements. Together referred
to as “Interest Rate Derivatives,” these instruments’ fair values are based on
Level 2 quoted prices for similar transactions. The Interest Rate Derivatives
reported are all related to the residential mortgage activity of CIB Marine.
Interest Rate Lock Commitments are agreements with customers to originate
residential mortgage loans at agreed upon interest rates. OTC Written Options
represent CIB Marine’s agreement with a counterparty to deliver each respective
loan agreed to under an Interest Rate Lock Commitment at a set price if the loan
closes as agreed and within an agreed time period, and Mortgage Forward Sale
Agreements represent CIB Marine’s agreement to deliver each respective closed
loan as reported in loans held for sale within the agreed time period. Credit
risk is minimal due to the combination of relatively low level of activity, the
short-term nature of the Interest Rate Derivatives and the credit worthiness of
the counterparty. The carrying value of the Interest Rate Derivatives are
reported in Other Assets and Other Liabilities on the Consolidated Balance
Sheet, and gains and losses are recorded in Other Income of the Consolidated
Statement of Operations. The Notional Amounts are reported within this
Note.
Impaired Loans. Impaired loans
often, but not always, have an impairment loss. Impairment losses are included
in the allowance for loan losses. The impairment loss is based on a Level 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 with an impairment loss and where
that impairment loss was determined based upon a fair value estimate of the
collateral.
Foreclosed Properties.
Foreclosed property fair value estimates are provided using Level 2 inputs,
including primarily the appraised value of the real estate with certain other
market correlated or corroborated information.
Other Equity Investments.
Other equity investments are those equity investments represented in Other
Assets on the Consolidated Balance Sheet and Note 9-Other Assets that are
carried at market value when it is below CIB Marine’s cost. The fair value is
estimated using Level 3 inputs based primarily on an estimate of CIB Marine’s
respective ownership share in the net worth of the entity.
14
The table
below summarizes the information required by ASC 825-10-65.
September 30, 2009
|
||||||||
Carrying
Amount
|
Estimated
Fair Value
|
|||||||
(Dollars
in thousands)
|
||||||||
Financial
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 61,057 | $ | 61,057 | ||||
Loans
held for sale
|
5,001 | 5,001 | ||||||
Securities
|
197,085 | 197,085 | ||||||
Loans,
net
|
490,436 | 492,438 | ||||||
Federal
Home Loan Bank and other equity investments (1)
|
11,620 | 11,620 | ||||||
Accrued
interest receivable
|
3,258 | 3,258 | ||||||
Financial
liabilities:
|
||||||||
Deposits
|
641,369 | 646,993 | ||||||
Short-term
borrowings
|
13,843 | 13,843 | ||||||
Long-term
borrowings
|
21,000 | 21,686 | ||||||
Liabilities
subject to compromise (2)
|
107,189 | |||||||
Accrued
interest payable
|
1,207 | 1,207 |
September 30, 2009
|
||||||||||||
Contractual
or Notional
Amount
|
Carrying
Amount
|
Estimated
Fair Value
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Off-balance
sheet items:
|
||||||||||||
Commitments
to extend credit
|
$ | 44,706 | $ | 5 | $ | 5 | ||||||
Standby
letters of credit
|
2,147 | (3 | ) | (3 | ) | |||||||
Interest
rate derivatives
|
2,444 | (9 | ) | (9 | ) |
December 31, 2008
|
||||||||
Carrying
Amount
|
Estimated
Fair Value
|
|||||||
(Dollars
in thousands)
|
||||||||
Financial
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 57,231 | $ | 57,231 | ||||
Loans
held for sale
|
4,777 | 4,777 | ||||||
Securities
|
280,452 | 280,452 | ||||||
Loans,
net
|
535,965 | 533,914 | ||||||
Federal
Home Loan Bank and other equity investments (1)
|
11,620 | 11,620 | ||||||
Accrued
interest receivable
|
4,289 | 4,289 | ||||||
Financial
liabilities:
|
||||||||
Deposits
|
694,632 | 702,548 | ||||||
Short-term
borrowings
|
62,806 | 62,806 | ||||||
Long-term
borrowings
|
27,000 | 27,985 | ||||||
Junior
subordinated debentures (3)
|
61,857 | |||||||
Accrued
interest payable
|
41,377 | 41,377 |
December 31, 2008
|
||||||||||||
Contractual
or
Notional
Amount
|
Carrying
Amount
|
Estimated
Fair Value
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Off-balance
sheet items:
|
||||||||||||
Commitments
to extend credit
|
$ | 110,951 | $ | — | $ | — | ||||||
Standby
letters of credit
|
3,913 | (24 | ) | (24 | ) | |||||||
Interest
rate derivatives
|
3,463 | — | — |
|
(1)
|
The
carrying amount and estimated fair value of FHLB stock was $11.6 million
at both September 30, 2009 and December 31, 2008; and other equity
investments excluding those accounted for under the equity method of
accounting were $0.07 million at both September 30, 2009 and December 31,
2008.
|
|
(2)
|
See
Liabilities Subject to Compromise (Junior Subordinated Debentures) below
for Estimated Fair Value
information.
|
|
(3)
|
See
Junior Subordinated Debentures below for Estimated Fair Value
information.
|
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.
15
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.
The
estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) is
not reflected. The value of this item is significant.
Because
of the wide range of valuation techniques and the numerous estimates that must
be made, it may be difficult to make reasonable comparisons of CIB Marine’s fair
value to that of other financial institutions. It is important that the many
uncertainties discussed above be considered when using the estimated fair value
disclosures and to realize that because of these uncertainties the aggregate
fair value should in no way be construed as representative of the underlying
value of CIB Marine.
The
following describes the methodology and assumptions used to estimate fair value
of financial instruments required by ASC 825-10-65.
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 reverse
repurchase agreements.
Available
for Sale Securities
The
estimated fair values of securities by type are provided in Note 6-Securities
Available for Sale. These are based on quoted market prices, when available. If
a quoted market price is not available, fair value is estimated using Level 2
and Level 3 pricing inputs as described within this Note 4-Fair Values of
Financial Instruments.
Loans
held for Sale
The fair
value of loans held for sale, consisting primarily of commercial loans and
residential mortgage loans, is estimated based on the underlying value of the
collateral of the commercial loan and using current market prices for similar
residential mortgage loans in the market.
Loans
Receivable
The fair
values of loans receivable were estimated by discounting the expected future
cash flows using current interest rates at which similar loans would be made to
borrowers with similar credit ratings and maturities. The carrying value of
loans receivable is net of the allowance for loan losses.
Federal
Home Loan Bank and Federal Reserve Bank Stock
The
carrying amounts of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank
(“Reserve Bank”) stock approximate their fair values.
Accrued
Interest Receivable
The
carrying amounts of accrued interest approximate its fair
value.
16
Deposit
Liabilities
The
carrying value of deposits with no stated maturity approximates their fair value
as they are payable on demand. The estimated fair value of fixed time deposits
is based on discounted cash flow analyses. The discount rates used in these
analyses are based on market rates of alternative funding sources currently
available for similar remaining maturities.
Short-term
Borrowings
The
carrying value of short-term borrowings payable within three months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than three months is based on quoted market prices, when
available. Borrowed funds with a maturity greater than three months for which
quoted prices were not available were valued using cash flows discounted at a
current market rate for similar types of debt. For purposes of this disclosure,
short-term borrowings are those borrowings with stated final maturities of less
than or equal to one year, including securities sold under agreements to
repurchase, U.S. Treasury tax and loan notes, lines of credit, commercial paper
and other similar borrowings.
Long-term
Borrowings
The fair
market value of long-term borrowings payable were based on discounted cash flows
using current quoted rates as the discount rate.
Junior
Subordinated Debentures
An
estimate of fair value of the Debentures for December 31, 2008 had not been made
because it was not practicable to make such estimate at that time. Information
pertinent to estimating fair value is available in Note 12-Pre-petition Debt
(Junior Subordinated Debentures).
Liabilities
Subject to Compromise (Junior Subordinated Debentures)
An
estimate of fair value of the Debentures and the related accrued interest
payable for September 30, 2009 has not been made because it is not practical to
make such an estimate at this time due to the bankruptcy proceeding. Information
pertinent to estimating fair value is available in Note 12-Pre-petition Debt
(Junior Subordinated Debentures).
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.
The fair
value of interest rate derivatives are estimated using Level 2 quoted prices for
similar transactions described within this Note.
Note
5-Stock Option Plans
CIB
Marine has a nonqualified stock option and incentive plan for its employees and
directors. At September 30, 2009, options to purchase 752,326 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.
17
The
following is a reconciliation of stock option activity for the nine months ended
September 30, 2009:
Number
of Shares
|
Range of
Option Prices
per Share
|
Weighted
Average
Exercise
Price
|
Weighted Average
Remaining
Contractual
Term in Years
|
Weighted
Average Grant
Date Fair Value
Per Share
|
||||||||||||||||
Shares
under option at December 31, 2008
|
1,101,617 | $ | 2.17-22.89 | $ | 6.16 | |||||||||||||||
Granted
|
— | $ | — | $ | — | |||||||||||||||
Lapsed
or surrendered
|
(238,797 | ) | 3.70-22.89 | 8.76 | ||||||||||||||||
Exercised
|
— | — | — | |||||||||||||||||
Shares
under option at September 30, 2009
|
862,820 | $ | 2.17-22.89 | $ | 5.44 | 6.55 | ||||||||||||||
Shares
exercisable at September 30, 2009
|
495,920 | $ | 2.17-22.89 | $ | 6.57 | 5.86 |
The
following table shows activity relating to nonvested stock options:
Nonvested
stock options at December 31, 2008
|
528,000 | |||
Granted
|
— | |||
Vested
|
(77,500 | ) | ||
Forfeited
|
(83,600 | ) | ||
Nonvested
stock options at September 30, 2009
|
366,900 |
Fair
value has been estimated using the Black-Scholes model as defined in ASC 718-10.
There were no options granted in the first nine months of 2009.
ASC
718-10’s fair value method resulted in $0.1 million compensation expense for
both the first nine months of 2009 and 2008. In accordance with ASC 718-10, CIB
Marine is required to estimate potential forfeitures of stock grants and adjust
compensation expense recorded accordingly. The estimate of forfeitures will be
adjusted over the requisite service period to the extent that actual forfeitures
differ, or are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized in the period of change and will also impact the
amount of stock compensation expense to be recorded in future periods. At
September 30, 2009, CIB Marine had $0.2 million of total unrecognized
compensation cost related to nonvested stock options. That cost is expected to
be recognized over a weighted-average period of 2.1 years.
ASC
718-10 also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow rather than an
operating cash flow as required under previous literature. There were no such
tax benefits during the first nine months of 2009 or 2008.
CIB
Marine records amounts received upon the exercise of options by crediting common
stock and capital surplus. Income tax benefits from the exercise of stock
options result in a decrease in current income taxes payable and, to the extent
not previously recognized as a reduction in income tax expense, an additional
increase in capital surplus.
Note
6-Securities Available for Sale
The
amortized cost, gross unrealized gains and losses and approximate fair values of
securities are as follows:
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
September
30, 2009
|
||||||||||||||||
U.S.
government agencies
|
$ | 18,585 | $ | 1,088 | $ | — | $ | 19,673 | ||||||||
Obligations
of states and political subdivisions
|
30,204 | 1,185 | 100 | 31,289 | ||||||||||||
Other
notes and bonds
|
8,702 | — | 4,248 | 4,454 | ||||||||||||
Mortgage-backed
securities (agencies)
|
74,704 | 3,117 | — | 77,821 | ||||||||||||
Mortgage-backed
securities (non-agencies)
|
69,451 | 141 | 6,528 | 63,064 | ||||||||||||
Equity
securities (at cost basis)
|
955 | — | 171 | 784 | ||||||||||||
Total
securities available for sale
|
$ | 202,601 | $ | 5,531 | $ | 11,047 | $ | 197,085 | ||||||||
December
31, 2008
|
||||||||||||||||
U.S.
government agencies
|
$ | 44,835 | $ | 2,244 | $ | — | $ | 47,079 | ||||||||
Obligations
of states and political subdivisions
|
30,236 | 622 | 624 | 30,234 | ||||||||||||
Other
notes and bonds
|
9,012 | — | 5,409 | 3,603 | ||||||||||||
Commercial
paper
|
4,800 | — | — | 4,800 | ||||||||||||
Mortgage-backed
securities (agencies)
|
107,194 | 1,754 | 26 | 108,922 | ||||||||||||
Mortgage-backed
securities (non-agencies)
|
93,428 | 71 | 8,504 | 84,995 | ||||||||||||
Equity
securities (at cost basis)
|
955 | — | 136 | 819 | ||||||||||||
Total
securities available for sale
|
$ | 290,460 | $ | 4,691 | $ | 14,699 | $ | 280,452 |
18
Securities
available for sale with a carrying value of $158.8 million and $222.3 million at
September 30, 2009 and December 31, 2008, respectively, were pledged to secure
public deposits, FHLB advances, repurchase agreements and for other purposes as
required or permitted by law.
The
amortized cost and fair value of securities as of September 30, 2009, 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
|
$ | 4,456 | $ | 4,596 | ||||
Due
after one year through five years
|
20,286 | 21,601 | ||||||
Due
after five years through ten years
|
10,646 | 11,219 | ||||||
Due
after ten years
|
22,103 | 18,000 | ||||||
57,491 | 55,416 | |||||||
Mortgage-backed
securities
|
144,155 | 140,885 | ||||||
Other
equities (at cost basis)
|
955 | 784 | ||||||
Total
securities available for sale
|
$ | 202,601 | $ | 197,085 |
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 September 30,
2009 and December 31, 2008:
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)
|
||||||||||||||||||||||||
September 30, 2009
|
||||||||||||||||||||||||
Obligations
of states and political subdivisions
|
$ | 4,028 | $ | 56 | $ | 919 | $ | 44 | $ | 4,947 | $ | 100 | ||||||||||||
Other
notes and bonds
|
— | — | 4,304 | 4,248 | 4,304 | 4,248 | ||||||||||||||||||
Mortgage-backed
securities
|
8,226 | 2,063 | 43,598 | 4,465 | 51,824 | 6,528 | ||||||||||||||||||
Equity
security (at cost basis)
|
— | — | 784 | 171 | 784 | 171 | ||||||||||||||||||
Total
securities with unrealized losses
|
$ | 12,254 | $ | 2,119 | $ | 49,605 | $ | 8,928 | $ | 61,859 | $ | 11,047 | ||||||||||||
Securities
without unrealized losses
|
135,226 | |||||||||||||||||||||||
Total
securities
|
$ | 197,085 | ||||||||||||||||||||||
December 31, 2008
|
||||||||||||||||||||||||
Obligations
of states and political subdivisions
|
$ | 8,780 | $ | 428 | $ | 2,260 | $ | 196 | $ | 11,040 | $ | 624 | ||||||||||||
Other
notes and bonds
|
1,220 | 1,516 | 2,034 | 3,893 | 3,254 | 5,409 | ||||||||||||||||||
Mortgage-backed
securities
|
83,820 | 8,530 | 14 | — | 83,834 | 8,530 | ||||||||||||||||||
Equity
security (at cost basis)
|
819 | 136 | — | — | 819 | 136 | ||||||||||||||||||
Total
securities with unrealized losses
|
$ | 94,639 | $ | 10,610 | $ | 4,308 | $ | 4,089 | $ | 98,947 | $ | 14,699 | ||||||||||||
Securities
without unrealized losses
|
181,505 | |||||||||||||||||||||||
Total
securities
|
$ | 280,452 |
For those
securities with fair value less than cost at September 30, 2009, 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 OTTI; except for the following: (1) two
mortgage-backed securities (non-agency) (“Non-agency MBS”) $0.1 million credit
related OTTI during the third quarter of 2009, with amortized costs and
unrealized losses totaling $3.4 million and $1.5 million, respectively, at
September 30, 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 the third quarter of 2009, with amortized costs and unrealized losses
totaling $4.7 million and $3.2 million, respectively.
19
Proceeds
from the sales of securities available for sale during the first quarter of 2009
were $13.3 million and CIB Marine realized a gain on the sale of $0.6 million.
There were no sales of securities during the first nine months of 2008 or in the
second and third quarters of 2009.
Net
unrealized losses on investment securities at September 30, 2009 were $5.5
million compared to $10.0 million at December 31, 2008. As of September 30,
2009, other notes and bonds accounted for $4.2 million, Non-agency MBS accounted
for $6.4 million and other equity accounted for $0.2 million in net unrealized
losses. The remaining securities have net unrealized gains of $5.3 million at
September 30, 2009.
Municipal Securities. As of
September 30, 2009 the municipal securities were all rated investment grade by
nationally recognized statistical rating agencies, except one security rated B.
That security had a par value of $2.5 million and an unrealized loss of $0.04
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. In addition, CIB Marine has
determined a credit loss does not exist and as a result has not recognized any
OTTI in its municipal securities.
Other Notes and Bonds. At
September 30, 2009, CIB Marine held $8.9 million par value with an amortized
cost of $8.7 million and $4.5 million fair value of other notes and bonds, which
included $8.7 million par value with an amortized cost of $8.6 million and $4.3
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 $3.3
million at December 31, 2008. To a limited extent these securities are protected
against 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.
CIB
Marine evaluates for OTTI and performs assessments depending on the security as
prescribed by ASC 820 Fair
Value Measurements and Disclosures, and ASC 320 Investments-Debt and Equity
Securities, and ASC 325 Investments-Other. In
addition, for some of the evaluations for OTTI, CIB Marine performs assessments
prescribed by ASC 325-40-65 in determining whether
it is probable that an adverse change in the estimated cash flows has occurred.
This evaluation of estimated cash flows includes an assessment of the credit
risk inherent in the pool of collateral, estimates of the timing and severity of
the issuer deferrals and defaults and related recovery and their impact on
estimated cash flow waterfalls for both interest and principal. CIB Marine also
considers current levels of over-collateralization and collateral coverage tests
that trigger changes in the cash flow waterfalls in performing the
analysis.
To
determine whether there has been an adverse change in estimated cash flows from
the cash flows previously projected, the present value of the remaining cash
flows as estimated at the date they were last previously revised (or the initial
transaction if not previously revised) is compared against the present value of
the cash flows estimated at the current financial reporting date. The cash flows
are discounted at a rate equal to the current yield used to accrete the
beneficial interest.
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 and, based on performance information, evaluated for potential default
and those amounts were compared to the current assessed level of defaults needed
to 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 related
to the structure of the related securities issued sharing an interest in the
collateral pool to derive expected credit loss outcomes through
maturity.
20
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 September 30, 2009 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 at
their future interest due dates, and in taking this in combination with the
expected future deferrals and defaults given the deterioration in the financial
industry has expanded enough to consider these two securities to be OTTI. The
cash that is received from performing issuers in each respective collateral pool
will be directed to pay down the par values of certain classes senior to the
class held by CIB Marine’s 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 the third quarter of 2009. It is estimated for Class C-FP
of PreTSL 23 and Class B-1 of PreTSL 26, it would take an additional 19% and
26%, respectively, of performing collateral to 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, however, CIB Marine
considers them to be OTTI and has recorded $0.07 million in credit related OTTI
during the third quarter of 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 $3.1 million of unrealized loss
recorded in the AOCI is largely related to a decline in prices in these
securities over the course of the past year due to the lack of demand and
liquidity in this securities sector, the deteriorated condition of the economy,
capital markets and financial industry and the perceptively higher risk today
that losses in the collateral pools could be higher than what is expected. With
the contractual PIK process described earlier in this section, all the
respective securities were performing as to full and timely payments at
September 30, 2009 as permitted under the contractual arrangements.
Additional
information as of September 30, 2009, 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
|
Amortized
Cost
|
Fair
Value
|
Unrealized
Gain (Loss)
|
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(1)
|
$ | 747 | $ | 267 | $ | (480 | ) | $ | 67 | $ | (480 | ) |
C/NR/CCC
|
17/19/(11)
|
|||||||||||
PreTSL
26
|
B-1(1)
|
3,949 | 1,326 | (2,623 | ) | — | (2,623 | ) |
B2/NR/CCC
|
20/26/(11)
|
||||||||||||||||
PreTSL
27
|
A-1
|
1,896 | 1,274 | (622 | ) | — | — |
A3/BBB(n)/AA
|
20/41/28
|
|||||||||||||||||
PreTSL
28
|
A-1
|
1,961 | 1,438 | (523 | ) | — | — |
A3/BBB(n)/A
|
13/43/40
|
|
(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 15%
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 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.
|
21
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 September 30, 2009, CIB Marine had
Non-agency MBS holdings of $70.5 million par value with a fair value of $63.1
million, down from holdings at December 31, 2008, of $96.5 million par value
with a fair value of $85.0 million. The decline of $26.0 million in par value
was due entirely to the repayment and prepayment of principal. CIB Marine’s
principal and interest payments received from the securities from the purchase
date through September 30, 2009, have all been timely and in full.
At the
time of purchase, all of CIB Marine’s Non-agency MBS were credit rated AAA by
all of Moody’s, Standard and Poor’s and Fitch to the extent they had rated the
security, and in every case at least two of the firms had rated each security.
In addition, at September 30, 2009, all these securities were performing with
respect to the full and timely receipt of principal and interest payments due to
CIB Marine. At September 30, 2009, securities with a par value of $25.3 million
and unrealized losses of $4.4 million were below investment grade compared to
securities with a par value of $4.2 million and no unrealized losses at December
31, 2008. The table below displays the current composition of the Non-agency MBS
portfolio based on the lowest credit rating assigned by any of Moody’s, Standard
and Poor’s or Fitch that have assigned a rating.
Total Non-Agency Mortgage Backed Securities Credit Ratings
|
||||||||||||
Credit Rating
|
Par
|
Amortized
Cost
|
Unrealized
Gain (Loss)
|
|||||||||
(Dollars
in thousands)
|
||||||||||||
AAA
|
$ | 24,844 | $ | 24,310 | $ | (521 | ) | |||||
AA
|
6,002 | 5,976 | (254 | ) | ||||||||
A
|
5,555 | 5,481 | (367 | ) | ||||||||
BBB
|
8,780 | 8,768 | (819 | ) | ||||||||
BB
or below (1)
|
25,348 | 24,916 | (4,426 | ) | ||||||||
Total
|
$ | 70,529 | $ | 69,451 | $ | (6,387 | ) |
(1)
|
BB
and lower credit ratings are considered to be below investment grade. All
the securities were originally
AAA.
|
Non-agency
MBS are assessed for OTTI within the scope of ASC 320 Investments-Debt and Equity
Securities, by determining whether a decline in fair value below the
amortized cost basis is other-than-temporary. If an OTTI is determined to exist,
then the cost basis of the security is written down by the amount of OTTI
recognized in earnings. If CIB Marine does not intend to sell the investments
and it is not more likely than not that CIB Marine will be required to sell the
investments before recovery of the amortized cost basis less any current period
credit loss, the amount of the OTTI recognized in earnings is the amount related
to expected credit loss only and not the level of impairment related to other
factors; otherwise it is the full unrealized loss of the security related to
both credit loss, as well as to other factors.
CIB
Marine considers a number of factors in assessing whether or not a credit loss
exists and the period over which recovery of any unrealized loss is expected to
occur, including: the length of time the fair value has been less than the
amortized cost basis, the payment structure of the debt security, failure of the
issuer to make scheduled interest or principal payments, any changes to the
rating by a rating agency, recoveries or any additional decline to the fair
value subsequent to the balance sheet date, the degree to which any subordinated
interests (if any) are able to absorb estimated losses in the collateral, and
conditions related to the specific security and its collateral. With respect to
the latter, a number of factors are considered, including past and current debt
ratings, projected prepayment speeds, past and current payment status, past and
current levels of defaults and estimates of related recoveries, and estimates of
future defaults and their related recoveries, and other factors. Estimates of
future levels of defaults and related recoveries involve consideration of a
number of contributing inputs, including but not limited to the year of
origination, current pay status, trends in home value appreciation
(depreciation) for year of issuance, original loan-to-value ratios, borrower
credit scores, loan documentation types and others. In addition to using various
sources for the inputs from others deemed to be reliable, the resulting
estimates of collateral losses are compared to those derived by others, where
available, to determine reasonableness of the estimates.
22
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., jumbo, conforming Alt-A and jumbo Alt-A which includes reduced
documentation types). All of CIB Marine’s Non-agency MBS are senior in position
to the issuance of securities that included 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. As of September 30, 2009, the vintages from 2004 or earlier represented
$30.7 million in amortized cost with a market value of $29.8 million and an
unrealized loss of $0.9 million, and the vintages from 2005 through 2006
represented $38.7 million in amortized cost with a market value of $33.3 million
and an unrealized loss of $5.4 million. As of September 30 2009, the mean and
median percentages for each security, respectively, of various delinquency and
non-performance measures to the total mortgage loans collateralizing those
securities were: (1) 3.06% and 1.53%, respectively, for loans 60 or more days
past due but not in foreclosure or transferred to other real estate owned, (2)
2.97% and 1.07%, respectively, for loans in foreclosure plus other real estate
owned, and (3) 6.03% and 2.45%, 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 28.2%. The
State of California represents the highest geographic concentration of loans
with a range of loans within each respective securities collateral pool ranging
from 16% to 100% from California but with the majority of the securities within
30% to 50%. Other states representing geographic concentrations of at least 10%
within any one or more of the collateral pools include Florida, Maryland,
Massachusetts, New York, Texas and Virginia.
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 related to credit loss and recognized in earnings was
$0.2 million and $0.1 million during 2008 and the first three quarters of 2009,
respectively; and the OTTI related to other factors and recognized in AOCI was
$0.2 million and $0.3 million during 2008 and the first three quarters of 2009,
respectively. On January 1, 2009 upon adoption of ASC 320-10-65 an adjustment of
$1.6 million was made between retained earnings and AOCI that had previously
been recognized in earnings during 2008, as required under previous the
accounting standards applicable to the period ended December 31,
2008.
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 included annualized prepayment
speeds ranging between 6% and 15%, future cumulative default rates ranging
between 34% and 40%, cumulative loss severity rates ranging between 43% and 48%,
and resulting future cumulative collateral loss rates ranging between 15% and
19% at a prepayment speed of 6%. Resulting cash flows were projected considering
the affects of related subordinated securities to derive expected credit loss
outcomes through maturity.
Total Non-Agency Mortgage Backed Securities with OTTI
As of September 30, 2009
|
|||||||||||||||||||||||||||||||||
Credit
Category |
Amortized
Cost |
Fair
Value |
Unrealized
Gain(Loss)
|
Total OTTI
Recognized in
Earnings (2)
|
Total OTTI
Recognized in
AOCI
|
Range of Non-Performing
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 | $ | 0 |
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||||
Below
Investment Grade (1)
|
3,393 | 1,892 | — | (348 | ) | (1,501 | ) | 22 – 28 | % | 73 - 73 | % |
2006
|
3.7 – 4.5 | % | |||||||||||||||||||
Total
|
$ | 3,393 | $ | 1,892 | $ | — | $ | (348 | ) | $ | (1,501 | ) | 22 – 28 | % | 73 - 73 | % |
2006
|
3.7 – 4.5 | % |
(1)
|
BB
and lower credit ratings are considered to be below investment grade. All
the securities were originally AAA.
|
(2)
|
All
total OTTI recognized in earnings have been related to credit
loss.
|
(3)
|
Ranges
represent the high and low measures for each security’s respective loan
collateral pool for securities with OTTI recognized. Non-performing loans
here means past due 60 or more days, in foreclosure or held as real estate
owned. The full amount of non-performing 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. As of
September 30, 2009, CIB Marine held marketable equity securities from a single
issuer amounting to $1.0 million in cost basis and $0.8 million in fair value
with an unrealized loss of $0.2 million. At December 31, 2008, the unrealized
loss on such securities was $0.4 million. The unrealized loss is in part related
to the continued decline in community bank stock prices since the time CIB
Marine obtained the stock in relation to the sale of certain assets and deposits
of Citrus Bank, N.A. during the third quarter of 2008. Based on an evaluation of
CIB Marine’s ability and intent to hold the securities for a reasonable period
of time sufficient for a forecasted recovery of fair value, CIB Marine does not
consider the securities to be OTTI as of September 30, 2009.
23
Expectations
that CIB Marine’s other notes and bonds and Non-agency MBS 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.
Rollfoward of OTTI Related to Credit
Loss. The following table is a rollforward 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 quarter and nine months ended September 30,
2009:
Rollforward of OTTI
|
||||||||
September
30, 2009
|
||||||||
Quarter Ended
|
Nine Months Ended
|
|||||||
(Dollars in thousands)
|
||||||||
Beginning
of period 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
|
$ | 228 | $ | 202 | ||||
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
|
186 | 212 | ||||||
Balance
at September 30, 2009 of credit losses related OTTI for which a portion
was recognized in other comprehensive income
|
$ | 414 | $ | 414 |
Note
7-Loans
The
composition of the loan portfolio is as follows:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Commercial
|
$ | 72,436 | 14.2 | % | $ | 75,289 | 13.6 | % | ||||||||
Commercial
real estate
|
267,199 | 52.5 | 258,881 | 46.8 | ||||||||||||
Commercial
real estate construction
|
60,917 | 12.0 | 86,909 | 15.7 | ||||||||||||
Residential
real estate
|
20,874 | 4.1 | 26,110 | 4.7 | ||||||||||||
Home
equity (1)
|
85,076 | 16.6 | 103,253 | 18.7 | ||||||||||||
Consumer
|
2,952 | 0.6 | 2,990 | 0.5 | ||||||||||||
Receivables
from sale of CIB Marine stock
|
— | — | (51 | ) | — | |||||||||||
Gross
loans
|
509,454 | 100.0 | % | 553,381 | 100.0 | % | ||||||||||
Deferred
loan costs
|
1,340 | 1,826 | ||||||||||||||
Loans
|
510,794 | 555,207 | ||||||||||||||
Allowance
for loan losses
|
(20,358 | ) | (19,242 | ) | ||||||||||||
Loans,
net
|
$ | 490,436 | $ | 535,965 |
|
(1)
|
Includes
purchased fixed rate home equity pools. At September 30, 2009 and December
31, 2008, the total outstanding balance of these purchased pools was $37.4
million and $52.2 million, the amount of loans past due 30 to 89 days and
still accruing interest was $3.2 million and $2.0 million and the loss
reserves allocated to these two pools totaled $5.5 million and $4.5
million, respectively.
|
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, the Bank in the ordinary course of business.
Such loans totaled $2.0 million and $3.3 million at September 30, 2009 and
December 31, 2008, respectively.
At
September 30, 2009 and December 31, 2008, CIB Marine had $0.4 million and $0.2
million, respectively, in outstanding principal balances on loans secured, or
partially secured, by CIB Marine stock. No specific reserves were allocated to
these loans at both September 30, 2009 and December 31, 2008. Loans made
specifically to enable the borrower to purchase CIB Marine stock and which were
not adequately secured by collateral other than the stock have been classified
as receivables from sale of stock, recorded as contra-equity and are not
included in this balance.
24
The
following table lists information on nonperforming and certain past due
loans:
September 30,2009
|
December 31, 2008
|
|||||||
(Dollars in thousands)
|
||||||||
Nonaccrual-loans
|
$ | 46,132 | $ | 15,072 | ||||
Nonaccrual-loans
held for sale
|
2,601 | 2,025 | ||||||
Restructured
loans
|
778 | — | ||||||
Loans
90 days or more past due and still accruing-loans
|
— | 1,040 | ||||||
Loans
90 days or more past due and still accruing-loans held for
sale
|
500 | 1,680 |
Information
on impaired loans is as follows:
September 30,2009
|
December 31, 2008
|
|||||||
(Dollars in thousands)
|
||||||||
Impaired
loans without a specific allowance
|
$ | 26,631 | $ | 4,363 | ||||
Impaired
loans with a specific allowance
|
19,965 | 9,789 | ||||||
Total
impaired loans
|
$ | 46,596 | $ | 14,152 | ||||
Specific
allowance related to impaired loans
|
$ | 5,074 | $ | 3,847 |
The
decline in performance of loans, and in particular those classified as
nonaccrual loans, caused an increase in impaired loans. The increase in 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
already taken on certain impaired 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.
Changes
in the allowance for loan losses were as follows:
Quarter Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Balance
at beginning of period
|
$ | 17,121 | $ | 22,640 | 19,242 | 20,706 | ||||||||||
Charge-offs
|
(6,859 | ) | (7,160 | ) | (18,510 | ) | (15,890 | ) | ||||||||
Recoveries
|
67 | 209 | 396 | 1,513 | ||||||||||||
Net
loan charge-offs
|
(6,792 | ) | (6,951 | ) | (18,114 | ) | (14,377 | ) | ||||||||
Allowance
for loans sold
|
— | (581 | ) | — | (581 | ) | ||||||||||
Transfer
from accrual for unfunded standby letters of credit to funded standby
letters of credit
|
— | 510 | — | 510 | ||||||||||||
Provision
for loan losses
|
10,029 | 10,355 | 19,230 | 19,715 | ||||||||||||
Balance
at end of period
|
$ | 20,358 | $ | 25,973 | $ | 20,358 | $ | 25,973 | ||||||||
Allowance
for loan losses as a percentage of loans
|
3.99 | % | 4.46 | % | 3.99 | % | 4.46 | % |
During
the third quarter and first nine months of 2009, the provision for credit losses
included approximately $4.6 million and $10.7 million, respectively, related to
the purchased home equity pools as compared to $5.1 million and $9.7 million,
during the third quarter and first nine months of 2008,
respectively.
The
allowance for loan losses as a percentage of loans declined from September 30,
2008 to September 30, 2009, as a result of a reduction in the proportion of the
portfolio represented by home equity and construction and development loans, and
the level of charge-offs for loans relative to the respective loan’s level of
allocated allowances for loan losses.
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 $1.5 million and $2.0 million as of September 30, 2009 and December
31, 2008, respectively.
Note
8-Companies Held For Disposal and Discontinued Operations
At
September 30, 2009, assets and liabilities of companies held for disposal
consist entirely of the remaining assets and liabilities of CIB Marine’s wholly
owned subsidiary, CIB Construction, including CIB Construction’s subsidiary
Canron Corporation (“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, 2009.
25
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 September 30, 2009 and December 31, 2008, CIB Construction’s net carrying
value of its investment in Canron was zero.
Note 9-Other
Assets
The
following table summarizes the composition of CIB Marine’s other
assets:
September 30, 2009
|
December 31, 2008
|
|||||||
(Dollars in thousands)
|
||||||||
Federal
Home Loan Bank and Federal Reserve Bank stock, at cost
|
$ | 11,555 | $ | 11,555 | ||||
Prepaid
expenses
|
1,176 | 950 | ||||||
Accounts
receivable
|
81 | 124 | ||||||
Trust
preferred securities underwriting fee, net of amortization
(2)
|
1,184 | 1,225 | ||||||
Other
investments
|
1,062 | 1,167 | ||||||
Income
tax receivable (1)
|
80 | 890 | ||||||
Other
|
1 | 9 | ||||||
$ | 15,139 | $ | 15,920 |
(1)
|
December
31, 2008 includes $0.7 million tax receivable from company held for
disposal per tax sharing agreement. This tax receivable was written off in
the third quarter of 2009.
|
(2)
|
Asset
will be written off upon confirmation of the
Plan.
|
The major
components of other investments is investments in limited partnership interests
in various affordable housing partnerships, which had a carrying value of $1.0
million and $1.1 million at September 30, 2009 and December 31, 2008,
respectively. In addition CIB Marine holds an interest in a small business
investment company with a carrying value of $0.1 million at both September 30,
2009 and December 31, 2008.
As a
member of the FHLB of Chicago, the Bank is required to maintain minimum amounts
of FHLB of Chicago stock as required by that institution.
In
October 2007, the FHLB Chicago entered into a consensual Cease and Desist Order
(the “FHLB C&D”) with its regulator, the Federal Housing Finance Board
(“Finance Board”). The FHLB C&D states that the Finance Board has determined
that requiring the FHLB Chicago to take the actions specified in the FHLB
C&D will improve the condition and practices of the FHLB Chicago, stabilize
its capital, and provide the FHLB Chicago an opportunity to address the
principal supervisory concerns identified by the Finance Board. Under the terms
of the FHLB C&D, capital stock repurchases and redemptions, including
redemptions upon membership withdrawal or other termination, are prohibited
unless the Bank has received approval of the Director of the Office of
Supervision of the Finance Board ("OS Director"). The FHLB C&D provides that
the OS Director may approve a written request by the FHLB Chicago for proposed
redemptions or repurchases if the OS Director determines that allowing the
redemption or repurchase would be consistent with maintaining the capital
adequacy of the FHLB Chicago and its continued safe and sound operations. The
FHLB C&D also provides that dividend declarations are subject to the prior
written approval of the OS Director and that the FHLB Chicago must submit a
Capital Structure Plan to the Finance Board consistent with the requirements of
the Gramm-Leach-Bliley Act and Finance Board regulations. Accounting guidance
indicates that an investor in FHLB Chicago capital stock should recognize
impairment if it concludes that it is not probable that it will ultimately
recover the par value of its shares. The decision of whether impairment exists
is a matter of judgment that should reflect the investor’s view of FHLB
Chicago’s long-term performance, which includes factors such as its operating
performance, the severity and duration of declines in the market value of its
net assets related to its capital stock amount and other factors including
regulatory. Based on this information CIB Marine believes the cost of the
investments will be fully recovered. The FHLB Chicago did not declare any
dividends for the nine months ended September 30, 2009 or the comparable period
in 2008. At both September 30, 2009 and December 31, 2008, CIB Marine had $11.6
million in FHLB Chicago stock, of which $1.1 million and $3.4 million,
respectively, were required stock holdings to maintain the level of borrowings
outstanding with the FHLB of Chicago.
26
Note
10-Short-term Borrowings
Borrowings
with original maturities of one year or less are classified as short-term. The
following table presents information regarding short-term
borrowings:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Federal
funds purchased and securities sold under repurchase
agreements
|
$ | 13,650 | 0.45 | % | $ | 19,908 | 0.68 | % | ||||||||
Treasury,
tax, and loan notes
|
193 | — | 2,898 | — | ||||||||||||
Federal
Home Loan Bank
|
— | — | 40,000 | 0.55 | ||||||||||||
Total
short-term borrowings
|
$ | 13,843 | 0.44 | % | $ | 62,806 | 0.57 | % |
CIB
Marine is required to maintain qualifying collateral as security for both
short-term and long-term FHLB borrowings. The debt to collateral ratio is
dependent upon the type of collateral pledged. As part of a collateral
arrangement covering both short-term and long-term borrowings from the FHLB, CIB
Marine had securities pledged with a fair value of $78.5 million and $74.8
million at September 30, 2009 and December 31, 2008, respectively.
In 2004,
CIB Marine entered into a written agreement with the Reserve Bank of Chicago
(the “Agreement”). Among other items, the Agreement requires CIB Marine to
obtain Reserve Bank approval before incurring additional borrowings or debt, and
pre-approval to pay interest on Debentures.
Note
11-Long-term Borrowings
Long-term
borrowings consist of borrowings having an original maturity of greater than one
year.
FHLB
The
following table presents information regarding amounts payable to the FHLB
Chicago that are included in the consolidated balance sheets as long-term
borrowings:
September 30, 2009
|
December 31, 2008
|
Schedulede | |||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
Maturity
|
|||||||||||||
(Dollars
in thousands)
|
|||||||||||||||||
$ | — | — | % | $ | 6,000 | 4.52 | % |
4/24/09
|
|||||||||
3,000 | 4.49 | 3,000 | 4.49 |
10/26/09
|
|||||||||||||
3,000 | 4.54 | 3,000 | 4.54 |
10/25/10
|
|||||||||||||
5,000 | 3.32 | 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
|
|||||||||||||
Total
|
$ | 21,000 | 4.02 | % | $ | 27,000 | 4.14 | % |
Note
12-Pre-petition Debt (Junior Subordinated Debentures)
The
following table presents information regarding CIB Marine’s Debentures at both
September 30, 2009 and December 31, 2008:
Balance
|
Issue
Date
|
Interest
Rate
|
Maturity Date
|
Callable
After
|
||||||||
(Dollars
in thousands)
|
||||||||||||
CIB
Marine Capital Trust I
|
$ | 10,310 |
03/23/00
|
10.88 | % |
03/08/30
|
03/08/10
|
|||||
CIB
Statutory Trust III
|
15,464 |
09/07/00
|
10.60 |
09/07/30
|
09/07/10
|
|||||||
CIB
Statutory Trust IV
|
15,464 |
02/22/01
|
10.20 |
02/22/31
|
02/22/11
|
|||||||
CIB
Statutory Trust V
|
20,619 |
09/27/02
|
Variable
(1)
|
09/27/32
|
09/30/07
|
|||||||
Total
junior subordinated debentures
|
$ | 61,857 |
(1)
|
Three-month
LIBOR + 3.40% adjusted quarterly, which was 3.69% and 4.87% at September
30, 2009 and December 31, 2008,
respectively.
|
27
CIB
Marine has 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 are 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. As a result of the Agreement entered into
with its regulator, CIB Marine elected to defer all such interest payments
subsequent to December 31, 2003, and as a result the Trusts deferred
distributions on their respective TruPS. At September 30, 2009 and December 31,
2008 CIB Marine had accrued interest payable on its $61.9 million Debentures of
$45.3 million and $39.1 million, respectively. As of the Filing Date, interest
expense on these Debentures is no longer being accrued. 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. In
addition, interest also accrues on all interest that was not paid when due,
compounded quarterly or semi-annually. During the deferral period and while in
default, CIB Marine may not pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment on its stock, or make any
payment of principal, interest or premium, or redeem any similar debt securities
of CIB Marine, subject to certain limitations. The TruPS are subject to
mandatory redemption, in whole or in part, upon repayment of the Debentures at
maturity or their earlier redemption. The TruPS qualify as regulatory capital,
subject to regulatory limitation.
On March
16, 2009, CIB Marine issued a consent solicitation seeking the consent of the
holders of its TruPS to a proposed restructuring plan that would have converted
the debt under the Debentures into preferred stock, thus reducing the ongoing
interest expense burden and eliminating any consequences of default on the TruPS
(see the discussion in the Liquidity and Capital Plan Update section). The vote
was concluded on May 11, 2009, however, CIB Marine did not receive the requisite
number of votes to approve the plan of restructuring.
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 that was presented to the TruPS holders for their approval. Under the Plan,
approximately $105.3 million (as of July 16, 2009) of cumulative high-interest
indebtedness of the TruPS will be exchanged for 55,624 shares of Series A 7%
fixed rate preferred noncumulative perpetual stock with a stated value of $1,000
per share and 4,376 shares of Series B 7% fixed rate convertible noncumulative
perpetual preferred stock with a stated value of $1,000 per share. Each share of
Series B Preferred will be 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 will have
no stated redemption date and holders will not have the right to compel the
redemption of any or all of the shares. Further, dividends will be noncumulative
and payable only to the extent CIB Marine declared a dividend, at its discretion
and subject to regulatory approval. The effects of the Plan, which was approved
by the TruPS holders on September 15, 2009 and confirmed by the Bankruptcy Court
on October 29, 2009 would improve earnings by eliminating the interest burden on
CIB Marine associated with the TruPS-related indebtedness, and significantly
improve its capital position. See Subsequent Events Section in Part I, Item 2 of
this Form 10-Q for update of bankruptcy proceeding.
Under the
Plan, common shareholders would not be impaired. If all Series B Preferred
shareholders were to convert their shares in connection with a merger, they
would own slightly less than 50% of the outstanding common stock and have a
right to participate at that level in any merger consideration paid to acquire
CIB Marine.
The
Federal Reserve Board (“FRB”) has a rule limiting the inclusion of Debentures in
Tier 1 equity capital. The ruling limited the total restricted Tier 1 capital
elements, including Debentures, net of investment in trust, to 25% of total Tier
1 capital elements, net of goodwill less any associated deferred tax liability.
At September 30, 2009, CIB Marine did not include any of its Debentures in Tier
1 capital.
28
Note 13-Other
Liabilities
September 30, 2009
|
December 31, 2008
|
|||||||
(Dollars in thousands)
|
||||||||
Accounts
payable
|
$ | 85 | $ | 179 | ||||
Accrued
real estate taxes
|
124 | 147 | ||||||
Accrued
compensation and employee benefits
|
845 | 681 | ||||||
Accrued
professional fees
|
31 | 490 | ||||||
Accrued
other expenses
|
648 | 448 | ||||||
Other
liabilities
|
336 | 278 | ||||||
$ | 2,069 | $ | 2,223 |
Note
14-Stockholders’ Equity (Deficit)
Receivables
from Sale of Stock
Loans not
sufficiently collateralized by assets other than CIB Marine stock and made by
the Bank to borrowers who used the proceeds to acquire CIB Marine stock, are
classified as receivables from sale of stock and are accounted for as a
reduction of stockholders’ equity and recorded as receivables from sale of
stock, unless the loan had been repaid prior to the issuance of the financial
statements. The balance of loans classified as receivable from sale of stock was
$0.05 million at December 31, 2008. There were no such loans outstanding at
September 30, 2009.
Treasury
Stock
The 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. Also, during the quarter ended June 30, 2009, CIB
Marine repurchased 205,836 shares of stock held in the employee stock ownership
plan sponsored by CIB Marine. At both September 30, 2009 and December 31, 2008,
7,452 shares of treasury stock were directly owned by the Bank and thus were not
excluded from the number of shares outstanding.
Regulatory
Capital
CIB
Marine and the 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 the 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, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank’s assets and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank‘s capital
amounts and classifications are also subject to qualitative judgments by its
regulators about components, risk weightings and other factors. To be
categorized as well capitalized, the Bank must maintain total risk adjusted
capital, Tier 1 capital and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively.
There are
five capital categories defined in the regulations: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Classification of the 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.
Under the
definition of capital levels within the C&D order, a bank is classified as
adequately capitalized if it is at or above the targeted level of capital
specified in the order. At September 30, 2009, the Bank was adequately
capitalized under this definition.
29
At both
September 30, 2009 and December 31, 2008, CIB Marine was subject to the
Agreement it entered into with the Reserve Bank in the second quarter of 2004.
Among other items, the Agreement requires CIB Marine to maintain a sufficient
capital position for the consolidated organization including the current and
future capital requirements of the Bank, CIB Marine’s nonbank subsidiaries and
the consolidated organization. As of September 30, 2009, CIB Marine’s Tier 1
leverage ratio was a negative 0.50% compared to 3.58% at December 31, 2008 and
was below the 4.0% required by the Agreement. The decline reflects the continued
operating losses of CIB Marine during the first nine months of 2009. Depending
on the extent of continuing losses incurred by CIB Marine in future periods as
well as the overall size of its balance sheet, further credit downgrades and
OTTI adjustments to its securities portfolio and potential loan losses and
recoveries, CIB Marine’s capital ratios could decline further. CIB Marine’s
ability to increase its capital and meet the requirements of the Agreement is
dependent upon the successful execution of the Plan outlined in Note
2-Pre-packaged Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy
Code.
CIB
Marine continues to focus on the safety and soundness of the Bank. CIB Marine
has provided the Bank with $5.0 million of capital during 2008 and an additional
$4.0 million in 2009. This is consistent with CIB Marine’s goal of supporting
strong capital and liquidity positions at the Bank and is in keeping with its
source of strength obligations under the Bank Holding Company Act of 1956, as
amended (the “BHCA”). While in bankruptcy, if capital is required at the Bank,
CIB Marine must petition the Bankruptcy Court for permission to contribute the
needed capital to the Bank. However, other capital management strategies such as
balance sheet management and investment portfolio sales can still be employed by
the Bank.
In its
2008 Form 10-K, CIB Marine disclosed that its Wisconsin state-chartered bank
subsidiary at the time, Marine Bank, stipulated to a cease and desist order (the
“C&D”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the
Wisconsin Department of Financial Institutions, Division of Banking (the
“WDFI”). The terms of the C&D were described in CIB Marine’s 2008 Form 10-K.
The C&D became effective on April 24, 2009. Failure to adhere to the
requirements of the actions mandated by the C&D could have subjected Marine
Bank to more severe restrictions and civil monetary penalties. The C&D added
no additional requirements to the asset quality and loan review program
previously implemented by Marine Bank. When Marine Bank merged with and into CIB
Marine’s Illinois state-chartered bank subsidiary, Central Illinois Bank, to
form CIBM Bank. The C&D was re-affirmed by the FDIC. Although, the Illinois
Department of Financial and Professional Regulation, Division of Banks and Real
Estate (“IDBRE”) has yet to formally join in the C&D since consummation of
the merger of the bank charters, CIB Marine believes the C&D will continue.
CIB Marine and the Bank remain committed to maintaining adequate capital levels
at the Bank. Generally, enforcement actions such as the C&D can be lifted
only after subsequent examinations substantiate complete correction of the
underlying issues.
The
actual and required capital amounts and ratios for CIB Marine and its bank
subsidiary (as defined in the regulations) 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)
|
||||||||||||||||||||||||
September
30, 2009
|
||||||||||||||||||||||||
Total
capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | (4,048 | ) | (0.64 | )% | $ | 50,528 | 8.00 | % | |||||||||||||||
CIBM
Bank
|
85,147 | 13.94 | 48,867 | 8.00 | $ | 61,083 | 10.00 | % | ||||||||||||||||
Tier
1 capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | (4,048 | ) | (0.64 | )% | $ | 25,264 | 4.00 | % | |||||||||||||||
CIBM
Bank
|
77,362 | 12.66 | 24,433 | 4.00 | $ | 36,650 | 6.00 | % | ||||||||||||||||
Tier
1 leverage to average assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | (4,048 | ) | (0.50 | )% | $ | 32,523 | 4.00 | % | |||||||||||||||
CIBM
Bank (1)
|
77,362 | 9.75 | 31,747 | 4.00 | $ | 39,684 | 5.00 | % | ||||||||||||||||
December
31, 2008
|
||||||||||||||||||||||||
Total
capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 65,884 | 10.04 | % | $ | 52,504 | 8.00 | % | ||||||||||||||||
Central
Illinois Bank
|
58,451 | 17.91 | 26,104 | 8.00 | $ | 32,630 | 10.00 | % | ||||||||||||||||
Marine
Bank
|
40,505 | 13.31 | 24,349 | 8.00 | 30,436 | 10.00 | ||||||||||||||||||
Tier
1 capital to risk weighted assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 32,942 | 5.02 | % | $ | 26,252 | 4.00 | % | ||||||||||||||||
Central
Illinois Bank
|
54,340 | 16.65 | 13,052 | 4.00 | $ | 19,578 | 6.00 | % | ||||||||||||||||
Marine
Bank
|
36,624 | 12.03 | 12,174 | 4.00 | 18,262 | 6.00 | ||||||||||||||||||
Tier
1 leverage to average assets
|
||||||||||||||||||||||||
CIB
Marine Bancshares, Inc.
|
$ | 32,942 | 3.58 | % | $ | 36,821 | 4.00 | % | ||||||||||||||||
Central
Illinois Bank
|
54,340 | 11.10 | 19,577 | 4.00 | $ | 24,471 | 5.00 | % | ||||||||||||||||
Marine
Bank
|
36,624 | 9.00 | 16,270 | 4.00 | 20,337 | 5.00 |
|
(1)
|
Pursuant
to the C&D, which became effective in April 2009, the Bank is required
to maintain a Tier 1 leverage capital ratio of at least 10% of total
assets. At September 30, 2009, the Bank’s Tier 1 leverage capital ratio to
total assets at the end of the period was
10.18%.
|
30
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
the Bank during the first nine months of 2009, and at September 30, 2009, the
Bank did not have any retained earnings available for the payment of dividends
to CIB Marine without first obtaining the consent of its
regulators.
Pursuant
to the Agreement, so long as the Agreement remains in effect, CIB Marine cannot
declare or pay dividends without first obtaining the consent of its
regulator.
Note
15-Loss Per Share Computations
The
following provides a reconciliation of basic and diluted loss per share from
continuing operations:
Quarter Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars in thousands, except share and per share data)
|
||||||||||||||||
Loss
from continuing operations
|
$ | (14,624 | ) | $ | (10,118 | ) | $ | (30,760 | ) | $ | (26,846 | ) | ||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 | ||||||||||||
Effect
of dilutive stock options outstanding
|
— | — | — | — | ||||||||||||
Diluted
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 | ||||||||||||
Per
share loss:
|
||||||||||||||||
Basic
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) | ||||
Effect
of dilutive stock options outstanding
|
— | — | — | — | ||||||||||||
Diluted
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) |
Because
CIB Marine had a net loss from continuing operations in all periods presented,
options to purchase 896,012 and 1,124,365 shares for the quarters ended, and
978,254 and 1,167,790 shares for the nine months ended September 30, 2009 and
2008, respectively, were excluded from the calculation of diluted loss per share
since their assumed exercise would be anti-dilutive.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis presents CIB Marine’s consolidated financial
condition as of September 30, 2009 and results of operations for the quarter and
nine months ended September 30, 2009. This discussion should be read together
with the consolidated financial statements and accompanying notes contained in
Part I, Item 1 of this Form 10-Q, as well as CIB Marine’s 2008 Form
10-K.
The
Company is currently operating under Chapter 11 of the Bankruptcy Code. The
bankruptcy case is discussed in detail in Note 2-Pre-packaged Plan of
Reorganization Pursuant to Chapter 11 of the Bankruptcy Code to the financial
statements in Part I, Item 1 of this Form 10-Q. The reorganization goals are to
maximize enterprise value during the reorganization process and to emerge from
Chapter 11 as soon as practicable as a sustainable, viable company.
31
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 2008 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.
These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. CIB
Marine does not assume any obligation to update or revise any forward-looking
statements subsequent to the date on which they are made, whether as a result of
new information, future events or otherwise.
Reorganization
Proceedings under Chapter 11 of the Bankruptcy Code
The
Company is operating as a debtor under Chapter 11 of the Bankruptcy Code in
the Bankruptcy Court for the Eastern District of Wisconsin (Case
No. 09-33318). No subsidiary of the Company is a debtor in the
bankruptcy.
The
bankruptcy case is being jointly administered, with the Debtor managing its
business as a debtor in possession subject to the supervision of the Bankruptcy
Court. The Company has determined that a prolonged Chapter 11 case would
severely damage its ongoing business operations and threaten its viability as a
going concern. The pre-packaged nature of the Plan allows the Debtor to exit
Chapter 11 quickly, while the provisions of the Plan allow the Debtor to meet
its regulatory capital needs and de-lever its balance sheet, thereby better
positioning it to seek a strategic partner.
Although
there is currently no active trading market for shares of CIB Marine’s common
stock, the common stock is quoted on the Pink Sheets under the trading symbol
“CIBHQ.PK”.
Pre-petition
Claims
Most
persons and entities asserting pre-petition claims against the Company were
required to file proofs of claim in the Bankruptcy Court by October 21, 2009.
The Plan addresses the proposed treatment of allowed claims and provides for the
resolution of remaining claims after emergence from Chapter 11.
Pre-petition
Debt
The
Debentures and the unpaid accrued interest of $107.2 million are characterized
as unsecured debt for purposes of the reorganization proceedings and the related
obligations are classified as liabilities subject to compromise in CIB Marine
consolidated balance sheets as of September 30, 2009. In accordance with ASC
825, following the Filing Date, the recording of interest expense on debt
classified as liabilities subject to compromise was discontinued. The Plan
addresses the proposed treatment of the claims of the holders of the Debentures
through the issuance of preferred stock upon emergence from
Bankruptcy.
Plan
of Reorganization
As stated
above, the Company filed the Plan and the related disclosure statement (the
Disclosure Statement’) with the Bankruptcy Court on September 15, 2009. On
October 29, 2009, the Bankruptcy Court confirmed the Plan.
No
assurances can be given regarding the ability to consummate the Plan to affect
quick emergence from Chapter 11, the impact that events occurring during the
reorganization process will have on CIB Marine’s business and financial results
or the other factors described in this paragraph. See Note 2-Pre-packaged Plan
of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code in Part I in
this Form 10-Q, Liquidity and Capital Plan Update, Forward-Looking Statements
above and Item 1A, “Risk Factors,” in CIB Marine’s Annual Report on Form 10-K
for the year ended December 31, 2008, as supplemented below in Part II, Item
1A-Risk Factors, in this Form 10-Q, for further discussion of the risks and
uncertainties affecting CIB Marine’s operations and overall capital. Also, see
Subsequent Events Section in Part I, Item 2 of this Form 10-Q for update of
bankruptcy proceeding.
32
As
discussed above, the Plan and the Disclosure Statement describes the anticipated
organization, operations, and financing of the reorganized Company. The
Disclosure Statement contains certain information about the Company’s
pre-petition operating and financial history, and the events leading up to the
commencement of the bankruptcy case. The Disclosure Statement also describes the
terms and provisions of the Plan including certain effects of confirmation of
the Plan, certain risk factors associated with CIB Marine Preferred Stock to be
issued under the Plan, and the manner in which distributions of CIB Marine
Preferred Stock will be made under the Plan.
Continuation
as a Going Concern
CIB
Marine’s financial statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. As a result of the bankruptcy
filing by the Company, such realization of assets and liquidation of liabilities
is subject to uncertainty. While operating as debtor in possession under the
protection of Chapter 11 of the Bankruptcy Code, the Company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those recorded in its financial statements, subject to Bankruptcy
Court approval or as otherwise permitted in the ordinary course of business. CIB
Marine’s financial statements as of September 30, 2009 do not give effect
to all the adjustments to the carrying value of assets and liabilities that may
become necessary as a consequence of the Company’s reorganization.
CIB
Marine’s continuation as a going concern is contingent upon its ability to
manage to the extent possible the Risk Factors outlined in Part II, Item 1A of
this Form 10-Q. Accordingly, there is substantial doubt about CIB Marine’s
ability to continue as a going concern.
Results
of Operations
Overview
During
the first nine months of 2009, CIB Marine continued to focus on the
comprehensive capital plan outlined in the 2007 Form 10-K and updated in the
2008 Form 10-K. The main goals of the capital plan were to resolve the deferral
and default of the interest payments on the Debentures, maintain
“well-capitalized” capital ratios at the Bank, and improve the efficiency of CIB
Marine through revenue growth and expense management.
Net loss
increased to $13.9 million for the third quarter of 2009 compared to a net loss
of $11.2 million for the third quarter of 2008. The net loss in the third
quarter of 2009 was greater than the comparable quarter in 2008 primarily due to
the fact that a $4.2 million net gain on sale of assets was recorded in the
third quarter of 2008, related to the sale of Citrus Bank. Net loss increased to
$30.0 million for the first nine months of 2009 compared to a net loss of $28.0
million for the first nine months of 2008. The increase in net loss was due to a
decrease of $6.7 million in net interest income and a decrease of $3.9 million
in noninterest income, largely offset by a decrease in provision for credit
losses of $0.3 million, a decrease in noninterest expense of $6.4 million and an
increase in income from discontinued operations of $1.8 million. CIB Marine
continued to accrue interest expense on the Debentures until entering Chapter 11
on September 15, 2009. The interest on the Debentures was $1.9 million during
the third quarter of 2009 and $6.3 million in the first nine months of 2009.
Reflecting the continuing net losses recorded during the third quarter of 2009,
total stockholders’ deficit was $9.4 million at September 30, 2009.
In light
of the current operating environment and net losses in each year ended since
December 31, 2003, CIB Marine and the Bank have continued to work closely with
their respective regulators. CIB Marine remains under the Agreement with its
regulator, the Reserve Bank, which continues to impose certain restrictions and
reporting requirements including, but not limited to:
33
|
·
|
Restrictions
on dividend payments and redemption of shares of CIB Marine stock without
regulatory approval;
|
|
·
|
Adoption
of a comprehensive plan to improve
earnings;
|
|
·
|
Development
of a plan to correct and prevent violations of banking laws and
regulations related to affiliate
transactions.
|
In its
2008 Form 10-K, CIB Marine disclosed that its Wisconsin state-chartered bank
subsidiary at the time, Marine Bank, stipulated to a C&D with the FDIC and
the WDFI. The terms of the C&D were described in CIB Marine’s 2008 Form
10-K. The C&D became effective on April 24, 2009. Failure to adhere to the
requirements of the actions mandated by the C&D could have subjected Marine
Bank to more severe restrictions and civil monetary penalties. The C&D added
no additional requirements to the asset quality and loan review program
previously implemented by Marine Bank. When Marine Bank merged with and into CIB
Marine’s Illinois state-chartered bank subsidiary, Central Illinois Bank, to
form CIBM Bank, the C&D was re-affirmed by the FDIC. The IDBRE has yet to
formally join in the C&D since consummation of the merger of the bank
charters, yet CIB Marine believes the C&D will continue. CIB Marine and the
Bank remain committed to maintaining adequate capital levels at the Bank.
Generally, enforcement actions such as the C&D can be lifted only after
subsequent examinations substantiate complete correction of the underlying
issues.
Notwithstanding
CIB Marine’s efforts to convert the Debentures into equity through the
implementation of the Plan, federal or state bank regulators could take
enforcement action, which could include placing the Bank into receivership.
Although, CIB Marine has provided the Bank with $5.0 million of capital during
2008 and an additional $4.0 million in 2009, bank regulators could continue to
increase minimum capital levels at the Bank. The circumstances described in Part
I, Item 1, Note 14-Stockholders’ Equity (Deficit) of this Form 10-Q, combined
with the continued net losses and in consideration of existing regulatory
matters, raise substantial doubt concerning the ability of CIB Marine to
continue as a going concern.
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. As a result of the Chapter 11 reorganization process, a substantial
portion of CIB Marine’s debt obligations in the form of the Debentures are now
subject to compromise. Effective as of the Filing Date for reorganization under
Chapter 11, interest expense is no longer accrued on these obligations. The
post-filing interest expense not recognized in the quarter and nine month
periods ended September 30, 2009 on these obligations amounted to $0.4
million.
34
Selected
Unaudited Consolidated Financial Data
At or For the Quarter Ended
September 30,
|
At or For the Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars in thousands, except share and per share data)
|
||||||||||||||||
Selected
Statements of Operations Data
|
||||||||||||||||
Interest
and dividend income
|
$ | 9,416 | $ | 13,548 | $ | 30,593 | $ | 43,438 | ||||||||
Interest
expense
|
6,194 | 8,219 | 20,570 | 26,711 | ||||||||||||
Net
interest income
|
3,222 | 5,329 | 10,023 | 16,727 | ||||||||||||
Provision
for credit losses
|
10,029 | 10,141 | 19,230 | 19,501 | ||||||||||||
Net
interest loss after provision for credit losses
|
(6,807 | ) | (4,812 | ) | (9,207 | ) | (2,774 | ) | ||||||||
Noninterest
income
|
348 | 4,661 | 1,596 | 5,532 | ||||||||||||
Noninterest
expense
|
8,166 | 9,879 | 23,050 | 29,495 | ||||||||||||
Loss
from continuing operations before income taxes
|
(14,625 | ) | (10,030 | ) | (30,661 | ) | (26,737 | ) | ||||||||
Income
tax expense (benefit)
|
(1 | ) | 88 | 99 | 109 | |||||||||||
Net
loss from continuing operations
|
(14,624 | ) | (10,118 | ) | (30,760 | ) | (26,846 | ) | ||||||||
Discontinued
operations:
|
||||||||||||||||
Pretax
income from discontinued operations
|
711 | 493 | 711 | 493 | ||||||||||||
Income
tax expense
|
— | 1,571 | — | 1,631 | ||||||||||||
Net
income (loss) from discontinued operations
|
711 | (1,078 | ) | 711 | (1,138 | ) | ||||||||||
Net
loss
|
$ | (13,913 | ) | $ | (11,196 | ) | $ | (30,049 | ) | $ | (27,984 | ) | ||||
Common
Share Data
|
||||||||||||||||
Basic
loss per share:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) | ||||
Discontinued
operations
|
0.04 | (0.06 | ) | 0.04 | (0.07 | ) | ||||||||||
Net
loss
|
$ | (0.77 | ) | $ | (0.61 | ) | $ | (1.65 | ) | $ | (1.53 | ) | ||||
Diluted
loss per share:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.81 | ) | $ | (0.55 | ) | $ | (1.69 | ) | $ | (1.46 | ) | ||||
Discontinued
operations
|
0.04 | (0.06 | ) | 0.04 | (0.07 | ) | ||||||||||
Net
loss
|
$ | (0.77 | ) | $ | (0.61 | ) | $ | (1.65 | ) | $ | (1.53 | ) | ||||
Dividends
|
— | — | — | — | ||||||||||||
Book
value per share
|
$ | (0.52 | ) | $ | 1.41 | $ | (0.52 | ) | $ | 1.41 | ||||||
Weighted
average shares outstanding-basic
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 | ||||||||||||
Weighted
average shares outstanding-diluted
|
18,127,943 | 18,333,779 | 18,247,826 | 18,333,779 | ||||||||||||
Financial
Condition Data
|
||||||||||||||||
Total
assets excluding assets of companies held for disposal
|
$ | 778,454 | $ | 935,984 | $ | 778,454 | $ | 935,984 | ||||||||
Total
assets of companies held for disposal
|
1,207 | 1,092 | 1,207 | 1,092 | ||||||||||||
Loans
|
510,794 | 582,590 | 510,794 | 582,590 | ||||||||||||
Allowance
for loan losses
|
(20,358 | ) | (25,973 | ) | (20,358 | ) | (25,973 | ) | ||||||||
Securities
|
197,085 | 298,084 | 197,085 | 298,084 | ||||||||||||
Deposits
|
641,369 | 683,843 | 641,369 | 683,843 | ||||||||||||
Borrowings,
including junior subordinated debentures
|
96,700 | 177,116 | 96,700 | 177,116 | ||||||||||||
Stockholders’
equity (deficit)
|
(9,394 | ) | 25,925 | (9,394 | ) | 25,925 | ||||||||||
Financial
Ratios and Other Data
|
||||||||||||||||
Performance
ratios:
|
||||||||||||||||
Net
interest margin (1)
|
1.59 | % | 2.15 | % | 1.60 | % | 2.20 | % | ||||||||
Net
interest spread (2)
|
1.16 | 1.64 | 1.15 | 1.62 | ||||||||||||
Noninterest
income to average assets (3)
|
0.17 | 1.85 | 0.25 | 0.72 | ||||||||||||
Noninterest
expense to average assets
|
3.98 | 3.93 | 3.64 | 3.81 | ||||||||||||
Efficiency
ratio (4)
|
228.74 | 98.89 | 198.38 | 132.51 | ||||||||||||
Loss
on average assets (5)
|
(7.14 | ) | (4.02 | ) | (4.86 | ) | (3.47 | ) | ||||||||
Loss
on average (equity) deficit (6) (8)
|
NM
|
(109.38 | ) | (787.55 | ) | (70.54 | ) | |||||||||
Asset
quality ratios:
|
||||||||||||||||
Nonaccrual
loans, restructured loans and loans 90 days or more past due and still
accruing to total loans (7)
|
9.18 | % | 3.84 | % | 9.18 | % | 3.84 | % | ||||||||
Nonperforming
assets and loans 90 days or more past due and still accruing to total
assets (7)
|
6.19 | 2.50 | 6.19 | 2.50 | ||||||||||||
Allowance
for loan losses to total loans (7)
|
3.99 | 4.46 | 3.99 | 4.46 | ||||||||||||
Allowance
for loan losses to nonaccrual loans, restructured loans and loans 90 days
or more past due and still accruing (7)
|
43.40 | 116.14 | 43.40 | 116.14 | ||||||||||||
Net
charge-offs annualized to average loans
|
5.23 | 4.45 | 4.58 | 3.11 | ||||||||||||
Capital
ratios:
|
||||||||||||||||
Total
(deficit) equity to total assets (7)
|
(1.21 | )% | 2.77 | % | (1.21 | )% | 2.77 | % | ||||||||
Total
risk-based capital ratio
|
(0.64 | ) | 11.91 | (0.64 | ) | 11.91 | ||||||||||
Tier
1 risk-based capital ratio
|
(0.64 | ) | 5.96 | (0.64 | ) | 5.96 | ||||||||||
Leverage
capital ratio
|
(0.50 | ) | 4.16 | (0.50 | ) | 4.16 | ||||||||||
Other
data:
|
||||||||||||||||
Number
of employees (full-time equivalent)
|
165 | 200 | 165 | 200 | ||||||||||||
Number
of banking facilities
|
17 | 19 | 17 | 19 |
(1)
|
Net
interest margin is the ratio of annualized net interest income, on a
tax-equivalent basis, to average interest-earning assets. In the future,
CIB Marine does not expect to realize all of the tax benefits associated
with tax-exempt assets due to substantial losses and at September 30, 2009
and 2008, no U.S. federal or state loss carryback potential remains.
Accordingly, the 2009 and 2008 interest income on tax-exempt earning
assets has not been adjusted to reflect the tax-equivalent basis. If 2009
and 2008 had been shown on a tax-equivalent basis of 35%, the net interest
margin would have been 1.59% and 2.16% for the quarter and 1.60% and 2.21%
for the nine months ended September 30, 2009 and 2008,
respectively.
|
(2)
|
Net
interest rate spread is the yield on average interest-earning assets less
the rate on average interest-bearing
liabilities.
|
(3)
|
Noninterest
income to average assets excludes gains and losses on
securities.
|
(4)
|
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.
|
(5)
|
Loss
on average assets is annualized net loss divided by average total
assets.
|
(6)
|
Loss
on average (equity) deficit is annualized net loss divided by average
common equity (deficit).
|
(7)
|
Assets
of companies held for disposal are deducted for ratio
calculations.
|
(8)
|
Not
meaningful, average equity is negative for the quarter ended September 30,
2009.
|
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 (deficit)
categories. Interest income on tax-exempt securities has not been adjusted to
reflect the tax equivalent basis, since CIB Marine does not expect to realize
all of the tax benefits associated with these securities due to substantial
losses incurred. There were no tax-exempt loans during the first nine months of
2009 and 2008. See the Income Tax discussion for additional information. As a
result of the Chapter 11 reorganization process, a substantial portion of CIB
Marine’s debt obligations in the form of the Debentures are now subject to
compromise. Effective as of the Filing Date for reorganization under Chapter 11,
interest expense is no longer accrued on these obligations. The post-filing
interest expense not recognized in the quarter and nine month periods ended
September 30, 2009 on these obligations amounted to $0.4 million.
35
Quarter Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Interest-earning
assets
|
||||||||||||||||||||||||
Securities
(1):
|
||||||||||||||||||||||||
Taxable
(3)
|
$ | 218,648 | $ | 2,732 | 5.00 | % | $ | 320,160 | $ | 3,986 | 4.98 | % | ||||||||||||
Tax-exempt
(2)
|
307 | 4 | 5.21 | 630 | 8 | 5.08 | ||||||||||||||||||
Total
securities
|
218,955 | 2,736 | 5.00 | 320,790 | 3,994 | 4.98 | ||||||||||||||||||
Loans
held for sale (3)
|
5,133 | 6 | 0.46 | 963 | 13 | 5.37 | ||||||||||||||||||
Loans
(3)(4)(5):
|
||||||||||||||||||||||||
Commercial
|
76,670 | 980 | 5.07 | 82,129 | 1,150 | 5.57 | ||||||||||||||||||
Commercial
real estate (6)
|
332,605 | 4,063 | 4.85 | 412,710 | 5,831 | 5.62 | ||||||||||||||||||
Consumer
|
105,729 | 1,587 | 5.96 | 126,285 | 2,276 | 7.17 | ||||||||||||||||||
Total
loans
|
515,004 | 6,630 | 5.11 | 621,124 | 9,257 | 5.93 | ||||||||||||||||||
Federal
funds sold, reverse repo and interest-bearing due from
banks
|
68,607 | 44 | 0.25 | 43,914 | 284 | 2.57 | ||||||||||||||||||
Total
interest-earning assets
|
807,699 | 9,416 | 4.64 | 986,791 | 13,548 | 5.47 | ||||||||||||||||||
Noninterest-earning
assets
|
||||||||||||||||||||||||
Cash
and due from banks
|
9,168 | 15,071 | ||||||||||||||||||||||
Premises
and equipment (5)
|
5,272 | 7,129 | ||||||||||||||||||||||
Allowance
for loan losses (5)
|
(18,492 | ) | (22,319 | ) | ||||||||||||||||||||
Receivables
from sale of stock
|
— | (51 | ) | |||||||||||||||||||||
Accrued
interest receivable and other assets (5)
|
9,427 | 14,086 | ||||||||||||||||||||||
Total
noninterest-earning assets
|
5,375 | 13,916 | ||||||||||||||||||||||
Total
assets
|
$ | 813,074 | $ | 1,000,707 | ||||||||||||||||||||
Liabilities
and Stockholders’ Equity (Deficit)
|
||||||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
Interest-bearing
demand deposits
|
$ | 30,937 | $ | 25 | 0.32 | % | $ | 36,453 | $ | 61 | 0.67 | % | ||||||||||||
Money
market
|
112,703 | 320 | 1.13 | 137,725 | 670 | 1.94 | ||||||||||||||||||
Other
savings deposits
|
8,578 | 4 | 0.19 | 11,347 | 21 | 0.74 | ||||||||||||||||||
Time
deposits (6)
|
459,776 | 3,761 | 3.25 | 478,234 | 4,481 | 3.73 | ||||||||||||||||||
Total
interest-bearing deposits (5)
|
611,994 | 4,110 | 2.66 | 663,759 | 5,233 | 3.14 | ||||||||||||||||||
Short-term
borrowings
|
12,837 | 15 | 0.46 | 110,246 | 578 | 2.09 | ||||||||||||||||||
Long-term
borrowings
|
21,000 | 216 | 4.08 | 19,826 | 215 | 4.31 | ||||||||||||||||||
Pre-petition
debt (Junior subordinated debentures)
|
61,857 | 1,853 | 11.98 | 61,857 | 2,193 | 14.18 | ||||||||||||||||||
Total
borrowed funds
|
95,694 | 2,084 | 8.70 | 191,929 | 2,986 | 6.21 | ||||||||||||||||||
Total
interest-bearing liabilities
|
707,688 | 6,194 | 3.48 | 855,688 | 8,219 | 3.83 | ||||||||||||||||||
Noninterest-bearing
liabilities
|
||||||||||||||||||||||||
Noninterest-bearing
demand deposits (5)
|
57,469 | 63,371 | ||||||||||||||||||||||
Accrued
interest and other liabilities (5)
|
50,289 | 44,849 | ||||||||||||||||||||||
Total
noninterest-bearing liabilities
|
107,758 | 108,220 | ||||||||||||||||||||||
Total
liabilities
|
815,446 | 963,908 | ||||||||||||||||||||||
Stockholders’
equity (deficit)
|
(2,372 | ) | 36,799 | |||||||||||||||||||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 813,074 | $ | 1,000,707 | ||||||||||||||||||||
Net
interest income and net interest spread (2)(7)
|
$ | 3,222 | 1.16 | % | $ | 5,329 | 1.64 | % | ||||||||||||||||
Net
interest-earning assets
|
$ | 100,011 | $ | 131,103 | ||||||||||||||||||||
Net
interest margin (2)(8)
|
1.59 | % | 2.15 | % | ||||||||||||||||||||
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
1.14 | 1.15 |
(1)
|
FHLB
and Reserve Bank stock are included in average balance and
yields.
|
(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 September 30, 2009 and 2008, no U.S. federal or state
loss carryback potential remains. Accordingly, 2009 and 2008 are not
presented on a tax-equivalent basis. If 2009 and 2008 had been shown on a
tax-equivalent basis of 35%, the net interest margin would have been 1.59%
and 2.16%, respectively.
|
(3)
|
Balance
totals include respective nonaccrual
assets.
|
(4)
|
Interest
earned on loans includes amortized loan fees of $(0.02) million and $0.1
million for quarters ended September 30, 2009 and 2008,
respectively.
|
(5)
|
Includes
assets and liabilities of branches held for sale or sold during
2008.
|
36
(6)
|
Interest
rates and amounts include the effects of derivatives entered into for
interest rate risk management and accounted for as fair value
hedges.
|
(7)
|
Net
interest rate spread is the yield on average interest-earning assets less
the rate on average interest-bearing
liabilities.
|
(8)
|
Net
interest margin is the ratio of annualized net interest income, on a
tax-equivalent basis, to average interest-earning
assets.
|
Nine Months Ended September
30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
Average
Balance
|
Interest
Earned/Paid
|
Average
Yield/Cost
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Interest-earning
assets
|
||||||||||||||||||||||||
Securities
(1):
|
||||||||||||||||||||||||
Taxable
(3)
|
$ | 245,479 | $ | 9,463 | 5.14 | % | $ | 329,760 | $ | 12,343 | 4.99 | % | ||||||||||||
Tax-exempt
(2)
|
309 | 12 | 5.18 | 868 | 34 | 5.22 | ||||||||||||||||||
Total
securities
|
245,788 | 9,475 | 5.14 | 330,628 | 12,377 | 4.99 | ||||||||||||||||||
Loans
held for sale (3)
|
4,934 | 24 | 0.65 | 384 | 17 | 5.91 | ||||||||||||||||||
Loans
(3)(4)(5):
|
||||||||||||||||||||||||
Commercial
|
77,812 | 2,963 | 5.09 | 78,031 | 3,453 | 5.91 | ||||||||||||||||||
Commercial
real estate (6)
|
339,119 | 12,687 | 5.00 | 412,301 | 19,859 | 6.43 | ||||||||||||||||||
Consumer
|
112,378 | 5,226 | 6.22 | 127,249 | 6,554 | 6.88 | ||||||||||||||||||
Total
loans
|
529,309 | 20,876 | 5.27 | 617,581 | 29,866 | 6.46 | ||||||||||||||||||
Federal
funds sold, reverse repo and interest-bearing due from
banks
|
58,652 | 218 | 0.50 | 66,260 | 1,178 | 2.37 | ||||||||||||||||||
Total
interest-earning assets
|
838,683 | 30,593 | 4.87 | 1,014,853 | 43,438 | 5.71 | ||||||||||||||||||
Noninterest-earning
assets
|
||||||||||||||||||||||||
Cash
and due from banks
|
9,869 | 15,508 | ||||||||||||||||||||||
Premises
and equipment (5)
|
5,506 | 8,180 | ||||||||||||||||||||||
Allowance
for loan losses (5)
|
(17,799 | ) | (21,080 | ) | ||||||||||||||||||||
Receivables
from the sale of stock
|
(17 | ) | (74 | ) | ||||||||||||||||||||
Accrued
interest receivable and other assets (5)
|
9,947 | 15,532 | ||||||||||||||||||||||
Total
noninterest-earning assets
|
7,506 | 18,066 | ||||||||||||||||||||||
Total
assets
|
$ | 846,189 | $ | 1,032,919 | ||||||||||||||||||||
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
Interest-bearing
demand deposits
|
$ | 32,376 | $ | 85 | 0.35 | % | $ | 37,994 | $ | 212 | 0.75 | % | ||||||||||||
Money
market
|
114,230 | 1,107 | 1.30 | 152,003 | 2,724 | 2.39 | ||||||||||||||||||
Other
savings deposits
|
8,458 | 13 | 0.21 | 13,443 | 87 | 0.86 | ||||||||||||||||||
Time
deposits (6)
|
475,621 | 12,247 | 3.44 | 473,227 | 14,703 | 4.15 | ||||||||||||||||||
Total
interest-bearing deposits (5)
|
630,685 | 13,452 | 2.85 | 676,667 | 17,726 | 3.50 | ||||||||||||||||||
Borrowings-short-term
|
22,316 | 109 | 0.65 | 118,278 | 1,935 | 2.19 | ||||||||||||||||||
Borrowings-long-term
|
23,484 | 726 | 4.13 | 14,628 | 489 | 4.47 | ||||||||||||||||||
Pre-petition
debt (Junior subordinated debentures)
|
61,857 | 6,283 | 13.54 | 61,857 | 6,561 | 14.14 | ||||||||||||||||||
Total
borrowed funds
|
107,657 | 7,118 | 8.82 | 194,763 | 8,985 | 6.15 | ||||||||||||||||||
Total
interest-bearing liabilities
|
738,342 | 20,570 | 3.72 | 871,430 | 26,711 | 4.09 | ||||||||||||||||||
Noninterest-bearing
liabilities
|
||||||||||||||||||||||||
Noninterest-bearing
demand deposits (5)
|
54,711 | 69,423 | ||||||||||||||||||||||
Accrued
interest and other liabilities (5)
|
47,914 | 41,232 | ||||||||||||||||||||||
Total
noninterest-bearing liabilities
|
102,625 | 110,655 | ||||||||||||||||||||||
Total
liabilities
|
840,967 | 982,085 | ||||||||||||||||||||||
Stockholders’
equity
|
5,222 | 50,834 | ||||||||||||||||||||||
Total
liabilities and stockholders’ equity
|
$ | 846,189 | $ | 1,032,919 | ||||||||||||||||||||
Net
interest income and net interest spread (2)(7)
|
$ | 10,023 | 1.15 | % | $ | 16,727 | 1.62 | % | ||||||||||||||||
Net
interest-earning assets
|
$ | 100,341 | $ | 143,423 | ||||||||||||||||||||
Net
interest margin (2)(8)
|
1.60 | % | 2.20 | % | ||||||||||||||||||||
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
1.14 | 1.16 |
(1)
|
FHLB
and Reserve Bank stock are included in average balance and
yields.
|
(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 September 30, 2009 and 2008, no U.S. federal or state
loss carryback potential remains. Accordingly, 2009 and 2008 are not
presented on a tax-equivalent basis. If 2009 and 2008 had been shown on a
tax-equivalent basis of 35%, the net interest margin would have been 1.60%
and 2.21%, respectively.
|
(3)
|
Balance
totals include respective nonaccrual
assets.
|
(4)
|
Interest
earned on loans includes amortized loan fees of $0.01 million and $0.3
million for the nine months ended September 30, 2009 and 2008,
respectively.
|
(5)
|
Includes
assets and liabilities of branches held for sale or sold during and
2008.
|
(6)
|
Interest
rates and amounts include the effects of derivatives entered into for
interest rate risk management and accounted for as fair value
hedges.
|
(7)
|
Net
interest rate spread is the yield on average interest-earning assets less
the rate on average interest-bearing
liabilities.
|
(8)
|
Net
interest margin is the ratio of annualized net interest income, on a
tax-equivalent basis, to average interest-earning
assets.
|
37
Net
interest income decreased $2.1 million and $6.7 million for the three and nine
month periods ended September 30, 2009 compared to the same periods in 2008. The
decrease in net interest income was primarily driven by an overall reduction in
earning assets. The ratio of total average interest-earning assets to total
average interest-bearing liabilities decreased from 1.15 and 1.16 for the three
and nine month periods ended September 30, 2008 to 1.14 and 1.14 for the
comparable periods of 2009, respectively, as the volumes of earning assets
declined $179.1 million and $176.2 million while interest-bearing liabilities
declined $148.0 million and $133.1 million between these periods, respectively.
In addition, for both the quarter and the nine months ended September 30, 2009
compared to the same periods in 2008, the percentage of lower yielding fed funds
sold, reverse repurchase agreement transactions and interest-bearing due from
banks, as well as high cost Debentures increased as a proportion of
interest-bearing liabilities. Although it has had a negative effect on net
interest income, CIB Marine made the decision to hold a higher level of lower
yielding fed funds sold, reverse repurchase agreement transaction and
interest-bearing due from banks relative to interest-bearing liabilities to
improve the liquidity of the Bank.
Total
interest income decreased $4.1 million, or 30.4%, from $13.5 million for the
three month period ended September 30, 2008 to $9.4 million for the comparable
period in 2009. The decrease was primarily caused by the reduction in earning
assets. The decrease in average volumes of interest-earning assets accounted for
a $2.6 million decrease in interest income, with $1.2 million due to a decline
in investment securities and $1.4 million due to a decline in loans, and the
decline in average yields on interest-earning assets accounted for the remaining
$1.5 million decline in interest income. The decline in average yields on
interest-earning assets was primarily due to a decline in yields on loans due to
the lower interest rate environment and the increase in nonaccrual loans, and
due to the proportion of lower yielding fed funds sold, reverse repurchase
agreement transactions and interest-bearing due from balances to total
interest-earning assets.
Total
interest income decreased $12.8 million, or 29.5%, from $43.4 million for the
nine-month period ended September 30, 2008 to $30.6 million for the nine-month
period ended September 30, 2009. The decline in interest-earning assets volume
caused $7.2 million reduction in interest income, with a $3.3 million reduction
from a decline in investment security volumes and a $3.9 million reduction from
a decline in loan volumes. In addition, $5.5 million of the reduction in
interest income was attributable to lower average yields on loans the result of
a lower interest rate environment, an increase in non-accrual loans and due to
an increase in the proportion of lower yielding fed funds sold, reverse
repurchase agreement transactions and interest-bearing due from balances to
total interest-earning assets.
Total
interest expense decreased $2.0 million from $8.2 million in the third quarter
of 2008 to $6.2 million in the third quarter of 2009. The decline in interest
expense was predominantly the result of lower interest costs on interest-bearing
deposits, the largest component of interest-bearing liabilities. The average
cost on deposits decreased from 3.14% to 2.66% or $1.1 million from the third
quarter of 2008 to the third quarter of 2009. The $51.8 million decline in
average volumes of interest-bearing deposits contributed $0.3 million to the
decline in interest expense. Additionally interest expense on borrowings
declined $0.9 million primarily due to a $97.4 million decline in short-term
borrowing volumes. Beginning in 2004, CIB Marine elected to defer all interest
payments due on its Debentures. Interest accrues on each of the deferred
payments at the coupon rate of the Debentures, creating a compounding effect for
the interest expense of the Debentures. This causes interest expense for the
Debentures to increase each year and become an increasing percentage of total
interest expense and total average interest-bearing liabilities. Interest
expense on the Debentures represented 29.9% and 26.7% of total interest expense
during the third quarter of 2009 and 2008, respectively. In addition, the total
average earning assets have decreased, making the interest expense burden of the
Debentures even greater. The interest expense due to the Debentures decreased
$0.3 million for the third quarter of 2009 compared to the same period of 2008
due to the discontinuance of recognizing interest expense accruals after the
Filing Date.
Total
interest expense decreased $6.1 million from $26.7 million for the nine month
period ended September 30, 2008 to $20.6 million for the comparable period ended
September 30, 2009. A decline of $3.7 million in interest expense was
attributable to the 37 basis point decrease in the average cost of
interest-bearing liabilities resulting from a 65 basis point decline in the
average cost of interest-bearing deposits reflecting the repricing of deposits
in a lower rate environment. The remaining $1.2 million of the decline in
interest expense was due to a decline in average interest-bearing liabilities.
Interest expense on the Debentures represented 30.5% and 24.6% of total interest
expense during the nine-month period ended September 30, 2009 and 2008,
respectively.
38
CIB
Marine’s net interest margin, which is the ratio of net interest income to
average interest-earning assets, decreased by 56 basis points during the third
quarter of 2009 compared to the third quarter of 2008 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, decreased by 48 basis points during the same period. In addition,
the average yield on earning assets declined by 83 basis points and the average
cost of deposits declined by 48 basis points over the period. The declines are
largely attributable to (1) lower total interest-earning assets relative to the
decline in interest-bearing liabilities, caused primarily by a reduction in
total loan and total securities average volumes (2) the increase in average
volumes of fed funds sold, reverse repurchase agreement transactions and
interest-bearing due from banks relative to interest-bearing liabilities (3) the
increase in non-performing loans and (4) the increase in the high cost
Debentures as a proportion of total interest-bearing liabilities. The net
interest margin declined by more than the net interest spread due to lower
earning asset yields funded by noninterest-bearing liabilities and
capital.
CIB
Marine’s net interest margin decreased by 60 basis points during
the nine months ending on September 30, 2009 compared to the same
period of 2008, and its net interest spread decreased by 47 basis points during
the same period. The average yield on earning assets declined by 84 basis points
and the average cost of deposits declined by 65 basis points over the period.
The declines are largely attributable to (1) lower total interest-earning assets
relative to interest-bearing liabilities caused primarily by a reduction in
total loan and total securities average volumes (2) the increase in average
volumes of fed funds sold, reverse repurchase agreement transactions and
interest-bearing due from banks relative to interest-bearing liabilities (3) the
increase in non-performing loans and (4) the increase in the high cost
Debentures as a proportion of total interest-bearing liabilities. The net
interest margin declined by more than the net interest spread due to lower
earning asset yields funded by noninterest-bearing liabilities and
capital.
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:
Quarter
Ended September 30, 2009
Compared
to
Quarter
Ended September 30, 2008 (3)
|
Nine
Months Ended September 30, 2009 Compared to
Nine
Months Ended September 30, 2008 (3)
|
|||||||||||||||||||||||||||||||
Volume
|
Rate
|
Total
|
%
Change
|
Volume
|
Rate
|
Total
|
%
Change
|
|||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
Interest
Income
|
||||||||||||||||||||||||||||||||
Securities-taxable
|
$ | (1,269 | ) | $ | 15 | $ | (1,254 | ) | (31.46 | )% | $ | (3,239 | ) | $ | 359 | $ | (2,880 | ) | (23.33 | )% | ||||||||||||
Securities-tax-exempt(1)
|
(4 | ) | — | (4 | ) | (50.00 | ) | (22 | ) | — | (22 | ) | (64.71 | ) | ||||||||||||||||||
Total
securities (2)
|
(1,273 | ) | 15 | (1,258 | ) | (31.50 | ) | (3,261 | ) | 359 | (2,902 | ) | (23.45 | ) | ||||||||||||||||||
Loans
held for sale
|
13 | (20 | ) | (7 | ) | (53.85 | ) | 34 | (27 | ) | 7 | 41.18 | ||||||||||||||||||||
Commercial
|
(73 | ) | (97 | ) | (170 | ) | (14.78 | ) | (10 | ) | (480 | ) | (490 | ) | (14.19 | ) | ||||||||||||||||
Commercial
real estate
|
(1,034 | ) | (734 | ) | (1,768 | ) | (30.32 | ) | (3,182 | ) | (3,990 | ) | (7,172 | ) | (36.11 | ) | ||||||||||||||||
Consumer
|
(337 | ) | (352 | ) | (689 | ) | (30.27 | ) | (728 | ) | (600 | ) | (1,328 | ) | (20.26 | ) | ||||||||||||||||
Total
loans (including fees)
|
(1,444 | ) | (1,183 | ) | (2,627 | ) | (28.38 | ) | (3,920 | ) | (5,070 | ) | (8,990 | ) | (30.10 | ) | ||||||||||||||||
Reverse
repurchase securities federal funds sold and interest-bearing due from
banks
|
105 | (345 | ) | (240 | ) | (84.51 | ) | (122 | ) | (838 | ) | (960 | ) | (81.49 | ) | |||||||||||||||||
Total
interest income (1)
|
(2,599 | ) | (1,533 | ) | (4,132 | ) | (30.50 | ) | (7,269 | ) | (5,576 | ) | (12,845 | ) | (29.57 | ) | ||||||||||||||||
Interest
Expense
|
||||||||||||||||||||||||||||||||
Interest-bearing
demand deposits
|
(8 | ) | (28 | ) | (36 | ) | (59.02 | ) | (27 | ) | (100 | ) | (127 | ) | (59.91 | ) | ||||||||||||||||
Money
market
|
(106 | ) | (244 | ) | (350 | ) | (52.24 | ) | (568 | ) | (1,049 | ) | (1,617 | ) | (59.36 | ) | ||||||||||||||||
Other
savings deposits
|
(4 | ) | (13 | ) | (17 | ) | (80.95 | ) | (24 | ) | (50 | ) | (74 | ) | (85.06 | ) | ||||||||||||||||
Time
deposits
|
(165 | ) | (555 | ) | (720 | ) | (16.07 | ) | 73 | (2,529 | ) | (2,456 | ) | (16.70 | ) | |||||||||||||||||
Total
deposits
|
(283 | ) | (840 | ) | (1,123 | ) | (21.46 | ) | (546 | ) | (3,728 | ) | (4,274 | ) | (24.11 | ) | ||||||||||||||||
Borrowings-short-term
|
(299 | ) | (264 | ) | (563 | ) | (97.40 | ) | (979 | ) | (847 | ) | (1,826 | ) | (94.37 | ) | ||||||||||||||||
Borrowings-long-term
|
13 | (12 | ) | 1 | 0.47 | 276 | (39 | ) | 237 | 48.47 | ||||||||||||||||||||||
Junior
subordinated debentures
|
— | (340 | ) | (340 | ) | (15.50 | ) | — | (278 | ) | (278 | ) | (4.24 | ) | ||||||||||||||||||
Total
borrowed funds
|
(286 | ) | (616 | ) | (902 | ) | (30.21 | ) | (703 | ) | (1,164 | ) | (1,867 | ) | (20.78 | ) | ||||||||||||||||
Total
interest expense
|
(569 | ) | (1,456 | ) | (2,025 | ) | (24.64 | ) | (1,249 | ) | (4,892 | ) | (6,141 | ) | (22.99 | ) | ||||||||||||||||
Net
interest income (1)
|
$ | (2,030 | ) | $ | (77 | ) | $ | (2,107 | ) | (39.54 | ) | $ | (6,020 | ) | $ | (684 | ) | $ | (6,704 | ) | (40.08 | ) |
(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 September 30, 2009 and 2008, no U.S. federal or state
loss carryback potential remains. Accordingly, 2009 and 2008 are not
presented on a tax-equivalent
basis.
|
(2)
|
FHLB
and Reserve Bank stock are included in average balance and
yields.
|
(3)
|
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. Nonaccrual loans were included in the average
balances used in determining
yields.
|
Provision
for Credit Losses
The
provision for credit losses represents charges made to earnings in order to
maintain an adequate allowance for loan losses and losses on unfunded
commitments and standby letters of credit. The provision for credit losses was
$10.0 million in the third quarter of 2009 compared to $10.1 million in the
third quarter of 2008. For the nine months ended September 30, 2009, the
provision for credit losses was $19.2 million compared to $19.5 million for the
first nine months of 2008. Net charge-offs were $18.1 million during the first
nine months of 2009 compared to $14.4 million during the same period of
2008.
39
The
provision for credit losses has been adversely affected by the economic
environment and in particular for its home equity loan pools and its
construction and development loans. Provision for credit losses for the third
quarter of 2009 and 2008 attributable to home equity loan pools was $4.6 million
and $5.1 million, respectively; and $1.6 million and $7.0 million, respectively,
for the construction and development loans. Provision for credit losses for the
nine months ended September 30, 2009 and 2008 attributable to home equity loan
pools was $10.7 million and $9.7 million; respectively, and $3.7 million and
$10.7 million, respectively, for construction and development
loans.
Noninterest
Income
The
following table presents the significant components of noninterest
income:
Quarter Ended
September 30,
|
Nine Months Ended
September 30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
(Dollars
in thousands)
|
|||||||||||||||||
Loan
fees
|
$ | 21 | $ | 86 | $ | 116 | $ | 153 | |||||||||
Deposit
service charges
|
247 | 231 | 709 | 744 | |||||||||||||
Other
service fees
|
36 | 27 | 96 | 100 | |||||||||||||
Other
income
|
6 | 162 | 9 | 349 | |||||||||||||
Gain
on sale of securities
|
— | — | 551 | — | |||||||||||||
Net
gain on sale of assets and deposits
|
38 | 4,155 | 115 | 4,186 | |||||||||||||
$ | 348 | $ | 4,661 | $ | 1,596 | $ | 5,532 |
The
decrease in noninterest income for the quarter and nine-months ended September
30, 2009 compared to the same periods in 2008 was primarily due to a $4.2
million gain recognized on the sale of all the branches, substantially of all
the deposits and the majority of the loan portfolio of CIB Marine’s Florida
banking subsidiary, Citrus Bank, during the third quarter of 2008. The decrease
was also due to interest on a 2002 federal income tax refund received during the
third quarter of 2008 and recorded in other income.
Noninterest
Expense
The
following table presents the significant components of noninterest
expense:
Quarter Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Compensation
and employee benefits
|
$ | 2,945 | $ | 4,266 | $ | 9,955 | $ | 13,080 | ||||||||
Equipment
|
379 | 425 | 1,039 | 1,551 | ||||||||||||
Occupancy
and premises
|
507 | 745 | 1,637 | 2,199 | ||||||||||||
Professional
services
|
1,346 | 1,509 | 3,440 | 3,247 | ||||||||||||
Reorganization
expense
|
122 | — | 122 | — | ||||||||||||
Write
down of assets
|
721 | — | 1,273 | — | ||||||||||||
Net
other-than-temporary impairment recognized in earnings
|
186 | 525 | 212 | 525 | ||||||||||||
Other
expense:
|
||||||||||||||||
Payroll
and other processing charges
|
2 | 25 | 40 | 67 | ||||||||||||
Correspondent
bank charges
|
64 | 55 | 225 | 177 | ||||||||||||
Advertising/marketing
|
109 | 167 | 211 | 454 | ||||||||||||
Communications
|
193 | 190 | 567 | 647 | ||||||||||||
Data
processing
|
272 | 273 | 723 | 855 | ||||||||||||
Supplies
and printing
|
50 | 54 | 125 | 172 | ||||||||||||
Shipping
and handling
|
82 | 111 | 230 | 309 | ||||||||||||
Collection
expense
|
227 | 6 | 269 | 17 | ||||||||||||
FDIC
and state assessment
|
319 | 274 | 1,440 | 627 | ||||||||||||
Recording
and filing fees
|
57 | 42 | 121 | 149 | ||||||||||||
Foreclosed
property
|
34 | 38 | 116 | 300 | ||||||||||||
Litigation
reserve
|
— | 400 | — | 3,400 | ||||||||||||
Other
expense
|
551 | 774 | 1,305 | 1,719 | ||||||||||||
Total
other expense
|
1,960 | 2,409 | 5,372 | 8,893 | ||||||||||||
Total
noninterest expense
|
$ | 8,166 | $ | 9,879 | $ | 23,050 | $ | 29,495 |
40
Total
noninterest expense decreased $1.7 million, or 17.3%, from $9.9 million for the
third quarter of 2008 to $8.2 million for the third quarter of 2009. The net
decrease was primarily a result of the following:
|
·
|
Compensation
and employee benefits expense decreased $1.3 million, or 31.0%, from $4.3
million for the third quarter of 2008, to $3.0 million for the third
quarter of 2009. The decrease was primarily due to staff reductions
related to the sale of Citrus Bank during the third quarter of 2008 and
other reductions-in-force completed during the first and second quarters
of 2009. The total number of full-time equivalent employees decreased from
200 at September 30, 2008 to 165 at September 30,
2009.
|
|
·
|
Equipment
and occupancy expense together decreased $0.3 million, or 24.3%, during
the third quarter of 2009 compared the third quarter of 2008 primarily due
to the sale of Citrus Bank during the third quarter of
2008.
|
|
·
|
Litigation
reserve was $0.4 million for the third quarter of 2008 related to the
Lewis litigation (as discussed further in the 2008 Form 10-K). There was
no litigation reserve for the third quarter of
2009.
|
|
·
|
OTTI
decreased $0.3 million, or 64.6%, from $0.5 million for the third quarter
of 2008 to $0.2 million for the third quarter of 2009. See Note
6-Securities Available for Sale for further
discussion.
|
|
·
|
Write
down of assets was $0.7 million for the third quarter ended September 30,
2009 primarily due to the write-off of an intercompany tax receivable from
discontinued operations.
|
Total
noninterest expense decreased $6.4 million, or 21.9%, from $29.5 million for the
nine months ended September 30, 2008 to $23.1 million for the nine months ended
September 30, 2009. The net change was primarily the result of the
following:
|
·
|
Compensation
and employee benefits expense decreased $3.1 million, or 23.9%, from $13.1
million for the nine months ended September 30, 2008, to $10.0 million for
the nine months ended September 30, 2009. The decrease was primarily due
to the sale of Citrus Bank during the third quarter of 2008. The total
number of full-time equivalent employees decreased from 200 at September
30, 2008 to 165 at September 30,
2009.
|
|
·
|
Equipment
and occupancy expense together decreased $1.1 million, or 28.6%, during
the first nine months of 2009 compared the first nine months of 2008
primarily due to the sale of Citrus Bank during the third quarter of
2008.
|
|
·
|
Professional
services increased $0.3 million during the first nine months of 2009
compared to the same period in 2008, primarily due to increased accounting
and legal fees associated with CIB Marine’s efforts to restructure its
TruPS.
|
|
·
|
Litigation
reserve was $3.4 million for the first nine months of 2008 related to the
Lewis litigation (as discussed further in the 2008 Form 10-K). There was
no litigation reserve for the first nine months of
2009.
|
|
·
|
OTTI
decreased $0.3 million, or 59.6%, from $0.5 million for the nine months
ended September 30, 2008 to $0.2 million for the nine months ended
September 30, 2009. See Note 6-Securities Available for Sale for further
discussion.
|
|
·
|
FDIC
and state assessment expense was $1.4 million for the first nine months of
2009 compared to $0.6 million for the first nine months of 2008. The
increase of $0.8 million was the result of increased FDIC assessment fees
during the first nine months of 2009 compared to the first nine months of
2008. In an effort to replenish the Deposit Insurance Fund in the wake of
the recent increase in bank failures in the United States, the FDIC
changed its rate structure in December 2008 to generally increase premiums
effective for assessments in the first quarter of 2009. Further, in May
2009, the FDIC issued a rule to impose a special one-time assessment
against all financial institutions in the second quarter of 2009, payable
in the third quarter of 2009. The special assessment for CIBM Bank was
$0.4 million.
|
|
·
|
Write
down of assets was $1.3 million for the nine months ended September 30,
2009 as a result of a write down of two foreclosed properties during the
third quarter of 2009 and the write-off of an intercompany tax receivable
from discontinued operations. There were no write downs of assets during
the first nine months of 2008.
|
41
Reorganization
Expenses
Reorganization
expense are expenses directly attributed to the Chapter 11 reorganization
process. See Note 2-Pre-packaged Plan of Reorganization Pursuant to Chapter 11
of the Bankruptcy Code to our financial statements in Part I, Item 1 of this
Form 10-Q for a summary of these costs.
Income
Taxes
No tax
benefit has been recognized on the consolidated net operating losses for 2009
and 2008 due to significant federal and state net operating loss carryforwards
on which the realization of related tax benefits is not “more likely than not.”
In the second quarter of 2009, $0.1 million of state tax expense was recognized
in connection with the finalization of various state tax issues. The continuing
operations income tax expense for the first nine months of 2008 consisted
primarily of the allocation of taxes, in accordance with tax sharing agreements
with companies included in discontinued operations that would have been payable
had it not been for the losses from continuing operations included in CIB
Marine’s consolidated returns. The net income tax expense on discontinued
operations also includes interest and penalty expense on a tax exposure related
to a sold subsidiary.
As of
December 31, 2008, CIB Marine had aggregate U.S. federal net operating loss,
capital loss and charitable contribution carryfowards (collectively, the “Tax
Attributes”) of approximately $199.6 million. In connection with CIB Marine’s
emergence from Chapter 11, it is likely that the Tax Attributes will be
significantly reduced due to the cancellation of indebtedness income. A full
valuation allowance has been recorded against the deferred tax asset related to
these Tax Attributes in the accompanying condensed consolidated balance
sheets.
Financial
Condition
Overview
CIB
Marine’s total assets decreased $126.7 million from $906.4 million at December
31, 2008 to $779.7 million at September 30, 2009. The decrease in total assets
was primarily due to a $45.5 million decrease in net loans and a $83.4 million
net decrease in securities.
Loans
Held for Sale
Loans
held for sale were $5.0 million at September 30, 2009, which comprised $0.2
million in residential mortgage loans and $4.8 million in commercial real estate
construction loans. Following the sale of Citrus Bank, the remaining loans of
Citrus Bank were transferred to CIB Marine. Of those remaining loans, $4.2
million were transferred to loans held for sale during the third quarter of
2008. At September 30, 2009 and December 31, 2008, loans held for sale with a
carrying value of $2.6 million and $2.0 million, respectively, were classified
as nonaccrual. At September 30, 2009 and December 31, 2008 loans held for sale
with a carrying value of $0.5 million and $1.7 million, respectively, were
classified as 90 days or more past due and still accruing.
Securities
Total
securities at September 30, 2009 were $197.1 million, a decrease of $83.4
million, or 29.7%, from $280.4 million at December 31, 2008. The decrease was
primarily due to sales, prepayments, repayments and maturities from the existing
portfolio, the proceeds of which have been used predominantly to pay down FHLB
borrowings, time deposits and increase cash and cash equivalent holdings at the
Bank. The ratio of total securities to total assets was 25.3% at September 30,
2009, compared to 30.9% at December 31, 2008.
The net
unrealized loss on available for sale securities was $5.5 million at September
30, 2009, compared to $10.0 million at December 31, 2008. The net unrealized
loss occurred mainly in other notes and bonds and Non-agency MBS, resulting from
declining credit quality and ongoing liquidity strains in the financial
markets.
At
September 30, 2009, 10.0% of the portfolio consisted of U.S. government agency
securities, compared to 16.8% at December 31, 2008, and at September 30, 2009,
71.5% of the portfolio consisted of mortgage-backed securities compared to 69.1%
at December 31, 2008. Obligations of states and political subdivisions
represented 15.9% of the portfolio at September 30, 2009, compared to 10.8% at
December 31, 2008.
42
Securities
available for sale with a carrying value of $158.8 million and $222.3 million at
September 30, 2009 and December 31, 2008, respectively, were pledged for current
outstanding or contingently available deposits and borrowings with public
entities, FHLB advances, repurchase agreements, federal funds purchased,
borrowings from the federal reserve discount window, and for other purposes as
required.
For those
securities whose fair value is less than cost at September 30, 2009, 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 amortized cost bases, which may be maturity, CIB Marine does not consider
those securities to be OTTI; except for the following: (1) two Non-agency MBS
had $0.1 million during the third quarter of 2009, and had amortized costs and
unrealized losses totaling $3.4 million and $1.5 million respectively at
September 30, 2009, and (2) two collateralized debt obligations with $0.07
million credit related OTTI during the third quarter of 2009, and amortized
costs and unrealized losses totaling $4.7 million and $3.2 million,
respectively.
Loans
Loans,
net of the allowance for loan losses, totaled $490.4 million or 62.9% of total
assets at September 30, 2009 compared to $536.0 million or 59.1% of total assets
at December 31, 2008. The decrease in loans from December 31, 2008 to September
30, 2009 was primarily due to a decrease in construction and development and
home equity loans reflecting predominantly repayments, collections and the
impact of charge-offs.
Credit
Concentrations
At
September 30, 2009 and December 31, 2008, the stockholders’ equity of the
subsidiary companies, including predominantly the Bank and CIB Marine Capital,
LLC, was $90.9 million and $99.2 million, with 25% representing $22.7 million
and $24.8 million, respectively. Using this measure for disclosing credit
concentrations, the subsidiary companies had no secured borrowing relationships
at either September 30, 2009 or December 31, 2008 in excess of 25% of
stockholders’ equity of such subsidiary companies.
Shown in
the table below are the concentrations in the loan portfolio classified by to
the 2007 North American Industry Classification System (“NAICS”) codes. At both
September 30, 2009 and December 31, 2008 CIB Marine had credit relationships
within four industry groups with outstanding balances exceeding 25% of the
subsidiary companies stockholders’ equity.
INDUSTRY
|
Outstanding
Balance
|
% of
Loans
|
% of
Subsidiaries Total
Stockholders’ Equity
|
|||||||||
(Dollars in millions)
|
||||||||||||
September
30, 2009
|
||||||||||||
Real
Estate, Rental & Leasing
|
$ | 193.7 | 38 | % | 213 | % | ||||||
Construction
|
62.6 | 12 | 69 | |||||||||
Health
Care & Social Assistance
|
46.3 | 9 | 51 | |||||||||
Accommodation
& Food Services
|
22.7 | 4 | 25 | |||||||||
December 31, 2008
|
||||||||||||
Real
Estate, Rental & Leasing
|
$ | 202.8 | 37 | % | 203 | % | ||||||
Construction
|
80.9 | 15 | 81 | |||||||||
Health
Care & Social Assistance
|
39.4 | 7 | 39 | |||||||||
Accommodation
& Food Services
|
24.2 | 4 | 25 |
43
Allowance
for Loan Losses
CIB
Marine monitors and maintains an allowance for loan losses to absorb an estimate
of probable losses inherent in the loan portfolio. The allowance is increased by
the amount of provision for loan losses and recoveries of previously charged-off
loans, and is decreased by the amount of loans charged-off and negative
provisions. The allowance is also increased or decreased for a change in the
credit quality of segments of the portfolio. At September 30, 2009, the
allowance for loan losses increased to $20.4 million or 4.0% of total loans
compared to $19.2 million, or 3.5% of total loans at December 31, 2008. The
increase was related to higher levels of nonperforming loans and continued
elevated levels of charge-offs in the purchased home equity pools. Total
charge-offs for the third quarter of 2009 were $6.9 million, while recoveries
were $0.07 million, compared to $7.2 million and $0.2 million, respectively, for
the same period of 2008. Total charge-offs for the nine months ended September
30, 2009 and 2008 were $18.5 million and $15.9 million, respectively, while
total recoveries were $0.4 million and $1.5 million, respectively. Net
charge-offs from the purchased home equity loan pools were $9.7 million for the
nine months ended September 30, 2009. The home equity pools remaining at
September 30, 2009 was $37.4 million compared to $52.2 million at December 31,
2009. The allowance for loan and lease losses for the home equity loan pools was
$5.5 million or 14.7% of remaining balance at September 30, 2009 and $4.5
million or 8.7% of remaining balance at December 31, 2008. Although CIB Marine
believes that the allowance for loan losses is adequate to absorb probable
losses on existing loans that may become uncollectible given the conditions of
the 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 to nonaccrual, restructured and 90 days or more past due and
still accruing loans was 43.4% at September 30, 2009 compared to 119.4% at
December 31, 2008.
The
following table summarizes changes in the allowance for loan
losses:
Quarter Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Balance
at beginning of period
|
$ | 17,121 | $ | 22,640 | $ | 19,242 | $ | 20,706 | ||||||||
Loans
charged-off
|
||||||||||||||||
Commercial
|
(27 | ) | (510 | ) | (414 | ) | (782 | ) | ||||||||
Commercial
real estate
|
— | (108 | ) | (27 | ) | (994 | ) | |||||||||
Commercial
real estate construction
|
(2,744 | ) | (3,749 | ) | (6,684 | ) | (3,757 | ) | ||||||||
Residential
real estate
|
(657 | ) | (497 | ) | (1,156 | ) | (664 | ) | ||||||||
Home
equity
|
(3,430 | ) | (2,287 | ) | (10,224 | ) | (9,627 | ) | ||||||||
Consumer
|
(1 | ) | (9 | ) | (5 | ) | (66 | ) | ||||||||
Total
loans charged-off
|
(6,859 | ) | (7,160 | ) | (18,510 | ) | (15,890 | ) | ||||||||
Recoveries
of loans charged-off
|
||||||||||||||||
Commercial
|
1 | 146 | 204 | 150 | ||||||||||||
Commercial
real estate
|
— | 2 | — | 993 | ||||||||||||
Commercial
real estate construction
|
— | 8 | — | 8 | ||||||||||||
Residential
real estate
|
5 | 28 | 17 | 65 | ||||||||||||
Home
equity
|
61 | 24 | 173 | 287 | ||||||||||||
Consumer
|
— | 1 | 2 | 10 | ||||||||||||
Total
loan recoveries
|
67 | 209 | 396 | 1,513 | ||||||||||||
Net
loans charged-off
|
(6,792 | ) | (6,951 | ) | (18,114 | ) | (14,377 | ) | ||||||||
Provision
for loan losses (1)
|
10,029 | 10,355 | 19,230 | 19,715 | ||||||||||||
Allowance
for loan loss sold
|
— | (581 | ) | — | (581 | ) | ||||||||||
Transfer
from accrual for unfunded standby letters of credit for funded standby
letters of credit
|
— | 510 | — | 510 | ||||||||||||
Ending
balance
|
20,358 | 25,973 | 20,358 | 25,973 | ||||||||||||
Total
loans
|
$ | 510,794 | $ | 582,590 | $ | 510,794 | $ | 582,590 | ||||||||
Average
total loans
|
515,004 | 621,124 | 529,309 | 617,581 | ||||||||||||
Ratios
|
||||||||||||||||
Allowance
for loan losses to total loans
|
3.99 | % | 4.46 | % | 3.99 | % | 4.46 | % | ||||||||
Allowance
for loan losses to nonaccrual loans, restructured loans and loans 90 days
or more past due and still accruing
|
43.40 | 116.14 | 43.40 | 116.14 | ||||||||||||
Net
charge-offs annualized to average total loans:
|
||||||||||||||||
Commercial
|
0.13 | 1.76 | 0.36 | 1.08 | ||||||||||||
Commercial
real estate and commercial real estate construction
|
3.27 | 3.71 | 2.65 | 1.21 | ||||||||||||
Residential
real estate, home equity and consumer
|
15.09 | 8.63 | 13.32 | 10.49 | ||||||||||||
Total
loans
|
5.23 | 4.45 | 4.58 | 3.11 | ||||||||||||
Ratio
of recoveries to loans charged-off
|
0.98 | 2.92 | 2.14 | 9.52 |
(1)
|
The
provision for loan losses as presented in the consolidated statement of
operations is net of $0.2 million recovery of accrued unfunded commitments
and standby letters of credit for both the quarter and nine months ended
September 30, 2008.
|
44
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”) loan 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 September 30, 2009, there were $8.4 million TDR loans of which $7.6
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.
September 30, 2009
|
December 31, 2008
|
September 30, 2008
|
||||||||||
(Dollars in thousands)
|
||||||||||||
Nonperforming
Assets
|
||||||||||||
Nonaccrual
loans:
|
||||||||||||
Commercial
|
$ | 3,775 | $ | 1,792 | $ | 2,042 | ||||||
Commercial
real estate
|
6,406 | 890 | 2,779 | |||||||||
Commercial
real estate construction
|
33,209 | 11,413 | 16,657 | |||||||||
Residential
real estate
|
2,742 | 969 | 262 | |||||||||
Home
equity
|
— | — | — | |||||||||
Consumer
|
— | 8 | 8 | |||||||||
46,132 | 15,072 | 21,748 | ||||||||||
Loans
held for sale
|
2,601 | 2,025 | — | |||||||||
Total
nonaccrual loans
|
48,733 | 17,097 | 21,748 | |||||||||
Foreclosed
properties
|
1,285 | 980 | 1,037 | |||||||||
Restructured
loans
|
778 | — | — | |||||||||
Total
nonperforming assets
|
$ | 50,796 | $ | 18,077 | $ | 22,785 | ||||||
Loans
90 Days or More Past Due and Still Accruing
|
||||||||||||
Commercial
|
$ | — | $ | — | $ | 570 | ||||||
Commercial
real estate
|
— | 1,040 | — | |||||||||
Commercial
real estate construction
|
— | — | — | |||||||||
Residential
real estate
|
— | — | 45 | |||||||||
Home
equity
|
— | — | — | |||||||||
Consumer
|
— | — | — | |||||||||
$ | — | $ | 1,040 | $ | 615 | |||||||
Loans
held for sale
|
$ | 500 | $ | 1,680 | $ | — | ||||||
Total
loans 90 days or more past due and still accruing
|
$ | 500 | $ | 2,720 | $ | 615 | ||||||
Allowance
for loan losses
|
$ | 20,358 | $ | 19,242 | $ | 25,973 | ||||||
Total
loans
|
$ | 510,794 | $ | 555,207 | $ | 582,590 | ||||||
Ratios:
|
||||||||||||
Nonaccrual
loans to total loans
|
9.03 | % | 2.71 | % | 3.73 | % | ||||||
Foreclosed
properties to total assets (1)
|
0.17 | 0.11 | 0.11 | |||||||||
Nonperforming
assets to total assets (1)
|
6.19 | 1.77 | 2.43 | |||||||||
Nonaccrual
loans, restructured loans and loans 90 days or more past due and still
accruing to total loans
|
9.18 | 2.90 | 3.84 | |||||||||
Nonperforming
assets and loans 90 days or more past due and still accruing to total
assets (1)
|
6.19 | 1.89 | 2.50 |
(1)
Assets of companies held for disposal are deducted for ratio
calculations.
Excluding
loans held for sale, nonaccrual loans increased $31.1 million from $15.1 million
at December 31, 2008 to $46.1 million at September 30, 2009. The ratio of
nonaccrual loans to total loans was 9.03% at September 30, 2009, compared to
2.71% at December 31, 2008. The increase reflects the adverse impact of the
current commercial and residential real estate environment including slower
sales, higher vacancy rates and reduced prices.
45
At
September 30, 2009, 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 $36.7 million in loan balances, or 79.4%, of
nonaccrual loans excluding those held for sale and 78.6% of total impaired
loans. The total specific allowance attributable to these twelve borrowing
relationships was $3.7 million. During the first nine months of 2009, $32.6
million of the $36.7 million were added as non-accrual and impaired with related
specific allowances totaling $3.2 million. At December 31, 2008, CIB Marine had
four borrowing relationships, each with nonaccrual loan balances in excess of
$1.0 million that accounted for $11.1 million, or 73.5% of nonaccrual
loans.
While CIB
Marine believes that the value of the collateral securing the above nonaccrual
loans approximates the net book value of the loans, CIB Marine cannot provide
assurances that the value will be maintained or that there will be no further
losses with respect to these loans.
During
the second quarter of 2006, CIB Marine purchased a $47.8 million pool of fixed
rate second lien home equity loans from Residential Funding Corporation, and
during the first quarter of 2007, CIB Marine purchased a $48.2 million closed
end pool of fixed rate second lien home equity loans from Residential Funding
Corporation, a division of General Motors Acceptance Corporation. At September
30, 2009 the remaining combined balance of the purchased home equity loan pools
was $37.4 million and loss reserves allocated to these two pools totaled $5.5
million and at December 31, 2008, the aggregate balance of these two home equity
pools was $52.2 million and loss reserves allocated to these two pools totaled
$4.5 million. During 2008, CIB Marine began charging off 100% of the outstanding
principal of each loan in the purchased home equity pools when it becomes 90
days past due. As a result of this policy change, none of the loans in the home
equity pools were classified as nonaccrual at September 30, 2009.
Foreclosed
properties were $1.3 million and consisted of six properties at September 30,
2009 compared to $1.0 million and nine properties at December 31, 2008. During
the first nine months of 2009 CIB Marine acquired through foreclosure, one
commercial property for $0.9 million and then wrote the value down to $0.6
million at September 30, 2009. Also, another commercial foreclosed property
accounted for $0.4 million, or 35.2% of the balance at September 30, 2009. There
was a combined total write down of $0.1 million on two other foreclosed
properties that were sold during the nine months ended September 30, 2009. All
foreclosed properties were held for sale.
Loans 90
days or more past due and still accruing interest are loans which are delinquent
with respect to the contractual payment terms of principal and/or interest but
which management believes all contractual principal and interest amounts due
will be collected. Excluding loans held for sale at December 31, 2008, CIB
Marine had one loan for $1.0 million that was 90 days or more past due and still
accruing. Excluding loans held for sale, there were no loans 90 days or more
past due and still accruing at September 30, 2009.
The ratio
of nonperforming assets and loans 90 days or more past due and still accruing to
total assets was 6.19% at September 30, 2009 compared to 1.89% at December 31,
2008.
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 increased
$32.4 million from $14.2 million at December 31, 2008 to $46.6 million at
September 30, 2009. The increase was primarily due to $40.6 million of
additional loans added to impaired loans, offset by $2.7 million in payments,
$4.0 million in charge-offs, $0.9 million transferred to foreclosed properties
and $0.6 million transferred to loans held for sale. 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 increase in 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 loans respective impairment analysis including the level of expected
discounted cash flows and collateral valuations.
46
The
following table sets forth information regarding impaired loans:
September 30, 2009
|
December 31, 2008
|
September 30, 2008
|
||||||||||
(Dollars in thousands)
|
||||||||||||
Impaired
loans without a specific allowance
|
$ | 26,631 | $ | 4,363 | $ | 1,802 | ||||||
Impaired
loans with a specific allowance
|
19,965 | 9,789 | 19,753 | |||||||||
Total
impaired loans
|
$ | 46,596 | $ | 14,152 | $ | 21,555 | ||||||
Specific
allowance related to impaired loans
|
$ | 5,074 | $ | 3,847 | $ | 9,525 |
Potential
Problem Loans
The level
of potential problem commercial, commercial real estate and commercial real
estate construction 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 and lease loss. Potential Problem Loans are those rated
as substandard by management but that are not in a nonperforming status. The
circumstances of each borrower presents enough doubt as to the ability of the
borrower to comply with the contractual repayment terms of their loans so that
they are considered Potential Problem Loans. The Potential Problem Loans cover a
diverse range of businesses and real estate property types. At September 30,
2009, Potential Problem Loans totaled $23.7 million, compared to $17.7 million
at December 31, 2008. The $6.0 million increase in Potential Problem Loans was
due to a $13.3 million increase in commercial real estate, a $7.1 million
decrease in commercial real estate construction and a $0.2 million decrease in
commercial loans of this category. The current rise in and level of Potential
Problem Loans highlights management’s continued heightened level of uncertainty
of the pace, magnitude and duration at which a commercial credit and any related
collateral may deteriorate.
Companies
Held For Disposal
At
September 30, 2009, assets and liabilities of companies held for disposal
consists entirely of the remaining assets and liabilities of CIB Marine’s wholly
owned subsidiary, CIB Construction, including CIB Construction’s subsidiary
Canron. The gross consolidated assets and liabilities of CIB Construction are
reported separately on the consolidated balance sheets at their estimated
liquidation values less costs to sell. Banking regulations limit the holding
period for assets not considered to be permissible banking activities and which
have been acquired in satisfaction of debt previously contracted to five years,
unless extended. CIB Construction is subject to these restrictions, and CIB
Marine has received an extension from its banking regulator to hold Canron until
December 31, 2009.
CIB
Construction acquired 84% of the outstanding stock of Canron through loan
collection activities in 2002. In the third quarter of 2003, the Board of
Directors of Canron authorized management to cease operating Canron and commence
a wind down of its affairs, including a voluntary liquidation of its assets. In
August 2005, Canron authorized and began liquidation distributions to its
shareholders, and in December 2006, Canron filed Articles of Dissolution. At
both September 30, 2009 and December 31, 2008, CIB Construction’s net carrying
value of its investment in Canron was zero.
Deposit
Liabilities
Total
deposits, were $641.4 million at September 30, 2009 and $694.6 million at
December 31, 2008. Time deposits represent the largest component of deposits.
The percentage of time deposits to total deposits was 67.9% at September 30,
2009 and 70.4% at December 31, 2008, reflecting CIB Marine’s reliance on time
deposits as a primary source of funding. At September 30, 2009 time deposits of
$100,000 or more amounted to $127.1 million, or 29.2%, of total time deposits,
compared to $151.1 million, or 30.9%, at December 31, 2008. The Bank accepts
brokered time deposits periodically to meet short-term funding needs and/or when
their related costs are at or below those being offered on other deposits.
Brokered time deposits were $18.0 million, or 4.1%, of total time deposits at
September 30, 2009, and $36.0 million, or 7.4%, of total time deposits at
December 31, 2008.
47
Borrowings
and Liabilities Subject to Compromise
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, including the Debentures, decreased $55.0
million from $151.7 million at December 31, 2008 to $96.7 million at September
30, 2009. The decrease was due to a $49.0 million reduction of short-term
borrowings caused mostly by a repayment of $40.0 million in short-term
borrowings from the FHLB. Also, there was a $6.0 million reduction of long-term
borrowings from the FHLB of Chicago during the first nine months of
2009.
During
the first nine months of 2009, the availability of federal funds purchased by
the Bank with correspondent banks continued to be contingent on the Bank’s
ability to fixed income investment securities.
In 2004,
CIB Marine entered into a written agreement with the Federal Reserve Bank of
Chicago. Among other items, the Agreement requires CIB Marine to obtain Reserve
Bank approval before incurring additional borrowings or debt, and pre-approval
to pay interest on Debentures.
Pursuant
to the Agreement, CIB Marine is not permitted to pay any interest on the
Debentures without prior approval of the Reserve Bank. CIB Marine had the right
to defer payments of interest on the Debentures for consecutive periods not
exceeding twenty consecutive quarters, but not beyond the stated maturity of the
Debentures. CIB Marine elected to defer all interest payments starting in 2004.
These deferral periods all expired in the first quarter of 2009, and throughout
the deferral period and while in default, interest on the Debentures continued
to accrue. In addition, interest also accrues on all interest that was not paid
when due, compounded quarterly or semi-annually. During the first nine months of
2009 CIB Marine continued to defer interest payments on its $61.9 million of
Debentures and as a result the Trusts deferred distributions on its $60.0
million of Debentures. CIB Marine had accrued interest payable on its Debentures
of $45.3 million and $39.1 million at September 30, 2009 and December 31, 2008,
respectively.
These
deferral periods all expired in the first quarter of 2009, and CIB Marine did
not make the required payments of interest such that, by April 30, 2009, CIB
Marine was in default with respect to the Debentures issued to all four of the
Trusts. In addition, interest also accrues on all interest that was not paid
when due, compounded quarterly or semi-annually. During the deferral period and
while in default, CIB Marine may not pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment on its stock, or make
any payment of principal, interest or premium, or redeem any similar debt
securities of CIB Marine, subject to certain limitations. The Debentures are
subject to mandatory redemption, in whole or in part, upon repayment of the
Debentures at maturity or their earlier redemption. The Debentures qualify as
regulatory capital, subject to regulatory limitation. As a result of CIB
Marine’s inability to make these payments and continued losses, and in
consideration of existing regulatory matters, as also stated in the 2008 Form
10-K, there is substantial doubt about CIB Marine’s ability to continue as a
going concern.
On March
16, 2009 CIB Marine issued a consent solicitation seeking the consent of the
holders of its TruPS to a proposed Plan of Restructuring that would have
converted the debt under the Debentures into preferred stock, thus reducing the
ongoing interest expense burden and eliminating any consequences of default on
the TruPS (see the discussion in the Liquidity and Capital Plan Update section).
The vote was concluded on May 11, 2009, however, CIB Marine did not receive the
requisite number of votes to approve the Plan of restructuring.
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 that was presented to the TruPS holders for their approval. Under the Plan,
approximately $105.3 million (as of July 16, 2009) of cumulative high-interest
indebtedness of the TruPS will be exchanged for 55,624 shares of Series A 7%
fixed rate preferred noncumulative perpetual stock with a stated value of $1,000
per share and 4,376 shares of Series B 7% fixed rate convertible noncumulative
perpetual preferred stock with a stated value of $1,000 per share. Each share of
Series B Preferred will be 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 will have
no stated redemption date and holders will not have the right to compel the
redemption of any or all of the shares. Further, dividends will be
noncumulative, and payable only to the extent CIB Marine declares a dividend, at
its discretion and subject to regulatory approval. The effects of the Plan would
be to improve earnings by eliminating the interest burden on CIB Marine
associated with the TruPS-related indebtedness, and to significantly improve its
capital position.
48
Under the
Plan, common shareholders would not be impaired. If all Series B Preferred
shareholders were to convert their shares in connection with a merger, they
would own slightly less than 50% of the outstanding common stock and have a
right to participate at that level in any merger consideration paid to acquire
CIB Marine.
See the
“Liquidity and Capital Plan Update” discussion below for further information on
CIB Marine’s capital plan.
Liquidity
and Capital Plan Update
The
objective of liquidity risk management at the Bank is to ensure that it is able
to meet, in a timely manner, its funding obligations related to commitments to
extend credit, deposit account withdrawals, maturities of borrowings and other
obligations. Liquidity positions of the Bank are actively managed by estimating,
measuring and monitoring the sources and uses of funds. The Bank’s funding
requirements are primarily met by the inflow of funds from deposits, and loan
and investment payments. The 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 used by the Bank include
federal funds purchased, securities sold under agreements to repurchase,
short-term borrowings from the FHLB and short-term brokered and negotiable time
deposits to the extent the Bank is authorized to accept or renew brokered
deposits. As a result of the C&D the Bank is restricted from issuing new
brokered deposits or renewing existing brokered deposits. The Bank could apply
to the FDIC to request approval to issue or renew brokered deposits but has
decided not to so that the Bank may apply under FDIC Rules and Regulations
interest rate restrictions based on its local markets as opposed to the national
markets. At this time the Bank is restricted from offering interest rates in
excess of the average interest rates offered by other depository institutions in
its local markets plus seventy five basis points. The Bank has also established
investment security-secured borrowing lines with the Reserve Bank and maintains
secured borrowing guidance lines with nonaffiliated banks. Long-term funding
sources, other than core deposits, include long-term time deposits and long-term
borrowings from the FHLB. Additional sources of liquidity include cash and cash
equivalents, federal funds sold, sale of loans held for sale and the sale of
securities.
During
the first nine months of 2009, the availability of federal funds purchased for
the Bank with its primary correspondent bank continued to be contingent on the
availability of fixed income securities at the Bank to pledge as collateral; the
Bank’s inter-day borrowing availability at the Reserve Bank has been restricted
to that available for banks with a secondary borrower status, and the Bank’s
intra-day credit and settlement activity must all be pre-funded at its account
with the Reserve Bank. Additionally, pursuant to the aforementioned Agreement
between CIB Marine and the Reserve Bank, CIB Marine, excluding its subsidiaries,
must obtain Reserve Bank approval before incurring additional borrowing or
debt.
CIB
Marine’s primary sources of funds for the nine months ended September 30, 2009
was a $90.7 million net decrease in the investment portfolio and a $25.4 million
net decrease in loans. CIB Marine’s primary use of funds for the nine months
ended September 30, 2009 was a $49.0 million net decrease in short-term
borrowings, a $6.0 million decrease in long-term borrowings and a $53.3 million
net decrease in deposits.
Beginning
in 2004, CIB Marine deferred interest payments on its $61.9 million of
Debentures and as a result distributions were deferred on $60.0 million of
TruPS. The obligations under the TruPS are solely the obligations of the Company
and not obligations of the Bank. Under the terms of the TruPS, the deferral
period may last up to five years. These deferral periods all expired in the
first quarter of 2009 and CIB Marine did not make the required payments of
interest such that, since April 30, 2009, CIB Marine has been in default with
respect to the Debentures issued to all four of the Trusts. At September 30,
2009, the accrued and unpaid interest on the Debentures totaled $45.3 million.
As a result of CIB Marine’s inability to make these payments and continued
losses, and in consideration of existing regulatory matters, as also stated in
the 2008 Form 10-K, there is substantial doubt about CIB Marine’s ability to
continue as a going concern.
49
As of
September 30, 2009, CIB Marine had $3.5 million in total cash and cash
equivalents and the non-bank subsidiaries had $3.8 million. In addition, a
non-bank subsidiary of the Company also holds $10.3 million in loans that it is
attempting to collect and an additional $4.5 million in loans held for sale.
According to the BHCA, “a bank holding company shall serve as a source of
financial and managerial strength to its subsidiary banks and shall not conduct
its operations in an unsafe or unsound manner.” Pursuant to this mandate CIB
Marine has continued to monitor the capital strength and liquidity of the Bank.
Since the fourth quarter of 2008, CIB Marine provided $9.0 million in capital to
the Bank to support the Bank in maintaining a “well-capitalized” position.
Although the current capital ratio at the Bank is above what is currently
required by its regulators, continuing losses at the Bank could require
additional contributions of capital by CIB Marine. Any other use of this cash to
pay interest or principal on the TruPS is subject to approval by the Reserve
Bank. Only cash available at CIB Marine may be used to pay debts or expenses of
CIB Marine, including interest or principal on the TruPS.
CIB
Marine did not receive any dividend payments from the Bank during the first nine
months of 2009, and at September 30, 2009, the Bank did not have any retained
earnings available for the payment of dividends without first obtaining the
consent of its regulators. In addition, CIB Marine may not issue new debt or
renew existing debt without the prior consent of the Reserve Bank.
As
reported in Part II, Item 7 of the 2007 Form 10-K, and updated in Part II, Item
7 of the 2008 Form 10-K, CIB Marine management has been developing and
implementing a comprehensive capital plan to resolve the deferral of interest
payments and default on the Debentures, maintaining “well-capitalized” capital
ratios at the Bank, and improving the efficiency of CIB Marine through revenue
growth and expense management. All of these goals were targeted to provide the
greatest value possible to shareholders of CIB Marine.
During
the first nine months of 2009, management continued its efforts on each of these
goals. In March 2009, CIB Marine submitted a consent solicitation to holders of
the existing TruPS to restructure the existing obligations. Pursuant to the
proposed Plan of Restructuring the then approximately $100.9 million of
indebtedness under the Debentures currently held by the Trusts would have been
replaced with approximately $94.9 million aggregate liquidation preference of
newly-issued CIB Marine 7% fixed rate perpetual noncumulative preferred stock
(“Perpetual Preferred”).
The vote
was concluded on May 11, 2009, however, CIB Marine did not receive the requisite
number of votes to approve the consent solicitation plan.
On July
16, 2009, CIB Marine filed a Current Report on Form 8-K describing the Plan that
was presented to the TruPS holders for their approval. Under the Plan,
approximately $105.3 million (as of July 16, 2009) of cumulative high-interest
indebtedness would be exchanged for 55,624 shares of Series A preferred
noncumulative perpetual stock with a stated value of $1,000 per share and 4,376
shares of Series B 7% fixed rate convertible noncumulative perpetual preferred
stock with a stated value of $1,000 per share. Each share of the Series B
Preferred would have been convertible into 4,000 shares of CIB Marine’s common
stock only upon the consummation of a merger transaction involving CIB Marine.
The CIB Marine Preferred will have no stated redemption date and holders would
not have the right to compel the redemption of any or all of the shares.
Further, dividends would be noncumulative, and payable only to the extent CIB
Marine declares a dividend, subject to regulatory approval. On September 15,
2009, the TruPS holders approved the Plan. On September 16, 2009, CIB Marine
filed the pre-packaged Plan under Chapter 11 of the Bankruptcy Code in
Bankruptcy Court in Milwaukee. The Plan would improve CIB Marine’s earnings by
eliminating the interest burden on it associated with the TruPS-related
indebtedness and significantly improve its capital position.
Under the
Plan, common shareholders would not be impaired. If all Series B Preferred
shareholders were to convert their shares in connection with a merger, they
would own slightly less than 50% of the outstanding common stock and have a
right to participate at that level in any merger consideration paid to acquire
CIB Marine.
The
primary purpose of the Plan is to effectuate the restructuring and substantial
de-leveraging of CIB Marine’s capital structure and to enhance its regulatory
capital position. The Plan will allow CIB Marine to continue its businesses in
the ordinary course and provides for full payment of allowed unsecured claims as
defined in the Plan. The
funds expected to be generated by CIB Marine’s operations will not be sufficient
to meet its debt service requirements and satisfy its debt obligations without
this restructuring.
50
In
connection with developing the Plan, CIB Marine reviewed its current business
operations and compared its prospects as an ongoing business enterprise with the
estimated recoveries of claims and equity interests in various liquidation
scenarios. As a result, CIB Marine concluded that the recovery for holders of
allowed claims and equity interests as defined in the Plan would be maximized by
continuing to operate as a going concern.
CIB
Marine also determined that a prolonged Chapter 11 case would severely damage
its ongoing business operations and threaten its viability as a going concern.
The pre-packaged nature of the Plan allows CIB Marine to exit Chapter 11
quickly, while the provisions of the Plan allow CIB Marine to meet its
regulatory capital needs and de-lever its balance sheet.
In
addition, CIB Marine continues to focus on the safety and soundness of the Bank.
In addition, liquidity remains strong at the Bank with contingency plans in
place to further ensure the safety of depository customers. As noted above, CIB
Marine has provided the Bank with $5.0 million of capital during 2008 and an
additional $4.0 million in 2009. This is consistent with CIB Marine’s goal of
supporting strong capital and liquidity positions at the Bank and is in keeping
with its source of strength obligations under the BHCA.
In its
2008 Form 10-K, CIB Marine disclosed that its Wisconsin state-chartered bank
subsidiary at the time, Marine Bank, stipulated to a C&D with the FDIC and
the WDFI. The terms of the C&D were described in CIB Marine’s 2008 Form
10-K. The C&D became effective on April 24, 2009. Failure to adhere to the
requirements of the actions mandated by the C&D could have subjected Marine
Bank to more severe restrictions and civil monetary penalties. The C&D added
no additional requirements to the asset quality and loan review program
previously implemented by Marine Bank. When Marine Bank merged with and into CIB
Marine’s Illinois state-chartered bank subsidiary, Central Illinois Bank, to
form CIBM Bank, the C&D was re-affirmed by the FDIC. The IBPRE has yet to
formally join in the C&D since consummation of the merger of the bank
charters, yet CIB Marine believes the C&D will continue. CIB Marine and the
Bank remain committed to maintaining adequate capital levels at the Bank.
Generally, enforcement actions such as the C&D can be lifted only after
subsequent examinations substantiate complete correction of the underlying
issues.
Deposit
and retirement accounts continue to be insured for a minimum of $250,000 per
depositor by the FDIC, through December 31, 2013. Because the Bank is
participating in the FDIC’s Transaction Account Guarantee Program (“TAGP”), most
types of checking accounts are guaranteed without limit through December 31,
2009 and the Bank plans to participate in the recent program that extends the
guarantee without limit through June 30, 2010.
Capital
and Regulatory Matters
CIB
Marine and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Pursuant to federal bank holding
company and bank regulations, CIB Marine and the 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, the Bank must meet specific capital guidelines that
involve quantitative measures of their assets and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. There are five
capital categories defined in the regulations: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. To be categorized as “well-capitalized,” the Bank must
maintain total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios
of 10.0%, 6.0% and 5.0%, respectively.
Classification
of a 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 its results of operations.
Under the
definition of capital levels within the C&D order, the Bank was classified
as adequately capitalized as of September 30, 2009 as specified in the
order.
51
As stated
in Note 14-Stockholders’ Equity (Deficit) to the Unaudited Consolidated
Financial Statements included in this Form 10-Q, CIB Marine was subject to an
Agreement which, among other items, requires it 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 September 30, 2009, CIB Marine’s Tier 1
leverage ratio was a negative 0.50%, which was below the 4.0% required by the
Agreement. The decline reflects the continued operating losses of CIB Marine
during the first nine months of 2009. CIB Marine’s ability to increase its
capital and meet the requirements of the Agreement is dependent upon the
successful execution of its Plan outlined in the Liquidity and Capital Plan
Update section above. Failure to meet the requirements of the Agreement could
cause the Reserve Bank to require CIB Marine to take other actions.
The
calculation of risk-based capital of CIB Marine at September 30, 2009 and
December 31, 2008 is set forth below:
September 30, 2009
|
December 31, 2008
|
|||||||
(Dollars in thousands)
|
||||||||
Risk
weighted assets
|
$ | 631,601 | $ | 656,304 | ||||
Average
assets (1)
|
813,074 | 920,519 | ||||||
Capital
components
|
||||||||
Stockholders’
equity (deficit)
|
$ | (9,394 | ) | $ | 14,802 | |||
Restricted
Core Capital:
|
||||||||
Junior
subordinated debentures net of investment in trust
|
60,000 | 60,000 | ||||||
Total
restricted core capital elements
|
60,000 | 60,000 | ||||||
Disallowed
amounts
|
(60,000 | ) | (51,730 | ) | ||||
Maximum
allowable in Tier 1 capital
|
— | 8,270 | ||||||
Nonfinancial
equity items
|
— | — | ||||||
Less:
disallowed intangibles
|
— | — | ||||||
Add:
unrealized loss on securities
|
5,516 | 10,008 | ||||||
Less:
unrealized loss on equities
|
(170 | ) | (138 | ) | ||||
Tier
1 capital
|
(4,048 | ) | 32,942 | |||||
Allowable
allowance for loan losses
|
8,049 | 8,340 | ||||||
Allowable
subordinated debentures net of investment in trust
|
60,000 | 51,730 | ||||||
Tier
2 capital
|
68,049 | 60,070 | ||||||
Allowable
Tier 2 Capital (equal to Tier 1)
|
(4,048 | ) | 32,942 | |||||
Total
risk-based capital
|
$ | (4,048 | ) | $ | 65,884 |
(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.
|
Actual
|
Minimum Required To be
Adequately Capitalized
|
|||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
September
30, 2009
|
||||||||||||||||
Total
capital to risk weighted assets
|
$ | (4,048 | ) | (0.64 | )% | $ | 50,528 | 8.00 | % | |||||||
Tier
1 capital to risk weighted assets
|
(4,048 | ) | (0.64 | ) | 25,264 | 4.00 | ||||||||||
Tier
1 leverage to average assets
|
(4,048 | ) | (0.50 | ) | 32,523 | 4.00 | ||||||||||
December
31, 2008
|
||||||||||||||||
Total
capital to risk weighted assets
|
$ | 65,884 | 10.04 | % | $ | 52,504 | 8.00 | % | ||||||||
Tier
1 capital to risk weighted assets
|
32,942 | 5.02 | 26,252 | 4.00 | ||||||||||||
Tier
1 leverage to average assets
|
32,942 | 3.58 | 36,821 | 4.00 |
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.
52
Standby
letters of credit are conditional commitments that the Bank 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. The Bank 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, the Bank’s credit
loss exposure is the same as in any extension of credit, up to the letter’s
contractual amount. Management assesses the borrower’s financial condition to
determine the necessary collateral, which may include marketable securities,
real estate, accounts receivable and inventory. Since the conditions requiring
the Bank to fund letters of credit may not occur, the Bank expects its future
cash requirements to be less than the total outstanding commitments. The maximum
potential future payments guaranteed by the Bank under standby letter of credit
arrangements at September 30, 2009 and December 31, 2008, were $4.9 million and
$5.5 million with a weighted average term of approximately 13 months and 8
months, respectively.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. CIB Marine evaluates each customer’s creditworthiness
and determines the amount of the collateral necessary based on management’s
credit evaluation of the counterparty. Collateral held varies, but may include
marketable securities, accounts receivable, inventories, property and equipment,
and real estate. CIB Marine had commitments to extend credit of $44.7 million
and $111.0 million at September 30, 2009 and December 31, 2008,
respectively.
New
Accounting Pronouncements
The
expected impact of accounting policies recently issued or proposed but not yet
required to be adopted are discussed below. To the extent the adoption of new
accounting standards materially affected CIB Marine’s financial condition,
results of operations, or liquidity, the impacts were discussed in the
applicable section of this financial review and the notes to the consolidated
financial statements.
Transfers
of Assets
In June
2009, the FASB issued an amendment to ASC 860, Transfers and Servicing which
among other things amends the criteria for whether a transfer qualifies for sale
accounting when only a portion of a financial asset is transferred. This
guidance impacts many types of financial assets (e.g. loan participations, sales
of mortgages or installment loans) occurring after the effective date of
November 15, 2009. The adoption of this amendment is not expected to have a
material effect on CIB Marine’s consolidated financial statements.
Consolidation
Guidance for Variable Interest Entities
In June
2009, the FASB also issued an amendment to ASC 810, Consolidations, which changes
the consolidation rules as they apply to variable interest entities. This
guidance is effective January 1, 2010 and is intended to address concerns about
companies’ ability to structure transactions to avoid consolidation. The
adoption of this amendment is not expected to have a material effect on CIB
Marine’s consolidated financial statements.
Measuring
Liabilities at Fair Value
In August
2009, the FASB amended ASC 820 by issuing Accounting Standards Update (“ASU”)
2009-05 which provides additional guidance on measuring the fair value of
liabilities. The guidance, which will become effective in the fourth quarter of
2009, clarifies the application of certain valuation techniques and addresses
certain practical difficulties in measuring fair value. No new fair value
measurements are required by the guidance. The adoption of ASU 2009-05 is not
expected to have a material effect on CIB Marine’s consolidated financial
statements.
Proposed
Statement of Disclosures About the Credit Quality of Financing Receivables and
the Allowance for Credit Losses
In June
2009, the FASB issued the proposed statement which would increase significantly
the Allowance for Loan and Lease Losses (“ALLL”) disclosures required by
financial institutions beginning in the fourth quarter of 2009. This proposed
statement addresses disclosures only and does not seek to change recognition or
measurement. However, the disclosures do represent a meaningful change in
practice. The adoption of this statement will expand the disclosures of the ALLL
in the 2009 Annual Report.
53
Inflation
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
October 29, 2009, the Bankruptcy Court considered and determined (i) the
approval of the solicitation of the TruPS holders who already had voted and
approved the Plan on September 15, 2009; (ii) the adequacy of the Disclosure
Statement; and (iii) confirmation of the Plan. CIB Marine expects the Effective
Date of the Plan and the emergence from Bankruptcy to be established before the
end of 2009.
Based on
CIB Marine’s preliminary analysis, on the Effective Date of the Plan the
cancellation of debt and the related issuance of preferred shares will result in
a $106 million increase in the Consolidated Shareholders’ Equity, The proforma
summary of CIB Marine’s regulatory ratios using this increase to Consolidated
Shareholders’ Equity as of September 30, 2009 would be as follows:
Actual
|
Proforma Adjustment
|
Minimum Required To
be Adequately
Capitalized
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
September
30, 2009
|
||||||||||||||||||||||||
Total
capital to risk weighted assets
|
$ | (4,048 | ) | (0.64 | )% | $ | 109,971 | 17.41 | % | $ | 50,528 | 8.00 | % | |||||||||||
Tier
1 capital to risk weighted assets
|
(4,048 | ) | (0.64 | ) | 101,922 | 16.14 | 25,264 | 4.00 | ||||||||||||||||
Tier
1 leverage to average assets
|
(4,048 | ) | (0.50 | ) | 101,922 | 12.54 | 32,523 | 4.00 |
Assuming
the Plan is approved and implemented by the Bankruptcy Court, the proforma
capital ratios of CIB Marine would be above the 4% required by the
Agreement.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since
December 31, 2008, CIB Marine’s market risk profile has continued to favor
declining interest rates over rising interest rates. CIB Marine’s strategy is to
gradually increase the term structure of its repricing liabilities relative to
that of its assets to reduce the impact of a potentially rising interest rate
environment at some point in the future. The percentage decrease in the net
interest income over a one year time period has worsened for the simulation of
an immediate increase in interest rates. This is partially the result of having
more term liabilities maturing in the next six months relative to assets at
September 30, 2009 compared to December 31, 2008; but is also due to having a
lower starting net interest margin resulting from the rising proportion of total
interest expense represented by interest expense relating to the Debentures, the
increased level of non-performing assets, elevated holdings of cash and due from
balances and limitations in reducing the interest cost of deposits (i.e., due to
implied deposit rate floors).
The
following table illustrates the period and cumulative interest rate sensitivity
gap for September 30, 2009.
54
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
|
$ | 245,522 | $ | 36,537 | $ | 63,642 | $ | 162,745 | $ | 2,348 | $ | 510,794 | ||||||||||||
Securities
|
20,322 | 14,965 | 32,635 | 99,270 | 29,893 | 197,085 | ||||||||||||||||||
Loans
held for sale
|
5,001 | — | — | — | — | 5,001 | ||||||||||||||||||
Reverse
repurchase securities and federal funds sold
|
— | — | — | — | — | — | ||||||||||||||||||
Total
interest-earning assets
|
270,845 | 51,502 | 96,277 | 262,015 | 32,241 | 712,880 | ||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Time
deposits
|
178,848 | 62,210 | 124,628 | 69,894 | 134 | 435,714 | ||||||||||||||||||
Savings
and interest-bearing demand deposits
|
151,689 | — | — | — | — | 151,689 | ||||||||||||||||||
Short-term
borrowings
|
11,843 | — | 2,000 | — | — | 13,843 | ||||||||||||||||||
Long-term
borrowings
|
3,000 | 5,000 | — | 13,000 | — | 21,000 | ||||||||||||||||||
Junior
subordinated debentures
|
20,619 | — | — | 41,238 | — | 61,857 | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 365,999 | $ | 67,210 | $ | 126,628 | $ | 124,132 | $ | 134 | $ | 684,103 | ||||||||||||
Interest
sensitivity gap (by period)
|
(95,154 | ) | (15,708 | ) | (30,351 | ) | 137,883 | 32,107 | 28,777 | |||||||||||||||
Interest
sensitivity gap (cumulative)
|
(95,154 | ) | (110,862 | ) | (141,213 | ) | (3,330 | ) | 28,777 | 28,777 | ||||||||||||||
Cumulative
gap as a % of total assets
|
(12.20 | )% | (14.22 | )% | (18.11 | )% | (0.43 | )% | 3.70 | % |
The
following table illustrates the expected percentage change in net interest
income over a one-year period resulting from a hypothetical immediate change in
short-term U.S. prime rate of interest as of September 30, 2009, and December
31, 2008.
Basis point changes
|
||||||||||||||||
+200 | +100 | -100 |
-200
|
|||||||||||||
Net
interest income change over one year: (1)
|
||||||||||||||||
September
30, 2009
|
(16.47 | )% | (6.25 | )% | 4.91 | % | 1.10 | % | ||||||||
December
31, 2008
|
(9.21 | )% | (3.88 | )% | (0.35 | )% | (1.46 | )% |
|
(1)
|
For
the down rate scenarios, -100 and -200 basis points, the reduction in key
benchmark interest rates at each term is constrained by a 0.25% floor so
that the yield curves may change in a non-parallel fashion in these
scenarios.
|
ITEM
4. 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 September 30, 2009. 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 September 30, 2009.
(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 September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, CIB Marine's internal control over
financial reporting.
55
PART
II-OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On September 15, 2009, the requisite beneficial owners of CIB
Marine’s TruPS gave approval to the Plan which paved the way for the Company to
file the Plan in Bankruptcy Court (Case No. 09-33318) under Chapter 11 of the
Bankruptcy Code. The restructuring of the Company pursuant to the Plan will have
no direct impact on the operations of the Bank, which is regulated separately
from the Company by both federal and state regulators and whose accounts are
insured by the FDIC. The Company continues to operate its business as a “debtor
in possession” under the jurisdiction and supervision of the Bankruptcy Court.
CIB Marine is continuing normal business operations during the bankruptcy
process and continues to take steps to reduce costs, increase revenue, and
resolve loan credit issues with the intention of making, CIB Marine a stronger
and more viable company upon emergence from bankruptcy. The direct effects of
the Plan on CIB Marine will be to improve earnings by eliminating the interest
burden associated with its TruPS-related indebtedness, and to significantly
improve the capital position at the Company.
On
September 16, 2009, the Bankruptcy Court approved certain first-day motions in
the Chapter 11 case including, without limitation, orders authorizing the
process of payment of suppliers, professionals and certain operating
expenses.
Plan
of Reorganization
The
primary purpose of the Plan is to effectuate the restructuring and substantial
de-leveraging of CIB Marine’s capital structure and to enhance its regulatory
capital position. The Plan will allow CIB Marine to continue its businesses in
the ordinary course and provides for full payment of allowed unsecured claims as
defined in the Plan. The funds expected to be generated by CIB Marine’s
operations will not be sufficient to meet its debt service requirements and
satisfy its debt obligations without this restructuring.
Under the
Plan, approximately $107.2 million of cumulative high-interest indebtedness of
the TruPS will be exchanged for 55,624 shares of Series A 7% fixed rate
preferred noncumulative perpetual stock with a stated value of $1,000 per share
and 4,376 shares of Series B 7% fixed rate convertible noncumulative perpetual
preferred stock with a stated value of $1,000 per share. 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. CIB Marine Preferred will have no stated redemption
date and the holders will not have the right to compel the redemption of any or
all of the shares. Further, dividends are noncumulative and payable only to the
extent CIB Marine declared a dividend, at its discretion and subject to
regulatory approval.
In
connection with developing the Plan, CIB Marine reviewed its current business
operations and compared its prospects as an ongoing business enterprise with the
estimated recoveries of claims and equity interests in various liquidation
scenarios. As a result, CIB Marine concluded that the recovery for holders of
allowed claims and equity interests as defined in the Plan would be maximized by
continuing to operate as a going concern. CIB Marine believes that its
businesses and assets have significant value that would not be realized in
liquidation, either in whole or in substantial part. Consistent with the
liquidation analysis included in the Plan, the value of CIB Marine’s assets
would be considerably greater if CIB Marine operates as a going concern instead
of liquidating.
There
have been no material developments in pending legal proceedings since the filing
of the 2008 Form 10-K.
ITEM
1A. RISK FACTORS
The
following discussion sets forth certain risks that CIB Marine believes could
have a material adverse impact on its financial condition and results of
operations. Additional risks that are not currently known to CIB Marine, or that
it currently believes to be immaterial, may also have a material adverse effect
on its financial condition and results of operations.
If
CIB Marine is not able to fully effectuate and implement the Plan, in Chapter
11, the case may be converted to a case under Chapter 7 of the Bankruptcy Code,
pursuant to which a trustee would be elected or appointed to liquidate the
assets of CIB Marine in accordance with the priorities of the Bankruptcy
Code.
While
operating as debtors-in-possession under Chapter 11, CIB Marine may sell or
otherwise dispose of or liquidate assets or settle liabilities, subject to the
approval of the Bankruptcy Court or as otherwise permitted in the ordinary
course of business, for amounts other than those reflected in the condensed
consolidated financial statements included in this Form 10-Q. Further, a plan,
other than the pre-packaged Chapter 11 Plan, could materially change the amounts
and classifications of assets and liabilities reported in the historical
consolidated financial statements. The historical consolidated financial
statements do not include any adjustments to the reported amounts of assets or
liabilities that might be necessary as a result of confirmation of the Plan or
any other plan.
56
Regulatory
guidelines require CIB Marine and the Bank to maintain a minimum Tier 1 core
capital ratio and a minimum total risk-based capital ratio at each quarter-end.
At September 30, 2009, the Bank and CIB Marine’s ratios were below the
“well-capitalized” guidelines as of that date. Based on CIB Marine’s current and
projected levels of capital, CIB Marine anticipates that it will not be able to
satisfy the Tier 1 core capital and total risk-based capital minimum ratios
unless it successfully converts its Debentures into equity pursuant to the Plan.
If CIB Marine cannot effectuate and implement the Plan, the Bank could be
subject to further regulatory enforcement action, including, without limitation,
the issuance of cease and desist orders (which may, among other things, further
restrict the Bank’s business activities and potentially place it into
receivership). Notwithstanding the restructuring of the Debentures, state and
federal regulators could take enforcement action before the Plan is fully
effectuated and implemented, which could include the state regulator seizing the
Bank. If the Bank is seized, this will lead to a complete loss of all value of
CIB Marine’s ownership interest in the Bank, and CIB Marine subsequently may be
exposed to significant claims by the FDIC or the state regulator. In addition,
further restrictions could be placed on the Bank if a determination that the
Bank is undercapitalized, significantly undercapitalized, or critically
undercapitalized is made, with increasingly greater restrictions being imposed
as the level of undercapitalization increases.
There
is substantial doubt concerning the ability of CIB Marine to continue as a going
concern for a reasonable period of time.
TruPS
holders are owed in excess of $100 million, all of which is currently due and
payable. At September 30, 2009, total assets at the Company were $98.1 million,
which included $3.5 million of liquid assets. There is no other source of
repayment of the TruPS, other than these assets. As of April 30, 2009, CIB
Marine defaulted on all four series of the TruPS and the Trusts, as holders of
the Debentures, have the legal right to accelerate the entire
indebtedness.
As a
result of CIB Marine’s current inability to meet its obligations with regard to
the TruPS, combined with the continued net losses sustained by CIB Marine during
the year, and in consideration of existing regulatory matters, there is
substantial doubt with respect to CIB Marine’s ability to continue as a going
concern.
Upon
emergence from Chapter 11, CIB Marine may not be able to consummate a business
combination transaction with a strategic partner within a reasonable timeframe,
or at all.
Pursuant
to its capital plan, CIB Marine intends to seek out a strategic business
combination partner upon emerging from Chapter 11. There can be no assurance
that CIB Marine will be successful in consummating any such business combination
on reasonable terms within a reasonable timeframe, or at all. If CIB Marine is
unsuccessful in consummating such a business combination transaction within a
reasonable timeframe, it may be unable to serve as a source of strength for the
Bank, which could result in regulatory intervention including, but not limited
to, seizure.
The
Bank is subject to a formal enforcement action with regulatory
authorities.
Under
applicable laws, the FDIC, as the Bank’s primary federal regulator and deposit
insurer, and the state regulators as the Bank’s chartering authorities, have the
ability to impose additional sanctions, restrictions and requirements on the
Bank if they determine, upon examination or otherwise, violations of laws with
which the 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. In the 2008 Form
10-K, CIB Marine disclosed that Marine Bank, prior to the Merger, stipulated to
a C&D with the FDIC and the WDFI. The C&D primarily resulted from the
high level of nonperforming assets of Marine Bank and the resulting impact on
its financial condition. The C&D required Marine Bank to take certain
corrective actions focusing on reducing exposure to non-performing loans,
charging off all loans classified as loss, imposes restrictions on lending to
credits with existing non-performing loans, and accruing interest on certain
delinquent loans in addition to charging off previously accrued interest on
those loans. Key provisions also included a restriction on paying dividends
without regulatory approval, a requirement to maintain a minimum Tier 1 leverage
ratio of ten percent (10%) at Marine Bank, retaining qualified management,
revising lending policies and procedures focused on documentation, maintaining
an appropriate loan review and grading system, and adopting a comprehensive
budget. Failure to adhere to the requirements of the actions mandated by the
C&D can result in more severe restrictions and civil monetary penalties. The
C&D added no additional requirements to the asset quality and loan review
program previously implemented by Marine Bank. In connection with the Merger,
the C&D, with respect to the FDIC, was assumed by the surviving entity, CIBM
Bank. The C&D, with respect to the WDFI, was terminated upon the Merger.
Although the IDBRE has yet to determine whether it will join in the C&D with
the FDIC, CIB Marine believes the C&D will continue. Generally, enforcement
actions such as the C&D can be lifted only after subsequent examinations
substantiate complete correction of the underlying issues.
57
CIB
Marine’s emergence from bankruptcy may potentially reduce or eliminate its net
operating loss carryfowards.
As of
December 31, 2008, CIB Marine had net operating loss, capital loss and tax
credit carryfowards (collectively, the “Tax Attributes”) of approximately $199.6
million. In connection with CIB Marine’s possible emergence from Chapter 11, it
is likely that the Tax Attributes will be significantly reduced due to the
cancellation of indebtedness income. A full valuation allowance has been
recorded against the deferred tax asset related to these Tax Attributes in the
condensed consolidated balance sheets included in this Form 10-Q.
CIB
Marine may be adversely affected by current economic and market
conditions.
The
national and global economic downturn has resulted in significant financial
market disruptions which may depress overall the market value of financial
institutions, limit access to capital, or have a material adverse effect on the
financial condition or results of operations of banking companies in general and
CIB Marine and the Bank in particular. In addition, the possible duration and
severity of the adverse economic cycle is unknown and may exacerbate CIB
Marine's exposure to credit risk.
CIB
Marine has been particularly exposed to downturns in the U.S. housing and
commercial real estate markets. Dramatic declines in the housing market over the
past year, with falling home prices and increasing foreclosures, unemployment
and under-employment, have negatively impacted the credit performance of
mortgage loans and resulted in significant write downs of asset values by
financial institutions. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding to borrowers,
including to other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies,
lack of consumer confidence, increased market volatility and widespread
reduction of business activity and employment generally. The resulting economic
pressure on consumers and lack of confidence in the financial markets has
adversely affected CIB Marine’s business, financial condition and results of
operations. CIB Marine cannot be certain that the difficult conditions in the
financial markets are likely to experience sustainable improvement in the near
future. A worsening or prolonging of these conditions would likely exacerbate
the adverse effects of these difficult market conditions on CIB Marine and
others in the financial institutions industry. In particular, CIB Marine may
face the following risks in connection with these events:
|
·
|
CIB
Marine expects to face increased regulation of its industry. Compliance
with such regulation may increase its costs and limit its ability to
pursue business opportunities.
|
|
·
|
CIB
Marine’s ability to assess the creditworthiness of its customers may be
impaired if the models and approaches it uses to select, manage and
underwrite its customers become less predictive of future
behaviors.
|
|
·
|
The
process CIB Marine uses to estimate losses inherent in its credit exposure
requires difficult, subjective and complex judgments, including forecasts
of economic conditions and how these economic predictions might impair the
ability of its borrowers to repay their loans, which may no longer be
capable of accurate estimation and which may, in turn, impact the
reliability of the process.
|
58
|
·
|
CIB
Marine will be required to pay significantly higher FDIC premiums because
market developments have significantly depleted the insurance fund of the
FDIC and reduced the ratio of reserves to insured
deposits.
|
|
·
|
CIB
Marine’s liquidity could be negatively impacted by an inability to access
the capital markets, unforeseen or extraordinary demands on cash, or
regulatory restrictions, which could, among other things, materially and
adversely affect its business prospects and financial
condition.
|
There
can be no assurance that enacted legislation and other measures undertaken by
the Treasury Department, the FRB and other governmental agencies will help
stabilize the U.S. financial system, improve the housing market or be of
specific benefit to CIB Marine.
Since
October 2008, various legislation has been signed into law including the
Emergency Economic Stabilization Act of 2008 (“EESA”) which, among other
measures, authorized the Secretary of the Treasury Department to establish a
Troubled Asset Relief Program (“the TARP”). The EESA gives broad authority to
the Treasury Department to purchase, manage, modify, sell and insure the
troubled mortgage related assets that triggered the current economic crisis as
well as other “troubled assets.” The EESA includes additional provisions
directed at bolstering the economy, including:
|
·
|
Authority
for the FRB to pay interest on depository institution
balances;
|
|
·
|
Mortgage
loss mitigation and homeowner protection;
and
|
|
·
|
Authority
to the SEC to suspend mark-to-market accounting requirements for any
issuer or class of category of
transactions.
|
Pursuant
to the TARP, the Treasury Department has created the Capital Purchase Program
(“CPP”) to provide access to capital to financial institutions through a
standardized program to acquire preferred stock (accompanied by warrants) from
eligible financial institutions that will serve as Tier 1 capital.
The EESA
also contains a number of significant employee benefit and executive
compensation provisions, some of which apply to employee benefit plans
generally, and others which impose on financial institutions that participate in
the TARP program restrictions on executive compensation.
In
October 2008, the FDIC announced the establishment of the Temporary Liquidity
Guarantee Program (“TLGP”) to temporarily provide insurance for all
noninterest-bearing transaction accounts and guarantees of certain newly issued
senior unsecured debt issued by financial institutions (such as the Bank), bank
holding companies and savings and loan holding companies (such as CIB
Marine).
There can
be no assurance as to the actual impact that the EESA and such related measures
undertaken to alleviate the credit crisis will have generally on the financial
markets, including the extreme levels of volatility and limited credit
availability currently being experienced The failure of such measures to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect CIB Marine’s
business, financial condition, results of operations, access to credit or the
trading price of its common stock.
Finally,
there can be no assurance regarding the specific impact that such measures may
have on CIB Marine—or whether (or to what extent) CIB Marine will be able to
benefit from such programs.
CIB
Marine may be subject to further increases in FDIC insurance premiums and
special assessments by the FDIC.
As an
FDIC-insured institution, the Bank is required to pay deposit insurance premiums
based on the risk it poses to the FDIC insurance funds. In 2008, the FDIC had
the authority to raise or lower assessment rates on insured deposits in order to
achieve certain designated reserve ratios in the insurance funds and to impose
special additional assessments. The FDIC had adopted a premium rate schedule,
which provided for an assessment range in 2008 of 0.05% to 0.43% of domestic
deposits, depending on the capital category and supervisory category to which
the bank was assigned. For the first quarter of 2009 these ranges were increased
by 0.07%, and beginning in the second quarter of 2009, the ranges were 0.07% to
0.775%. Further, in May 2009, the FDIC issued a final rule to impose a special
one-time assessment against total assets minus Tier 1 capital of each insured
financial institution in the second quarter of 2009, payable in the third
quarter of 2009. The FDIC’s risk-based insurance assessment system was amended
by the Federal Deposit Insurance Reform Act of 2005. Under regulations effective
for 2008, each insured bank is placed in one of four risk categories based on
its level of capital, supervisory ratings and other risk measures, including
debt ratings for large institutions, and its insurance assessment rate is
determined by its risk category. In 2008 there was a 38 basis point spread
between the highest and lowest assessment rates, so that banks classified by the
FDIC in Risk Category I are subject to an insurance assessment of five to seven
basis points (according to the FDIC’s assessment of the bank’s strength), and
banks classified by the FDIC in Risk Category IV are subject to an insurance
assessment rate of 0.43%. Risk assessment rates are determined on the last day
of each quarter. While the Risk Category to which the Bank is assigned is
considered to be confidential information by the FDIC, due to CIBM Bank’s
performance in 2008 and the first quarter of 2009 and the changes to the FDIC
rate structure, the insurance premium for the Bank has increased significantly
for 2009 and has had a material adverse effect on CIB Marine’s results of
operations.
59
The
creditworthiness of other financial institutions could adversely affect CIB
Marine.
CIB
Marine’s ability to engage in routine funding transactions could be adversely
impacted by the actions and commercial soundness of other banks and financial
institutions. Banks are interrelated as a result of lending, clearing,
counterparty and other relationships. As a result, defaults by, or even rumors
or questions about, one or more banks or the general banking industry have led
to market-wide liquidity problems and could lead to losses or defaults by CIB
Marine or by other financial institutions. Many of the transactions engaged in
by CIB Marine and the Bank in the ordinary course of business expose CIB Marine
to credit risk in the event of default of its counterparty or customer. In such
instances, the collateral held by CIB Marine may be insufficient to mitigate its
losses, as it may be unable to realize upon or liquidate at prices sufficient to
recover the full amount of the exposure due it. Such losses could have a
material and adverse affect on CIB Marine’s result of operations.
Terrorism,
acts of war, international conflicts and natural disasters could negatively
affect CIB Marine’s business and financial condition.
Acts or
threats of war or terrorism, international conflicts (including conflict in the
Middle East), natural disasters, and the actions taken by the U.S. and other
governments in response to such events, could disrupt business operations and
negatively impact general business and economic conditions in the U.S. If
terrorist activity, acts of war, other international hostilities or natural
disasters disrupt business operations, trigger technology delays or failures, or
damage physical facilities of the Bank, its customers or service providers, or
cause an overall economic decline, the financial condition and operating results
of CIB Marine could be materially adversely affected. The potential for future
occurrences of these events has created many economic and political
uncertainties that could seriously harm CIB Marine’s business and results of
operations in ways that cannot presently be predicted.
CIB
Marine’s earnings also are significantly affected by the fiscal and monetary
policies of the federal government and its agencies, which could affect
repayment of loans and thereby materially adversely affect CIB
Marine.
The
policies of the FRB impact CIB Marine significantly. The FRB regulates the
supply of money and credit in the U.S. Its policies directly and indirectly
influence the rate of interest earned on loans and paid on borrowings and
interest-bearing deposits and can also affect the value of financial instruments
CIB Marine holds. Those policies determine to a significant extent CIB Marine’s
cost of funds for lending and investing. Changes in those policies are beyond
CIB Marine’s control and are difficult to predict. FRB policies can affect the
Bank’s borrowers, potentially increasing the risk that they may fail to repay
their loans. For example, a tightening of the money supply by the FRB could
reduce the demand for a borrower’s products and services. This could adversely
affect the borrower’s earnings and ability to repay its loan, which could
materially adversely affect CIB Marine.
60
CIB Marine has suffered large losses
in recent years and may not be able to execute its strategic plan and return to
profitability.
Although
CIB Marine has developed and implemented strategies to improve its profitability
in the future, there can be no assurance that these strategies will be
successful. CIB Marine’s strategic plans are dependent on its ability to attract
and retain borrowing customers, commercial loan officers and core deposits, all
of which have been negatively impacted as a result of losses and a weakened
financial condition. If CIB Marine is unable to execute its strategic plans and
return to profitability, it will have a material impact on its business, results
of operations and financial condition including the possibility of negative
shareholder equity and further declines in regulatory capital ratios. The
inability to return to profitability may require CIB Marine to reduce the size
of the Bank and/or reduce staff. There can be no assurance that if CIB Marine is
required to sell assets, it will be able to do so on acceptable terms.
Regulators could take further action against CIB Marine in the event it does not
return to profitability and maintain adequate capital levels.
CIB
Marine is subject to liquidity risk.
Liquidity
risk is the potential that CIB Marine will continue to be unable to meet its
obligations as they come due or capitalize on growth opportunities as they arise
because of an inability to liquidate assets or obtain funding on a timely basis,
at a reasonable cost and within acceptable risk tolerances. Liquidity is
required to fund credit obligations to borrowers, withdrawals by depositors,
repayment of debt when due or called, operating expenses and capital
expenditures, among other things.
Funding
sources are derived primarily from bank-issued deposit growth and retention;
principal and interest payments on loans; sale, maturity and prepayment of
investment securities; net cash provided from operations; and access to other
funding sources, including secured and unsecured borrowings.
CIB
Marine’s liquidity can be affected by a variety of factors, including general
economic conditions, market disruption, operational problems affecting third
parties or CIB Marine, unfavorable pricing, competition, CIB Marine’s credit
rating and any regulatory restrictions. In addition, some of the borrowing
sources customarily utilized by CIB Marine have been restricted or unavailable
due to CIB Marine’s operating performance and financial condition and could be
further restricted.
CIB Marine’s results of operations
are subject to general and regional economic conditions, which are beyond its
control.
CIB
Marine’s success depends to a large degree on the general economic conditions of
the diverse geographic markets its Bank serves. Local economic conditions have a
significant impact on the generation of commercial, commercial real estate, and
real estate loans; the ability of borrowers to repay these loans; and the value
of the collateral securing these loans. Adverse changes in the economic
conditions of the markets in which the Bank operates could also negatively
impact the financial results of CIB Marine’s operations. For example, adverse
changes in these factors could lead to reduced interest income and an increase
in the provision for loan losses. This is consistent with what has occurred
during the current economic downturn with CIB Marine incurring significant
losses and a corresponding reduction in shareholders’ equity during the past
year.
CIB Marine operates in a highly
regulated environment and is subject to supervision and examination by
various federal and state regulatory agencies.
As a bank
holding company, CIB Marine is regulated by the FRB, and the Bank is regulated
separately by federal and state banking regulators. This regulation is primarily
intended to protect the Bank’s customers and their deposits rather than CIB
Marine’s shareholders. In addition, CIB Marine’s common stock is registered
under the Exchange Act and it is subject to regulation by the SEC and to public
reporting requirements.
CIB
Marine remains under the Agreement with the Reserve Bank which continues to
impose certain restrictions and reporting requirements including, but not
limited to:
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·
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Restrictions
on dividend payments and redemption of shares of CIB Marine stock without
regulatory approval;
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·
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Adoption
of a comprehensive plan to improve
earnings;
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·
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Development
of a plan to correct and prevent violations of banking laws and
regulations related to affiliate
transactions.
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61
In
addition, banking regulators can take actions at any time which could have an
adverse impact on CIB Marine. These actions could include raising minimum
capital amounts, restricting growth or other actions. Continued losses at the
Bank may require CIB Marine to provide additional capital. CIB Marine’s
capability to provide this capital is dependent on its limited cash resources
and other assets. During 2008, CIB Marine contributed $5.0 million of capital to
the Bank and, subsequent to December 31, 2008 contributed $4.0 million of
capital to the Bank.
The Bank’s loan portfolios contain
concentrations of credit to one borrower, related borrowers or
borrowers in the same industry, which creates special credit
risks.
Credit
risk at the Bank is primarily related to the risk that a borrower will not be
able to repay some or all of their obligations to the Bank. Concentrations of
credit risk occur when the aggregate amount owed by one borrower, a group of
related borrowers, or borrowers within the same or related industries or groups
represent a relatively large percentage of the total capital or total credit
extended by a bank. Although each loan in a concentration may be of sound
quality, concentration risks represent a risk not present when the same loan
amounts are extended to borrowers that are not a part of a concentration. Loans
concentrated in one borrower depend, to a large degree, upon the financial
capability and character of the individual borrower. Loans made to a group of
related borrowers can be susceptible to financial problems experienced by one or
a few members of that group. Loans made to borrowers that are part of the same
or related industries or groups can be all adversely impacted with respect to
their ability to repay some or all their obligations when adverse conditions
prevail in the broader economy or even within just the respective industries or
groups.
At
September 30, 2009, CIB Marine had certain concentrations of credit risk, which
are described in more detail in the “Credit Concentrations” section in Part I,
Item 7 of this Form 10-Q.
CIB Marine’s profitability is
dependent upon its ability to manage net interest income.
CIB
Marine’s primary source of income is net interest income, which is the
difference between the interest income earned on interest-earnings assets
(consisting primarily of loans and securities) and the interest expense paid on
interest-bearing liabilities (consisting primarily of deposits and other
borrowings). The level of net interest income is a function of the average
balance of interest-earning assets, the average balance of interest-bearing
liabilities, and the spread between the yield on such assets and the cost of
such liabilities. These factors are influenced by the Bank’s ability to attract
loans and core deposits and the pricing and mix of these and other
interest-earning assets and interest-bearing liabilities which, in turn, are
impacted by such external factors as the local economy, competition for loans
and deposits, monetary policy, and market interest rates.
The level
of net interest income is influenced by movements in such rates of interest, and
the pace at which such movements occur. If the interest rates on
interest-bearing liabilities increase at a faster pace than the interest rates
on interest-earning assets, the result could be a reduction in net interest
income and with it, a reduction in earnings. CIB Marine’s net interest income
and earnings would be similarly impacted if the interest rates on
interest-earning assets decline more quickly than the interest rates on
interest-bearing liabilities. In addition, such changes in interest rates could
have an effect on the ability to originate loans and attract and retain
deposits; the fair value of financial assets and liabilities; and the average
life of loan and securities portfolios.
CIB
Marine is subject to credit risk.
CIB
Marine is exposed to the risk that third parties that owe the Bank money,
securities, or other assets will not repay their obligations. Credit risk arises
anytime the Bank commits, invests or otherwise extends funds through contractual
agreements, whether reflected on or off the balance sheet. These parties may
default on their obligations due to bankruptcy, lack of liquidity, operational
failure or other reasons.
CIB
Marine’s credit risk is concentrated in the Bank’s loan portfolios. Credit risk
is affected by a variety of factors including credit-worthiness of the borrower,
the sufficiency of underlying collateral, the enforceability of third-party
guarantees, changing economic and industry conditions and concentrations of
credit by loan type, terms or geographic area, changes in the financial
condition of the borrower or other party, and by credit and underwriting
policies.
62
CIB
Marine has established an allowance for loan losses which represents
management’s best estimate of probable losses inherent in the Bank’s loan
portfolio. The determination of the appropriate level of the allowance involves
a high degree of subjectivity. If CIB Marine’s assumptions and judgments are
incorrect, its allowance may not be sufficient and additional provisions may
need to be made. In addition, bank regulatory agencies periodically review the
adequacy of the allowance and may require an increase in the allowance or loan
charge-offs. Increases in the allowance or charge-offs could have a material
adverse effect on CIB Marine’s financial condition and results of
operations.
The
current economic environment poses significant challenges to CIB Marine’s
efforts to execute its capital plan.
CIB
Marine is operating in a difficult and uncertain economic environment which
makes a quick return to profitability unlikely. This will continue to put
pressure on already declining capital ratios at CIB Marine. In addition to the
deteriorating credit quality due to the economic downturn, troubled worldwide
credit markets and the specific contraction of the U.S. housing market which
have been reflected in higher provision for loan losses and loan charge-offs,
these same trends may also cause valuation changes and losses in other balance
sheet items, most notably the investment portfolio. During future periods, as
the full effects of the economic conditions on CIB Marine’s investment portfolio
are determined, CIB Marine may experience OTTI write downs in its investment
portfolio which would further reduce the level of capital. The aggregate of loan
and securities losses could result in CIB Marine or the Bank being considered
undercapitalized. Being undercapitalized from a regulatory standpoint would
likely result in additional restrictions being placed on CIB Marine, further
restricting its ability to meet its obligations as they come due. As of
September 30, 2009 and as of the date of this Form 10-Q, CIB Marine continued to
be subject to the Agreement it entered into with the Reserve Bank in the second
quarter of 2004. Failure to comply with the Agreement could have a material
adverse effect on CIB Marine and its operations.
CIB
Marine’s accounting policies and methods are critical to how it reports its
financial condition and results of operations and require management to make
estimates about matters that are uncertain.
Accounting
policies and methods are fundamental to how CIB Marine records and reports the
financial condition and results of operations. Management must exercise judgment
in selecting and applying many of these accounting policies and methods so they
comply with GAAP in the U.S.
Management
has identified certain accounting policies as being critical because they
require management’s judgment to ascertain the valuations of assets,
liabilities, commitments and contingencies. A variety of factors could affect
the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset, or reducing a liability. CIB Marine has
established detailed policies and control procedures that are intended to ensure
these critical accounting estimates and judgments are well controlled and
applied consistently. In addition, the policies and procedures are intended to
ensure that the process for changing methodologies occurs in an appropriate
manner. Because of the uncertainty surrounding CIB Marine’s judgments and the
estimates pertaining to these matters, CIB Marine cannot guarantee that it will
not be required to adjust accounting policies or restate prior period financial
statements. See the “Critical Accounting Policies” in the Management’s
Discussion and Analysis Section and Item 8, Note 1-Summary of Significant
Accounting Policies, in Part II of the 2008 Form 10-K.
Changes
in accounting standards could adversely affect CIB Marine’s reported financial
results.
The
bodies that set accounting standards for public companies, including the FASB,
the SEC and others, periodically change or revise existing interpretations of
the accounting and reporting standards that govern the way that CIB Marine
reports its financial condition and results of operations. These changes can be
difficult to predict and can materially impact CIB Marine’s reported financial
results. In some cases, CIB Marine could be required to apply a new or revised
accounting standard, or a new or revised interpretation of an accounting
standard, retroactively, which could have a negative impact on reported results
or result in the restatement of CIB Marine’s financial statements for prior
periods.
63
CIB
Marine’s disclosure controls and procedures may not prevent or detect all errors
or acts of fraud.
CIB
Marine’s disclosure controls and procedures are designed to reasonably assure
that information required to be disclosed in reports filed or submitted under
the Exchange Act is accumulated and communicated to management, and recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. CIB Marine believes that any disclosure controls and
procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can
be faulty, that alternative reasoned judgments can be drawn, or that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of
the inherent limitations in CIB Marine’s control system, misstatements due to
error or fraud may occur and not be detected.
Significant
legal actions could subject CIB Marine to substantial uninsured
liabilities.
CIB
Marine is from time to time subject to claims related to its operations. These
claims and legal actions, including supervisory actions by regulators, could
involve large monetary claims and significant defense costs. Substantial legal
liability or significant regulatory action against CIB Marine could have
material adverse financial effects or cause significant reputational harm to it,
which in turn, could seriously harm its business prospects. CIB Marine may be
exposed to substantial uninsured liabilities, which could affect its results of
operations and financial condition.
In the
normal course of business, CIB Marine is subject to various legal proceedings
and claims. Accordingly, although CIB Marine believes it has made adequate
provisions for all current and threatened legal disputes, CIB Marine may, in the
future become involved in legal disputes arising from its relationships with its
shareholders, business partners and creditors, or from other sources. Such legal
disputes could result in large settlements and/or judgments which could
materially impair CIB Marine’s financial condition. In addition, the defense of
such proceedings could result in significant expense and the diversion of
management’s time and attention from the operation of the business, which could
impede CIB Marine’s ability to achieve its business objectives. Some or all of
the amount CIB Marine may be required to pay to defend or to satisfy a judgment
or settlement of any or all of these proceedings may not be covered by
insurance.
CIB
Marine is dependent upon key personnel.
Management
believes that CIB Marine’s and the Bank’s success will be greatly influenced by
the continuing ability to retain the services of its existing management team.
The unexpected loss of the services of CIB Marine’s or the Bank’s key management
personnel or the inability to recruit and retain qualified personnel in the
future, could have an adverse effect on CIB Marine’s and the Bank’s business and
financial results.
CIB
Marine may be subjected to negative publicity that may adversely affect its
business, financial condition, liquidity and results of operation.
CIB
Marine has recently been the subject of news reports discussing its financial
situation and may continue to be subject to negative publicity as the press and
others speculate about whether CIB Marine will be able to continue as a going
concern. These reports may have a negative impact on its business. The negative
publicity could result in a loss of deposit customers and their related balances
and reduced opportunity for new deposit customers even though the subsidiary
bank is member FDIC and its deposit customers are provided FDIC insurance up to
the limits. In addition, CIB Marine’s service providers may be reluctant to
commit to contracts with the Company or do so on less favorable terms. Even if
CIB Marine is able to improve its financial condition, there may be continued
negative publicity and speculation about its future.
64
ITEM
3. DEFAULTS ON SENIOR SECURITIES
On April
30, 2009, CIB Marine defaulted on all of its TruPS which are now pre-petition
debt obligations, including principal and accrued interest. The aggregate amount
of liabilities subject to compromise in default is approximately $107.2
million.
ITEM
6. EXHIBITS
Exhibit
10.1-Second Amendment to Services Agreement by and between CIB Marine and Edwin
J. Depenbrok dated January 7, 2008.
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.
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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.
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(Registrant)
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Date:
November 13, 2009
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By:
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/s/ EDWIN J. DEPENBROK
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Edwin
J. Depenbrok
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Chief
Financial Officer
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66