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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER: 000-24149
CIB MARINE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<Table>
WISCONSIN 37-1203599
(State of incorporation) (I.R.S. Employer Identification No.)
N27 W24025 PAUL COURT, PEWAUKEE, WISCONSIN 53072
(Address of principal executive offices) (Zip Code)
</Table>
Registrant's telephone number, including area code: (262) 695-6010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark 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 X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ____
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of June 30, 2002, based on a price per share of $23.22 (the price
per share at which the registrant sold shares of its common stock in its most
recent private placement in February and March of 2002) was $379.2 million.
As of March 14, 2003, there were issued and outstanding 18,313,742 shares
of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this report:
1. Portions of the registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders are incorporated by reference to Part III hereof.
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FORM 10-K TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I
Item 1 -- Business................................................. 1
Item 2 -- Properties............................................... 17
Item 3 -- Legal Proceedings........................................ 18
Item 4 -- Submission of Matters to a Vote of Security Holders...... 19
PART II
Item 5 -- Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 20
Item 6 -- Selected Financial Data.................................. 21
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 23
Item 7A -- Quantitative and Qualitative Disclosures About Market
Risk..................................................... 54
Item 8 -- Financial Statements and Supplementary Data.............. 58
Item 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 104
PART III
Item 10 -- Directors and Executive Officers of the Registrant....... 104
Item 11 -- Executive Compensation................................... 104
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management............................................... 104
Item 13 -- Certain Relationships and Related Transactions........... 105
Item 14 -- Controls and Procedures.................................. 105
PART IV
Item 15 -- Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 106
Signatures........................................................... 107
</Table>
i
PART I
ITEM 1. BUSINESS
CIB MARINE
CIB Marine Bancshares, Inc. ("CIB Marine") is a multi-bank holding company
with its principal executive offices in Pewaukee, Wisconsin, a suburb of
Milwaukee. CIB Marine currently owns and operates five separately chartered
commercial banking organizations and one federal savings bank:
- Central Illinois Bank, with its main office in Champaign, Illinois;
- CIB Bank, with its main office in Hillside, Illinois, a suburb of Chicago
("CIB -- Chicago");
- Marine Bank, with its main office in Wauwatosa, Wisconsin, a suburb of
Milwaukee ("Marine -- Wisconsin");
- CIB Bank, with its main office in Indianapolis, Indiana
("CIB -- Indiana");
- Marine Bank, a federal savings bank with its main office in Scottsdale,
Arizona ("Marine FSB"); and
- Citrus Bank, N.A., with its main office in Vero Beach, Florida ("Citrus
Bank").
As of December 31, 2002, CIB Marine had a total of 52 full-service banking
facilities in Illinois, Wisconsin, Indiana, Nebraska, Florida, Arizona and
Nevada.
CIB Marine offers a full array of traditional banking services through its
bank and non-bank subsidiaries. These services include a broad range of loan
products, such as commercial loans, commercial real estate loans, commercial and
residential real estate construction loans, one-to-four family residential real
estate loans, consumer loans, factoring receivables, and commercial and standby
letters of credit; accepting demand, savings, time and Eurodollar deposits;
providing commercial paper and repurchase agreements; and providing other
banking services.
CIB Marine also owns an 84% interest in Canron Corporation ("Canron"), a
closely held steel fabrication and erection company with operations in the
United States, Canada and Mexico, and 100% of MICR, Inc., a manufacturer of
payment processing systems, both of which were acquired as a result of loan
collection activities. These are businesses unrelated to CIB Marine's banking
business. CIB Marine has initiated a plan to sell these businesses and as such
they are considered assets held for disposal.
BUSINESS DEVELOPMENT STRATEGY
CIB Marine believes that its growth, from a one-bank holding company with
$9.4 million in assets at September 15, 1987, to a multi-bank holding company
with approximately $3.7 billion in assets at December 31, 2002, has been largely
attributable to the implementation of its business development strategy. CIB
Marine's business development strategy consists of the following three principal
components:
- DEVELOPING COMMERCIAL BANKING RELATIONSHIPS WITH SMALL TO MEDIUM-SIZED
BUSINESSES. CIB Marine is a full-service banking organization that has
developed its niche in establishing banking relationships with small to
medium-sized businesses. Typically, CIB Marine meets its business
customers' borrowing needs through various types of loans, including
commercial real estate loans, commercial business loans and construction
loans. While CIB Marine's primary focus is lending, once a lending
relationship has been established with a business customer, CIB Marine
then seeks to provide that customer with all its banking needs, including
accepting time and demand deposits, providing cash management services,
and serving the personal banking needs of the owners and managers of such
customers. CIB Marine is also willing to make multiple and different
types of loans to the same customer and its related interests with whom
it has experience and as its customers' banking needs grow. As a result
of this strategy CIB Marine's 20 largest borrowing relationships
accounted for $845.6 million, or 31.2% of its total loans at December 31,
2002. In addition, CIB Marine believes that consolidation in the banking
industry has resulted in the formation of larger institutions that
generally focus on larger commercial customers which has enhanced its
ability to attract and retain commercial
banking relationships with small to medium-sized businesses. CIB Marine
expects to continue to focus on and build upon its experience in this
segment in commercial banking.
- HIRING OF EXPERIENCED BANKING PROFESSIONALS. CIB Marine recruits and
hires experienced commercial banking officers who have strong community
ties and established relationships in the markets that it serves and as a
means of entering new markets more efficiently. This strategy has
contributed to CIB Marine's asset and revenue growth over the past five
years. Coupled with its strong lending culture, consolidation within the
banking industry has also helped CIB Marine to recruit experienced
commercial bankers. When financial institutions consolidate, CIB Marine
believes that experienced lending officers calling on small to
medium-sized businesses often find less management support for these
markets, giving CIB Marine the opportunity to selectively recruit
experienced candidates. Upon hiring, these lending officers frequently
are able to move selected lending relationships to CIB Marine.
- EXPANDING IN BOTH NEW AND EXISTING MARKETS. CIB Marine has expanded
through the establishment of new banks, branching and acquisitions. CIB
Marine has expanded its banking operations into geographic markets where
there are a significant number of small to medium-sized businesses and
where it has either identified and retained experienced commercial
bankers with established relationships to serve those markets or by
relocating experienced bankers to that area. Since 1987, CIB Marine has
entered the metropolitan markets of Chicago, Milwaukee, Indianapolis,
Omaha, Phoenix, Las Vegas, the southern and central Atlantic coastal
regions of Florida, as well as smaller metropolitan markets within
central Illinois. CIB Marine expects to further expand banking operations
in these markets and to enter new markets that it believes would be
conducive to its style of banking. When CIB Marine expands through
acquisitions, it seeks to identify financial institutions or financial
institution branches that offer lending and/or deposit opportunities, and
that are expected to enhance shareholder value. The majority of CIB
Marine's historical asset and earnings growth has been internally
generated. Since September 1987, CIB Marine has acquired four other
banks, all of which served as entry into new markets. In the aggregate,
at the time of acquisition, these banks had assets of $166.3 million.
OPERATING STRATEGY
CIB Marine employs the following operating strategy in the day-to-day
management of its business:
- MAINTAINING A STRONG COMMERCIAL LENDING CULTURE. CIB Marine's President
and CEO and each President of its subsidiary banks is an experienced
commercial lender, which has helped to establish CIB Marine's strong
commercial lending culture within the organization. CIB Marine's
President and CEO, Chief Credit Officer, and subsidiary bank Presidents
are actively involved in various aspects of loan origination and
underwriting, from participating in sales calls to closing. CIB Marine
also carefully monitors existing borrower relationships, and, when
necessary, actively manages troubled credits, continuously developing
strategies for maximizing recoveries and maintaining relationships.
- OFFERING MORE PERSONALIZED SERVICE TO COMMERCIAL BANKING CUSTOMERS. CIB
Marine believes that it is able to offer banking services in a community
banking atmosphere that are more personalized than the services offered
by other financial institutions. CIB Marine's culture emphasizes prompt
credit decisions, accessibility of personnel, and advice tailored to a
customer's specific financial situation, all of which have enabled CIB
Marine to attract and retain customers who value traditional community
banking.
- CENTRALIZING CONTROL. Virtually all of the significant functions of CIB
Marine's subsidiary banks are managed by the holding company, including
credit administration, loan and deposit pricing, loan review, accounting,
finance, investment, audit, operations, human resources, legal, marketing
and advertising. This provides consistency in CIB Marine's policies,
controls and procedures, while at the same time allowing its subsidiary
bank Presidents and their lending officers to focus on their area of core
expertise, loan origination.
2
- PROMOTING EFFICIENCY. Over the past five years, CIB Marine's efficiency
ratio has improved despite its rapid growth, reflecting a culture of
disciplined expense management and CIB Marine's emphasis on commercial
lending, as opposed to retail lending. CIB Marine's efficiency ratio was
60.19% for 1998 compared to 55.91% for 2002.
- MAINTAINING FUNDING BALANCE. CIB Marine actively seeks to maintain its
ratio of core deposits to total deposits. CIB Marine's core deposits have
grown at an annual compound rate of 28.2% over the past five years, from
$613.4 million to $2.1 billion. CIB Marine's strategy for targeting
deposits has been to prioritize its funding sources, first seeking
noninterest bearing demand deposits and other types of deposits from its
borrowers and then from non-borrowers within its local markets, before
utilizing brokered deposits and other short-term funding sources.
MARKETS CURRENTLY SERVED
CIB Marine currently serves eight specifically targeted geographic markets
or regions through its banking subsidiaries. Information on these banks as of
December 31, 2002 and the markets they serve is set forth in the following
table:
<Table>
<Caption>
OPERATED BANKING
BANK GEOGRAPHIC MARKET/REGION SINCE FACILITIES ASSETS DEPOSITS
- ---- ------------------------------ -------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
CIB -- Chicago.............. Chicago metropolitan area 1994 14 $1,744.8 $1,272.4
Central Illinois Bank....... Central Illinois 1987 18 1,124.3 918.4
Marine -- Wisconsin......... Milwaukee metropolitan area 1997 7 413.6 335.3
CIB -- Indiana.............. Indianapolis metropolitan area 1998 5 170.2 153.1
Citrus Bank................. Florida's southeastern coast 2001 5 182.0 160.9
Marine FSB.................. Omaha, Phoenix and Las Vegas 1999 3 98.0 80.9
metropolitan areas
</Table>
The majority of CIB Marine's banking assets are currently located along the
corridor from central Illinois, through Chicago, to Milwaukee and represented
approximately 90% of CIB Marine's assets at December 31, 2002. CIB Marine's most
significant market is the Chicago metropolitan market, which accounts for
approximately 48% of CIB Marine's total assets at December 31, 2002. CIB Marine
believes that Chicago and the other larger metropolitan areas in which it is
located offer the potential for additional lending and deposit growth.
DEVELOPMENT OF BANKING OPERATIONS
CIB Marine was originally incorporated in the State of Illinois in 1985 as
Sidney Bancorporation, Inc., a one-bank holding company headquartered in Sidney,
Illinois. In September 1987, a group of investors led by J. Michael Straka,
President and Chief Executive Officer of CIB Marine, acquired Sidney
Bancorporation, which at the time had total assets of $9.4 million, and
subsequently changed its name to Central Illinois Bancorp, Inc. On August 27,
1999, Central Illinois Bancorp reincorporated as a Wisconsin corporation and
changed its name to CIB Marine Bancshares, Inc.
EXPANSION IN CENTRAL ILLINOIS
At the time of the change in ownership in September 1987, CIB Marine had a
single banking subsidiary, Sidney Community Bank, an Illinois state bank. The
bank was originally organized in 1958 and had its sole office in Sidney,
Illinois, a town with a population of approximately 1,000 people, located in
Champaign County. In 1988, CIB Marine expanded into the Champaign-Urbana market,
a community of approximately 100,000 people and home to the University of
Illinois, changed the name of the bank to Central Illinois Bank and relocated
its main office to Champaign, Illinois.
In October 1991, CIB Marine acquired Arrowsmith State Bank, an Illinois
state bank organized in 1920. This bank had its sole office in Arrowsmith,
Illinois, a town with a population of approximately 350, located in
3
McLean County. At the time of the acquisition, the Arrowsmith bank had total
assets of approximately $10.0 million. This acquisition allowed CIB Marine to
enter the Bloomington-Normal market, a community of approximately 100,000
people, and home to Illinois State University. In July 1998, this bank was
merged with Central Illinois Bank.
CIB Marine has significantly expanded the operations of Central Illinois
Bank by establishing banking facilities throughout central Illinois, including
the five largest cities in this region. At December 31, 2002, the bank had total
assets of $1.1 billion, 159 full-time equivalent employees and 18 banking
facilities: three in Champaign-Urbana, three in Peoria, and one each in
Arrowsmith, Arthur, Bloomington-Normal, Danville, Decatur, East Peoria, Lincoln,
Monticello, Morton, Rantoul, Sidney and Springfield.
EXPANSION INTO THE CHICAGO METROPOLITAN AREA
In June 1994, CIB Marine entered the Chicago metropolitan market through
the acquisition of Hillside Investors, Ltd., a one-bank holding company located
in Hillside, Illinois. The sole subsidiary of Hillside Investors was the Bank of
Hillside, an Illinois state bank organized in 1963, with its main office located
in Hillside, a suburb of Chicago. At the time of the acquisition, the Bank of
Hillside had one banking facility and total assets of $34.5 million. In January
1995, the name of the bank was changed to CIB Bank.
CIB Marine has significantly expanded the operations of CIB -- Chicago by
establishing and acquiring banking facilities throughout the Chicago
metropolitan area. At December 31, 2002, the bank had total assets of
approximately $1.7 billion, 182 full-time equivalent employees and 14 banking
facilities: one each in Arlington Heights, Bolingbrook, downtown Chicago, Elk
Grove Village, Elmhurst, Frankfort, Gurnee, Hillside, Mount Prospect, Niles,
Northbrook, Palos Heights, Willow Springs and Zion. The Gurnee, Mount Prospect,
Arlington Heights and Zion facilities were acquired from other banking
organizations and had $13.3 million, $33.0 million, $82.8 million and $28.2
million of deposit liabilities, respectively, at the time of acquisition. In
January 2000, CIB -- Chicago established a foreign office in the Cayman Islands.
This office accepts Eurodollar deposits, thereby facilitating CIB Marine's money
desk operations. During 2002, CIB Marine also received approval to establish
banking facilities in Deerfield and Harwood Heights. CIB Marine expects these
facilities to open in the second quarter of 2003.
EXPANSION INTO THE MILWAUKEE METROPOLITAN AREA
In September 1997, CIB Marine entered the Milwaukee metropolitan area by
acquiring First Ozaukee Capital Corp., a one-bank holding company located in
Cedarburg, Wisconsin. The sole subsidiary of First Ozaukee Capital Corp. was
First Ozaukee Savings Bank, a Wisconsin savings bank, with its main office in
Cedarburg, and a banking facility in Grafton, both suburbs of Milwaukee. At the
time of the acquisition, the bank had total assets of $37.6 million. In
September 1997, CIB Marine changed the name of the bank to Marine Bank and
Savings. In February 2000, CIB Marine converted the savings bank's charter to a
Wisconsin commercial bank, changed its name to Marine Bank and moved its main
office to its Wauwatosa facility.
CIB Marine has expanded the operations of Marine -- Wisconsin by
establishing banking facilities throughout the Milwaukee metropolitan area. At
December 31, 2002, the bank had total assets of $413.6 million, 53 full-time
equivalent employees and seven banking facilities: one each in Brookfield,
Cedarburg, Franklin, Grafton, downtown Milwaukee, Pewaukee, which also serves as
CIB Marine's executive offices, and Wauwatosa.
EXPANSION INTO THE INDIANAPOLIS METROPOLITAN AREA
In March 1998, CIB Marine entered the Indianapolis metropolitan area by
organizing a new Indiana state bank, also under the name CIB Bank. Since its
organization, CIB Marine has expanded the operations of CIB -- Indiana by
establishing four additional banking facilities in the Indianapolis metropolitan
area. At December 31, 2002, CIB -- Indiana had total assets of $170.2 million,
34 full-time equivalent employees and five banking facilities.
4
EXPANSION INTO THE OMAHA METROPOLITAN AREA
In November 1999, CIB Marine entered the Omaha metropolitan area by
establishing a new federal savings bank also under the name Marine Bank. At
December 31, 2002, Marine FSB had total assets of $98.0 million, 15 full-time
equivalent employees and three banking facilities, one each in Omaha, Nebraska;
Scottsdale, Arizona; and Henderson, Nevada, a suburb of Las Vegas.
EXPANSION INTO FLORIDA
In September 2001, CIB Marine acquired Citrus Financial Services, Inc.,
including its banking subsidiary Citrus Bank, N.A., through a merger
transaction. The merger was accounted for as a pooling of interests. At
acquisition, Citrus Bank had total assets of $84.2 million and three banking
facilities located along central Florida's Atlantic coast, one each in Vero
Beach, Sebastian and Barefoot Bay, and a loan production office in Sebring. In
December 2001, CIB Marine converted its CIB -- Chicago loan production office in
North Miami Beach to a full-service banking facility of Citrus Bank. In January
2002, CIB Marine converted the bank's loan production office in Sebring to a
full-service banking facility. At December 31, 2002, Citrus Bank had total
assets of $182.0 million, 50 full-time equivalent employees and five banking
facilities, one each in Vero Beach, Sebastian, North Miami Beach, Barefoot Bay
and Sebring. During 2002, CIB Marine also received approval to establish banking
facilities in Boca Raton, Miami and Coral Gables. CIB Marine expects these
banking facilities to open in the second quarter of 2003.
EXPANSION INTO THE PHOENIX METROPOLITAN AREA
In October 2001, CIB Marine entered the Phoenix metropolitan area by
establishing a banking facility of Marine FSB in Scottsdale, Arizona.
EXPANSION INTO THE LAS VEGAS METROPOLITAN AREA
In January 2002, CIB Marine entered the Las Vegas metropolitan area by
establishing a banking facility of Marine FSB in Henderson, Nevada.
OPERATIONS OF NON-BANK SUBSIDIARIES
CIB Marine also has four wholly-owned non-banking subsidiaries or
affiliates: Mortgage Services, Inc., CIB Marine Capital, LLC, CIB Marine
Commercial Finance, LLC, a subsidiary of CIB -- Chicago, and CIB Marine
Information Services, Inc. Each of these subsidiaries or affiliates was created
or acquired to facilitate or complement CIB Marine's banking activities.
MORTGAGE SERVICES, INC.
In September 1995, CIB Marine acquired Mortgage Services of Illinois, Inc.,
a mortgage origination and mortgage brokerage services company. In 1998, CIB
Marine changed the name of this subsidiary to Mortgage Services, Inc. This
subsidiary is an Illinois corporation and conducts mortgage operations in a
number of states. During 2002, CIB Marine took various actions to allow it to
expand its mortgage operations, including upgrading its delivery and
underwriting platforms, the hiring of additional personnel, and acquiring the
operations of a mortgage company. In December 2002, CIB Marine acquired the
business and certain assets of Comcor Mortgage Corporation, a Wisconsin based
mortgage banking company, the operations of which are conducted as a division of
Mortgage Services. Through its mortgage operations, CIB Marine originates
conventional mortgage loans and offers VA, FHA and other fixed-rate and
variable-rate loans. Mortgage Services also operates a wholesale division, which
purchases mortgage loans through a network of brokers and correspondent banks.
Although CIB Marine sells substantially all of these mortgage loans in the
secondary market with servicing rights released, CIB Marine also retains
mortgage loans that meet its underwriting standards but do not conform to
secondary market underwriting guidelines, or where it believes that retaining
the loan is important in enhancing a customer relationship. As of December 31,
2002, Mortgage Services had 103 full-time equivalent employees. Mortgage
Services does not separately own any facilities, and its principal office is
located in the Bloomington facility of Central Illinois Bank. Mortgage Services
employees also
5
provide mortgage origination and mortgage brokerage services at many of the
other branch facilities of CIB Marine's subsidiary banks. The mortgage banking
operations are not presented as a separate segment as its assets and results of
operations do not meet the required disclosure criteria.
CIB MARINE CAPITAL, LLC
On April 3, 2001, CIB Marine established CIB Marine Capital, LLC, a
Wisconsin limited liability company. CIB Marine Capital provides leveraged
financing, including mezzanine loans. Typically, the collateral coverage on
these loans is insufficient to secure a senior debt position. These loans are
generally commercial, commercial real estate or commercial construction loans
and are typically secured by a junior position on some or all of the assets of
the borrower. CIB Marine may also require other credit enhancements such as
personal and corporate guarantees. These types of credit facilities are
generally provided to borrowers with whom CIB Marine has an established banking
relationship, where it is making the senior debt position loan, and where the
borrower has projected or established assets or cash flow to support such loan.
As these loans are, by their nature, inherently riskier than senior debt
position loans, CIB Marine structures such credit facilities with a goal of
generating a return commensurate with the level of risk. At December 31, 2002,
CIB Marine Capital had total loans outstanding of $26.3 million. CIB Marine and
its subsidiaries provide the staffing to operate this company. CIB Marine
Capital does not separately own any facilities and its principal office is
located in the Hillside, Illinois facility of CIB -- Chicago.
CIB MARINE COMMERCIAL FINANCE, LLC
In August 2002, CIB Marine acquired certain of the assets of a receivables
factoring business through CIB Marine Commercial Finance, LLC, an Illinois
limited liability company and a wholly-owned subsidiary of CIB -- Chicago. The
assets were acquired from a borrower who was in default of its obligations to
CIB Marine and other lenders. CIB Marine Finance provides the factoring of
receivables and other asset-based lending products to borrowers. At December 31,
2002, CIB Marine Finance had total assets of $11.7 million and 14 full-time
equivalent employees. CIB Marine Finance does not own any facilities and its
principal office is located in the Hillside, Illinois facility of
CIB -- Chicago. CIB Marine intends to operate this business.
CIB MARINE INFORMATION SERVICES, INC.
CIB Marine Information Services, Inc., an Illinois corporation, was
incorporated in August 1990 as CIB Data Processing Services, Inc. In 2002, CIB
Marine changed its name to CIB Marine Information Services, Inc. CIB Marine
organized this subsidiary to provide in-house data processing services. CIB
Marine Information coordinates computer equipment leases and purchases, licenses
banking software and coordinates operation of CIB Marine software. CIB Marine
operates CIB Marine Information to facilitate internal operational needs and
does not currently provide services to third parties. CIB Marine believes that
by performing its data processing function in-house, it receives more timely and
cost-effective service than would be received if it used a third-party service
provider. In addition, CIB Marine Information facilitates CIB Marine's business
development strategy by allowing it to rapidly integrate newly opened or
acquired branches and banks. As of December 31, 2002, CIB Marine Information had
64 full-time equivalent employees. CIB Marine Information does not separately
own any facilities, and its principal office is located in Mt. Prospect,
Illinois.
OTHER NON-BANK AFFILIATES
CIB -- Chicago owns 84% of Canron Corporation, a steel fabrication and
erection company with operations in the United States, Canada and Mexico, and
owns MICR, Inc., a manufacturer of payment processing systems based in Mukilteo,
Washington. Both of these interests were acquired from borrowers who were in
default of their obligations to CIB Marine and are classified as assets held for
disposal. For more information on these companies see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Companies Held For Disposal" and Notes 2 and 8 to the Consolidated
Financial Statements.
6
MANAGEMENT SUPPORT SERVICES
In addition to the support services provided by its non-bank subsidiaries,
as a holding company, CIB Marine performs a significant portion of its
subsidiaries' back office services, including credit administration, loan and
deposit pricing, loan review, accounting, finance, investment, audit,
operations, human resources, legal, marketing and advertising. CIB Marine
believes it is more efficient for it to consolidate these services in order to
assure that its operating policies and procedures are consistent throughout the
organization. This also enables CIB Marine to more efficiently manage the costs
of these services than if these services were performed independently at each
subsidiary. At December 31, 2002, CIB Marine had 170 full-time equivalent
employees at the holding company level, a majority of who are providing the
described services to its subsidiaries.
TOTAL EMPLOYEES
At December 31, 2002, CIB Marine and all of its bank and nonbank
subsidiaries had a combined total of 844 full-time equivalent employees.
Including MICR, Inc. and Canron Corporation, both of which are held for disposal
assets, CIB Marine had a total of 1,758 full-time equivalent employees.
COMPETITION
The banking industry is highly competitive. CIB Marine's subsidiary banks
compete for loans, deposits and other financial services in their markets and
surrounding areas. CIB Marine competes with other financial institutions, money
market and other mutual funds, insurance companies, brokerage companies and
other non-depository financial service companies, including certain governmental
organizations which may offer subsidized financing at lower rates than those
offered by CIB Marine. Many of these financial firms have a regional or national
presence and resources many times greater than those of CIB Marine. In addition,
new financial companies such as money market mutual funds, brokerage companies
and other non-banking organizations are not subject to the same regulations and
laws that govern the operation of traditional depository institutions.
Recent changes in federal and state laws have resulted in and are expected
to continue to result in increased competition. The reductions in legal barriers
to the acquisition of banks resulting from the implementation of interstate
banking laws, the Gramm-Leach-Bliley Act (the "GLBA"), and other recent and
proposed changes, are expected to continue to further stimulate competition in
the markets in which CIB Marine operates, although it is not possible to predict
the extent or timing of such increased competition.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under both federal and state law. Any significant change in the
banking laws and regulations applicable to CIB Marine or its banking
subsidiaries could materially impact CIB Marine's operations or change the
manner in which it conducts business. Federal and state regulation of financial
institutions is intended primarily for the protection of the federal deposit
insurance funds and depositors, rather than stockholders of a financial
institution.
CIB Marine is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is regulated by the Federal
Reserve Board. Marine FSB is a federal savings bank, and its primary regulator
is the Office of Thrift Supervision (the "OTS"). Citrus Bank is a national bank,
and its primary regulator is the Office of the Comptroller of Currency (the
"OCC"). CIB Marine's other bank subsidiaries are regulated by the Federal
Deposit Insurance Corporation (the "FDIC"), as their primary federal regulator,
and also by the state banking regulator for the state in which they are
chartered: either the Illinois Office of Banks and Real Estate (the "OBRE"), the
Wisconsin Department of Financial Institutions, or the Indiana Department of
Financial Institutions. CIB Marine's mortgage banking subsidiary is regulated by
the OBRE, and regulators in certain other states in which Mortgage Services
conducts operations.
7
CIB Marine and its non-bank subsidiaries are subject to examination by the
Federal Reserve Board. The state banking regulators and FDIC periodically
conduct examinations of CIB Marine's state bank subsidiaries and non-bank
subsidiaries that are under their regulatory authority. The OTS periodically
conducts examinations of Marine FSB. The OCC periodically conducts examinations
of Citrus Bank. The FDIC may also conduct special examinations of Marine FSB and
Citrus Bank.
The bank regulatory agencies have extensive oversight authority relative to
the depository holding companies and institutions that they supervise. They have
been granted wide-ranging enforcement and supervision powers and exercise this
authority to ensure that depository holding companies and institutions under
their jurisdiction operate on a safe and sound basis and in compliance with
applicable laws. Holding companies and institutions that fail to conduct their
operations in a safe and sound basis or in compliance with applicable laws can
be compelled by the regulators to change the way they do business and may be
subject to regulatory enforcement actions, including encumbrances imposed on
their operations.
The following discussion summarizes the material elements of the regulatory
framework applicable to CIB Marine and its subsidiaries. It is not meant to be a
complete discussion of all the federal and state banking statutes and
regulations applicable to CIB Marine and its subsidiaries. To the extent this
discussion describes statutory and regulatory provisions, it is qualified in its
entirety by reference to those provisions.
EXPANSION ACTIVITIES
The BHCA requires every bank holding company to obtain the prior approval
of the Federal Reserve Board before merging with another bank holding company,
acquiring substantially all the assets of any bank, or acquiring directly or
indirectly any ownership or control of more than 5% of the voting shares of any
bank. The BHCA also prohibits a bank holding company, with particular
exceptions, from acquiring direct or indirect ownership of more than 5% of the
voting shares of any company which is not a bank or bank holding company and
from engaging in any business other than that of banking, managing and
controlling banks, or furnishing services to banks and their subsidiaries. Bank
holding companies may, however, engage in some businesses and activities
determined by the Federal Reserve Board to be closely related to banking or
managing and controlling banks.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (the
"Riegle-Neal"), subject to certain concentration limits and other requirements:
- bank holding companies like CIB Marine are permitted to acquire banks and
bank holding companies located in any state;
- any bank that is a subsidiary of a bank holding company is permitted to
receive deposits, renew time deposits, close loans, service loans and
receive loan payments as an agent for any other bank subsidiary of that
bank holding company; and
- banks are permitted to acquire branch offices outside their home states
by merging with out-of-state banks, purchasing branches in other states
and establishing de novo branch offices in other states. The ability of
banks to engage in branching activities in other states through purchase
or de novo establishment is contingent, however, on the host state having
adopted legislation "opting in" to those provisions of Riegle-Neal. In
addition, the ability of a bank to merge with a bank located in another
state is contingent on the host state not having adopted legislation
"opting out" of that provision of Riegle-Neal.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act of
1999 (the "GLBA") into law. The GLBA significantly changes financial services
regulations by expanding permissible non-banking activities of bank holding
companies and removing barriers to affiliations among banks, insurance
companies, securities firms and other financial services entities. As a result
of the GLBA, a bank holding company may
8
become a "Financial Holding Company" and engage in a full range of financial
activities, including banking, insurance and securities activities, merchant
banking and additional activities that are determined by the Federal Reserve to
be "financial in nature", "incidental" to such financial activities or
complementary activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
provisions of the GLBA became effective March 11, 2000.
In order for a bank holding company to qualify as a Financial Holding
Company, the company is required to file a declaration with the Federal Reserve
Board electing to engage in activities permissible for Financial Holding
Companies and to certify that all of its insured depository institutions are
"well-capitalized" and "well-managed". In addition, the Federal Reserve must
also determine that each of the company's insured depository institutions has
received at least a satisfactory rating in their most recent Community
Reinvestment Act ("CRA") examination.
The GLBA also streamlines supervision of bank holding companies, expands
passive investments by Financial Holding Companies in any type of financial or
non-financial company through merchant bank and insurance company investments,
provides an enhanced framework for protecting the privacy of consumer
information, modifies the laws governing the implementation of the Community
Reinvestment Act, and broadens the activities which may be conducted by national
banks. Through a financial subsidiary, and subject to certain eligibility
requirements and restrictions, a national bank may engage in any activity
authorized for a national bank directly or any financial activity, except
insurance investments or underwriting, real estate investments or development,
or merchant banking, which may be conducted through a Financial Holding Company.
Because Wisconsin, Illinois and Indiana provide for parity with national banks,
the subsidiary banks of CIB Marine will be able to form subsidiaries and engage
in the activities permitted for national bank subsidiaries.
The GLBA also established a system of federal and state regulation based on
functional regulation, meaning that primary regulators' oversight for a
particular activity generally resides with the federal or state regulator having
the greatest expertise in the area. Banking is to be supervised by banking
regulators, insurance by state insurance regulators and securities activities by
the Securities and Exchange Commission ("SEC") and state securities regulators.
CIB Marine does not believe that the GLBA has had, or will have a material
effect upon its operations in the near term. However, to the extent the GLBA
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in a growing number of larger financial institutions that offer a wider
variety of financial services than CIB Marine currently offers and that can
aggressively compete in the markets currently served.
CAPITAL STANDARDS
The Federal Reserve Board imposes risk-based capital requirements and
guidelines on CIB Marine, which are substantially similar to the capital
requirements and guidelines imposed by the OCC, the OTS and the FDIC on the
depository institutions within their jurisdictions. For this purpose, a
depository institution's or holding company's assets and certain specified
off-balance sheet commitments are assigned to four risk categories, each
weighted differently based on the level of credit risk that is ascribed to those
assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market risk equivalent assets. A depository institution's
or holding company's capital, in turn, is divided into three tiers:
- core (commonly referred to as Tier 1) capital, which includes common
equity, noncumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock and related surplus (excluding
auction rate issues), and a limited amount of cumulative perpetual
preferred stock and minority interest in equity accounts of consolidated
subsidiaries, less goodwill, certain identifiable intangible assets and
certain other assets;
- supplementary (commonly referred to as Tier 2) capital, which includes,
among other items, perpetual preferred stock not meeting the Tier 1
definition, mandatory convertible securities, subordinated debt and
reserves for credit losses, subject to certain limitations, less certain
required deductions; and
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- market risk (commonly referred to as Tier 3) capital, which includes
qualifying unsecured subordinated debt.
CIB Marine, like other financial and bank holding companies, currently is
required to maintain Tier 1 capital equal to at least 4% and "total capital"
(the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 8% of its total
risk-weighted assets, including certain off-balance-sheet items, such as unused
lending commitments and standby letters of credit.
The Federal Reserve Board, the FDIC and the OCC have adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, became effective January 1, 1998. Under these market
risk requirements, capital must be allocated to support the amount of market
risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to maintain
a minimum "leverage ratio" of Tier 1 capital to adjusted total assets of 3% if
the bank holding company has the highest regulatory rating and meets certain
other requirements, or 3% plus an additional cushion of at least 100 to 200
basis points if the bank holding company does not meet these requirements.
The Federal Reserve Board may set capital requirements higher than the
minimums noted above for holding companies whose circumstances warrant it. For
example, bank holding companies experiencing or anticipating significant growth
may be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
"tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other
indications of capital strength in evaluating proposals for expansion or new
activities.
At December 31, 2002, CIB Marine was in compliance with these minimum
capital requirements. CIB Marine's banking subsidiaries must satisfy similar
minimum regulatory capital requirements and at December 31, 2002, were in
compliance with those requirements. For more information about the regulatory
capital levels of CIB Marine and its bank subsidiaries, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital" and Note 13 -- Stockholders' Equity as contained in the
Notes to Consolidated Financial Statements.
On January 30, 2003, CIB -- Chicago entered into a Memorandum of
Understanding (the "Memorandum") with the Illinois Office of Banks and Real
Estate (OBRE) and the (FDIC) (together the "Regulators"). The Memorandum was
entered into as a result of a deterioration in the credit quality of the loan
portfolio, the level of concentrations of credit, and weaknesses in the credit
administration process identified during the OBRE's regular examination of
CIB -- Chicago, which commenced on September 23, 2002.
Pursuant to the Memorandum, CIB -- Chicago has agreed to take certain
actions to correct the deficiencies noted within the examination report. In
addition, during the period in which the Memorandum is in effect, CIB -- Chicago
has agreed to maintain a Tier 1 capital level equal to or exceeding 8% of the
bank's total assets. In the event such ratio is less than 8% as of June 30 or
December 31 of each calendar year the Memorandum is in effect, the bank is
required within 30 days thereof to submit to the Regulators a plan for the
augmentation of the bank's capital accounts. Also, unless prior written consent
is received from the Regulators, CIB -- Chicago has agreed to restrict its loan
growth to no more than 2% during any consecutive three month period and suspend
the declaration or payment of dividends. For additional information relative to
the Memorandum, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Regulatory Matters" and Note 13 to the Consolidated
Financial Statements.
LIABILITY FOR BANK SUBSIDIARIES
Under current Federal Reserve Board policy, a bank holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and to maintain resources adequate to support each subsidiary
bank. This support may be required at times when the bank holding company may
not have the resources to provide it. In addition, Section 55 of the National
Bank Act permits the OCC to order the pro
10
rata assessment of a stockholder of a national bank whose capital has become
impaired. If a stockholder, like CIB Marine, failed within three months, to pay
that assessment, the OCC could order the sale of the stockholder's stock to
cover the deficiency. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a U.S. federal bank regulatory agency
to maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and entitled to priority of payment.
Any depository institution insured by the FDIC can be held liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC in connection
with:
- the "default" of a commonly controlled FDIC insured depository
institution, or
- any assistance provided by the FDIC to a commonly controlled FDIC insured
depository institution "in danger of default."
"Default" is generally defined as the appointment of a conservator or
receiver and "in danger of default" is generally defined as the existence of
certain conditions indicating that default is likely to occur in the absence of
regulatory assistance. All of CIB Marine's subsidiary banks are FDIC insured
depository institutions. If default occurred with respect to a CIB Marine
subsidiary bank, any capital loans to that bank from CIB Marine would be
subordinate in right of payment to the bank's depositors and certain of its
other obligations. At December 31, 2002, CIB Marine did not have any capital
loans to any of its subsidiary banks.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the federal banking regulators to take prompt corrective
action in respect to FDIC insured depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors established by regulation. Under
applicable regulations, an FDIC insured bank is defined as well capitalized if
it maintains a leverage ratio or Tier 1 capital to quarterly average total
assets of at least 5%, a total capital ratio or qualifying total capital to
risk-weighted assets, including certain off-balance sheet items, of at least 10%
and a Tier 1 capital ratio or Tier 1 capital to risk-weighted assets of at least
6% and is not otherwise in a "troubled condition" as specified by its
appropriate federal regulatory agency.
A bank is generally considered to be adequately capitalized if it is not
defined as well capitalized but meets all of its minimum capital requirements,
if it has a leverage ratio of 4% or greater or a leverage ratio of 3% or greater
if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines, a total
capital ratio of 8% or greater and a Tier 1 Capital Ratio of 4% or greater. A
bank will be considered undercapitalized if it fails to meet any minimum
required measure, significantly undercapitalized if it is significantly below
such measure and critically undercapitalized if it maintains a level of tangible
equity capital equal to or less than 2% of total assets. A bank may be
reclassified to be in a capitalization category that is next below that
indicated by its actual capital position if it receives a less than satisfactory
examination rating by its examiners with respect to its assets, management,
earning, or liquidity that has not been corrected, or it is determined that the
bank is in an unsafe or unsound condition or engages in an unsafe or unsound
practice.
FDICIA generally prohibits a depository institution from making any capital
distribution, including payment of dividends or paying any management fee to its
holding company, if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally depending upon where the deposits are solicited; in addition,
"pass-through" insurance coverage may not be available for certain employee
benefit accounts.
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A number of requirements and restrictions may apply to significantly
undercapitalized depository institutions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions may be restricted from making payments
of principal and interest on subordinated debt and are subject to appointment of
a receiver or conservator. At December 31, 2002, which is the most recent
notification from the banks' primary regulators, all of CIB Marine's bank
subsidiaries were categorized as well capitalized under the regulatory framework
for prompt corrective action.
DIVIDEND RESTRICTIONS
The Federal Reserve Board's policy regarding dividends is that a bank
holding company should not declare or pay a cash dividend which would impose
undue pressure on the capital of its subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect a bank
holding company's financial position. The Federal Reserve Board believes that a
bank holding company should not initiate or continue cash dividends on its
common stock unless its net income is sufficient to fully fund each dividend and
its prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
CIB Marine's ability to pay any dividends to its shareholders depends in
large part on the ability of CIB Marine's subsidiary banks to pay dividends to
it. The ability of state chartered commercial subsidiary banks to pay dividends
is subject to restrictions primarily under the banking laws of the state under
which the subsidiary bank is organized. In the case of CIB Marine's state
chartered banks, the laws of Illinois, Indiana and Wisconsin are applicable. The
ability of Marine FSB to pay dividends is subject to OTS regulations applicable
to federal savings banks. The ability of Citrus Bank to pay dividends is subject
to OCC regulations applicable to national banks.
Under Illinois law, a bank may generally pay dividends without the approval
of the OBRE as long as the amount of the dividend does not exceed net profits
then on hand, after first deducting from net profits the bank's losses and bad
debts, and subject to certain additional requirements of the OBRE.
Under Wisconsin law, a bank that meets its regulatory capital requirement
may declare dividends based upon undivided profits in an amount the board of
directors considers expedient if the board has made provisions for the payment
of all expenses, losses, reserves, taxes and interest accrued or due from the
bank prior to declaring the dividend from undivided profits. If the bank has
declared and paid dividends in either of the two immediately preceding years
that exceeded net income for either of those two years, the bank may not declare
or pay any dividend in the current year that exceeds year-to-date net income
without the written consent of the Division of Banking.
Under Indiana law, a bank may pay dividends without the approval of the
Indiana Department of Financial Institutions so long as its capital is
unimpaired. In any event, dividends may not exceed undivided profits on hand,
less losses, bad debts, certain depreciation and other expenses.
Under regulations of the OTS, the ability of a federal savings association
to pay cash dividends and make other capital distributions are subject to
certain limitations. An institution that desires to make a capital distribution
may be required to file a notice or an application with the OTS 30 days prior to
the proposed declaration of the dividend or approval of the proposed capital
distribution by the board of directors of the association. Whether an
association needs to file a notice or an application is relevant because the OTS
may disapprove a notice or deny an application if it determines that the
association will be undercapitalized, significantly undercapitalized or
critically undercapitalized following the capital distribution, the distribution
raises safety and soundness concerns or the distribution violates a prohibition
contained in any statute, regulation, agreement between the association and the
OTS or the FDIC, or a condition imposed on the association in an OTS approved
application or notice. If neither the association nor its proposed capital
distribution meet any of the criteria for filing a notice or an application,
then the association does not need to file a notice or application with the OTS
before making a capital contribution.
12
An association is required to file an application for a proposed capital
distribution if it is not eligible for expedited treatment. An association is
eligible for expedited treatment if it has a composite rating of 1 or 2, a
satisfactory CRA rating or better, a compliance rating of 1 or 2, meets all of
its capital requirements and has not been notified by supervisory personnel that
it is a problem association or an association in troubled condition. Even if an
association qualifies for expedited treatment, it must still file an application
if the total amount of all of the capital distributions, including the proposed
capital distribution by the association during the applicable calendar year,
exceeds the association's net income for that year to date plus the
association's retained net income for the preceding two years, or following the
proposed capital distribution the association would not be adequately
capitalized or the proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation or agreement between the
association and the OTS or the FDIC, or violate a condition imposed on the
association in an OTS-approved application or notice. An adequately capitalized
association is defined as one that has a total risk-based capital ratio of 8.0%
or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage
ratio of 4.0% or greater, or a leverage ratio of 3.0% or greater if the
association is assigned a composite rating of 1, and does not meet the
definition of a "well capitalized" savings association.
An association is required to file a notice for a proposed capital
distribution if it is not required to file an application for the distribution
and following the proposed capital distribution, it would not be well
capitalized or the proposed capital distribution would reduce the amount of, or
retire any part of, the association's common or preferred stock or retire, with
some exceptions, any part of debt instruments such as notes or debentures
included in capital, or the association is a subsidiary of a savings and loan
holding company. A well capitalized association is defined as one that has a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to
any written agreement or capital directive or the like issued by the OTS to meet
and maintain a specific capital level for any capital measure.
Under regulations of the OCC, a national bank may pay dividends without the
approval of the OCC if the total of all dividends, including the proposed
dividend, declared by the bank in any calendar year do not exceed the bank's net
income of that year to date plus the retained net income of the preceding two
years, less any transfers to capital surplus. However, a national bank may not
pay a dividend if the bank would be undercapitalized after the dividend payment
is made. The OCC's prior approval is required for payment of dividends exceeding
the limitations described above or where the dividend is to be paid in a form
other than cash.
In 2002 a total of $1.3 million in dividends were paid to CIB Marine by its
bank and non-bank subsidiaries. As of December 31, 2002, $51.3 million of the
total stockholders' equity of the subsidiary banks was available for payment of
dividends to CIB Marine without approval by the applicable regulatory
authorities, of which $27.0 million was attributable to CIB-Chicago. However,
pursuant to the Memorandum and throughout such time as the Memorandum remains in
effect, CIB -- Chicago may not pay a dividend to CIB Marine without first
obtaining the consent of the Regulators. For additional information regarding
the Memorandum see "Management Discussion and Analysis of Financial Condition
and Results of Operations -- Regulatory Matters" and Note 13 to the Consolidated
Financial Statements.
FEDERAL DEPOSIT INSURANCE
As FDIC-insured institutions, each of CIB Marine's subsidiary banks are
required to pay deposit insurance premiums based on the risk each poses to the
FDIC insurance funds. The FDIC has 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
has adopted a premium rate schedule, which provides for an assessment range of
0% to 0.27% of deposits, depending on the capital category and supervisory
category to which it is assigned. In addition to its insurance assessment, each
insured institution is subject to quarterly debt service assessments in
connection with bonds issued by the government corporation that financed the
federal savings and loan bailout.
13
RESTRICTIONS ON AFFILIATE TRANSACTIONS
Transactions between CIB Marine, its subsidiary banks and its non-bank
subsidiaries are subject to a number of restrictions. Federal law imposes
restrictions on CIB Marine's subsidiary banks from making extensions of credit
to, or the issuance of a guarantee or letter of credit on behalf of, CIB Marine
or other affiliates, the purchase of, or investment in, stock or other
securities thereof, the taking of such securities as collateral for loans, and
the purchase of assets of CIB Marine or other affiliates. Such restrictions
prevent CIB Marine or other affiliates from borrowing from the subsidiary banks
unless the loans are secured by marketable obligations of designated amounts.
Further, such secured loans and investments by the subsidiary banks to or in CIB
Marine or to or in any other affiliate are limited, individually, to 10% of the
respective subsidiary bank's capital and surplus, and such secured loans are
limited in the aggregate to 20% of the respective subsidiary bank's capital and
surplus. Federal Reserve Board policies also forbid the payment by bank
subsidiaries of management fees which are unreasonable in amount or exceed the
fair market value of the services rendered or, if no market exists, actual costs
plus a reasonable profit.
Certain of the subsidiary banks had $26.2 million of loans outstanding to
Canron Corporation at December 31, 2002. As Canron was acquired as a result of
debt previously contracted, it is not subject to the restrictions on affiliate
transactions for a period of two years, unless extended, but in no event more
than an additional three years.
QUALIFIED THRIFT LENDER
The Home Owners' Loan Act ("HOLA") requires savings associations such as
Marine FSB to meet a qualified thrift lender ("QTL") test. To meet the QTL test,
an association's "Qualified Thrift Investments" must total at least 65.0% of
"portfolio assets." Under OTS regulations, portfolio assets are defined as total
assets less intangibles, property used by a savings association in its business
and liquid investments in an amount not exceeding 20.0% of assets. Qualified
Thrift Investments generally consist of residential housing, small business,
credit card and educational loans, and loans for personal, family and household
purposes. A savings association that does not meet the QTL test must either
convert to a bank charter or comply with the following restrictions on its
operations:
- the association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank;
- the branching powers of the association shall be restricted to those of a
national bank;
- the institution shall not be eligible to obtain any advances from its
FHLB; and
- payment of dividends by the association shall be subject to the rules
regarding payment of dividends by a national bank.
Upon the expiration of three years from the date the association ceases to
be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances subject to safety and soundness considerations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING
CIB Marine's subsidiary banks are subject to the Community Reinvestment Act
("CRA") and various fair lending requirements and reporting obligations. The CRA
generally requires federal banking agencies to evaluate whether financial
institutions are meeting the credit needs of its local communities, including
low-and moderate-income neighborhoods, and to rate such institutions. State and
federal agencies also examine financial institutions compliance with fair
lending laws. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. Federal banking agencies
are also authorized to take compliance with such laws and a bank's CRA rating
into consideration when regulating and supervising other activities of a bank
holding company and its banks, including expansionary activities. As of the date
of its most recent examination, each of CIB Marine's subsidiary banks had a CRA
rating of at least satisfactory.
14
USA PATRIOT ACT OF 2001
On October 26, 2001, the President signed the USA Patriot Act of 2001
("Patriot Act"). The purpose of the Patriot Act is to strengthen the ability of
the U.S. Government to intercept and obstruct terrorism by, among others,
increasing the power of the U.S. government to obtain access to information and
to investigate a broad range of criminal activities. The Patriot Act also
expands the definition of money laundering to include terrorism, terrorism
support and foreign corruption, and increases the civil and criminal penalties
for money laundering offenses. The Patriot Act further applies certain
anti-money laundering measures to United States bank accounts of foreign
persons; prohibits financial institutions from establishing, maintaining,
administering or managing a correspondent account with a foreign shell bank;
provides for certain forfeitures of funds deposited in United States interbank
accounts by foreign banks; provides the Department of Treasury with regulatory
authority to ensure that certain accounts are not used to hide the identity of
customers transferring funds and to impose additional reporting requirements
with respect to money laundering activities; provides standards for verifying
customer identification at account opening; and sets forth rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. Although the potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging, CIB Marine does not
believe that compliance with the new requirements will have a material impact on
its operations or financial condition.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes"). This new legislation addresses corporate governance and
accounting oversight matters. Sarbanes requires the creation of a five-member
oversight board appointed by the SEC that is to set standards for accountants
and have investigative and disciplinary powers; prohibits accounting firms from
providing various forms of service to public clients, such as certain consulting
services; requires accounting firms to rotate partners working with public
clients every five years; expands disclosure of corporate operations and
internal controls; requires certification of financial statements by the
President and CEO and the Chief Financial Officer of public companies; increases
penalties and forfeitures for financial crimes or failing to report events
having a material affect on the financial statements or operations of a public
company; and enhances controls on and reporting of insider trading. CIB Marine
has implemented processes and procedures to comply with the requirements for
expanded disclosure of internal controls and the certification of its financial
statements. As a significant portion of Sarbanes becomes effective during 2003,
CIB Marine is evaluating the impact that Sarbanes and related regulations will
have upon its operations, including a potential increase in the cost of outside
professionals.
AVAILABLE INFORMATION
CIB Marine files various reports with the Securities and Exchange
Commission. The reports include the annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended. CIB Marine makes all SEC filings available
without charge to the public on its web site at http://www.cibmarine.com as soon
as reasonable practicable after filed.
15
FORWARD LOOKING STATEMENTS
CIB Marine has made statements in this Annual Report on Form 10-K and
documents that are incorporated by reference 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," "will 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. Potential risks and uncertainties that
may affect CIB Marine's operations, performance, development and business
results include the following:
- Adverse changes in business conditions in the banking industry generally
and in the markets in which CIB Marine operates;
- Changes in the legislative and regulatory environment which adversely
affect CIB Marine;
- Changes in accounting policies and practices;
- Changes in interest rates and changes in monetary and fiscal policies
which could negatively affect net interest margins, asset valuations and
expense expectations;
- Increased competition from other financial and non-financial
institutions;
- CIB Marine's ability to generate or obtain the funds necessary to achieve
its future growth objectives;
- CIB Marine's ability to manage its future growth;
- CIB Marine's ability to identify attractive acquisition and growth
opportunities;
- CIB Marine's ability to attract and retain key personnel;
- Adverse changes in CIB Marine's loan and investment portfolios;
- Changes in the financial condition or operating results of one or more
borrowers or related groups of borrowers or borrowers within a single
industry or small geographic region where CIB Marine has a concentration
of credit extended to those borrowers or related groups or to borrowers
within that single industry or small geographic region;
- Adverse changes in the valuation of assets held for disposal and/or
additional losses resulting from operations or disposition thereof;
- The competitive impact of technological advances in the banking industry;
- The costs and effects of unanticipated litigation and of unexpected or
adverse outcomes in such litigations; and
- Other risks set forth from time to time in CIB Marine's filings with the
Securities and Exchange Commission.
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.
16
ITEM 2. PROPERTIES
The following table provides information relating to the material real
properties owned or leased by CIB Marine and its subsidiaries as of December 31,
2002. CIB Marine's subsidiary banks lease or sublease office space to CIB Marine
and to its non-bank subsidiaries.
<Table>
<Caption>
OWNED DATE OPENED
LOCATION OR LEASED OR ACQUIRED
-------- --------- -----------
CENTRAL ILLINOIS BANK FACILITIES
Sidney, Illinois............................................ Owned 9/87
Champaign, Illinois......................................... Owned 9/88
Urbana, Illinois............................................ Owned 3/90
Arrowsmith, Illinois........................................ Owned 10/91
Champaign, Illinois (Midtown)............................... Owned 4/94
Rantoul, Illinois........................................... Leased 11/94
Monticello, Illinois........................................ Leased 5/95
Danville, Illinois.......................................... Owned 8/95
Decatur, Illinois........................................... Leased 10/95
Arthur, Illinois............................................ Owned 10/96
Morton, Illinois............................................ Leased 10/96
Peoria, Illinois............................................ Leased 9/97
East Peoria, Illinois....................................... Owned 10/97
Springfield, Illinois....................................... Leased 4/99
Peoria, Illinois (Fulton)................................... Leased 10/99
Lincoln, Illinois........................................... Owned 4/00
Bloomington, Illinois....................................... Owned 10/00
Peoria, Illinois (Knoxville)................................ Leased 12/01
CIB-CHICAGO FACILITIES
Hillside, Illinois.......................................... Leased 6/94
Willow Springs, Illinois.................................... Owned 7/96
Niles, Illinois............................................. Leased 8/96
Elk Grove Village, Illinois................................. Owned 10/96
Chicago, Illinois........................................... Leased 10/96
Bolingbrook, Illinois....................................... Leased 2/97
Elmhurst, Illinois.......................................... Leased 6/98
Gurnee, Illinois............................................ Leased 7/98
Mount Prospect, Illinois.................................... Owned 3/99
Arlington Heights, Illinois................................. Owned 3/99
Northbrook, Illinois........................................ Leased 4/99
Zion, Illinois.............................................. Owned 9/99
Frankfort, Illinois......................................... Leased 1/00
Palos Heights, Illinois..................................... Leased 11/02
MARINE-WISCONSIN FACILITIES
Cedarburg, Wisconsin........................................ Owned 9/97
Grafton, Wisconsin.......................................... Owned 9/97
Pewaukee, Wisconsin......................................... Leased 2/98
Wauwatosa, Wisconsin........................................ Leased 5/98
Milwaukee, Wisconsin........................................ Leased 4/99
Franklin, Wisconsin......................................... Leased 8/00
Brookfield, Wisconsin....................................... Leased 9/01
CIB-INDIANA FACILITIES
Indianapolis, Indiana (Fox Road)............................ Leased 3/98
Indianapolis, Indiana (Emerson Way)......................... Leased 9/98
Indianapolis, Indiana (Monument Circle)..................... Leased 4/99
Indianapolis, Indiana (Rockville Road)...................... Owned 3/00
Carmel, Indiana............................................. Leased 8/00
</Table>
17
<Table>
<Caption>
OWNED DATE OPENED
LOCATION OR LEASED OR ACQUIRED
-------- --------- -----------
MARINE FSB FACILITIES
Omaha, Nebraska............................................. Leased 11/99
Scottsdale, Arizona......................................... Leased 10/01
Henderson, Nevada........................................... Leased 1/02
CITRUS BANK FACILITIES
Vero Beach, Florida......................................... Owned 4/90
Sebastian, Florida.......................................... Owned 2/93
Barefoot Bay, Florida....................................... Owned 9/96
North Miami Beach, Florida.................................. Leased 12/01
Sebring, Florida............................................ Leased 1/02
MORTGAGE SERVICES, INC.
Waukesha, Wisconsin......................................... Leased 12/02
CIB MARINE BANCSHARES, INC.
Champaign, Illinois......................................... Leased 10/99
</Table>
The following table provides information relating to the material real
properties owned or leased by companies held for disposal by CIB Marine at
December 31, 2002. CIB Marine does not believe that there are any material
environmental issues affecting these properties.
<Table>
<Caption>
OWNED DATE OPENED
LOCATION OR LEASED OR ACQUIRED
-------- --------- -----------
MICR, INC.
Mukilteo, Washington........................................ Leased 10/00
CANRON CORPORATION
Rexdale, Ontario............................................ Owned 10/02
Conklin, New York........................................... Owned 10/02
Sadbury, Ontario............................................ Leased 10/02
New York, New York.......................................... Leased 10/02
New Westminster, British Columbia........................... Owned 10/02
Vancouver, British Columbia................................. Owned 10/02
Regine, Saskatchewan........................................ Owned 10/02
Edmonton, Alberta........................................... Leased 10/02
Fort McMurray, Alberta...................................... Leased 10/02
Portland, Oregon............................................ Owned 10/02
Piscataway, New Jersey...................................... Leased 10/02
Leon, Guahajuato............................................ Owned 10/02
</Table>
None of the properties owned by CIB Marine or its subsidiaries are subject
to encumbrances material to the operations of CIB Marine and its subsidiaries.
CIB Marine considers the conditions of its properties to be generally good and
adequate for the current needs of the businesses of it and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
CIB Marine is not currently involved in any material pending legal
proceedings other than litigation of a routine nature, which is being defended
and handled in the ordinary course of business.
CIB Marine has a lending relationship with a borrower who has recently been
charged with various criminal offenses, a conviction of which may result in
forfeiture to the United States of any and all property of the borrower involved
in the alleged criminal offenses and funds in the amount of $54.9 million. In
August of 2002, CIB Marine purchased various assets from certain of the
borrower's related interests, as a result of financial difficulties of this
borrower. Although CIB Marine does not currently believe it will incur any
losses with respect to any such forfeiture proceedings, this matter is being
disclosed as a contingent liability pursuant to Statement of Financial
Accounting Standard No. 5, Accounting for Contingencies. CIB Marine engaged in
the lending activities with the borrower and its related interests, and the
acquisition of assets from the
18
borrower's related interests, without knowledge of the alleged criminal
activities and believes that it is a bona fide purchaser for value of the
assets.
In addition, CIB Marine has lending relationships with other individuals
and entities who purchased certain assets of other operating subsidiaries of the
borrower. These loans are secured by certain assets previously owned by the
borrower's related interests. CIB Marine has no reason to believe at this time
that such assets will be subject to forfeiture and does not expect any loss to
occur as a result of any such forfeiture proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
CIB Marine did not submit any matters to a vote of its shareholders during
the fourth quarter of fiscal year 2002.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF CIB MARINE
The following table sets forth the names, ages and positions of all
executive officers of CIB Marine, the period that each has held positions with
CIB Marine, and a brief account of each officer's business experience during at
least the past five years. Under CIB Marine's by-laws, executive officers are
elected annually by the board of directors, and each executive officer holds
office until his successor has been duly elected and qualified or until the
earlier of his death, resignation or removal.
<Table>
<Caption>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
J. Michael Straka, 65(1)............. Mr. Straka is the President and Chief Executive Officer of
CIB Marine and has held those positions since 1987. Prior to
assuming those positions, Mr. Straka was head of the
international division of a large Milwaukee-based regional
bank where he was employed for 26 years.
Michael L. Rechkemmer, 53............ Mr. Rechkemmer has been Executive Vice President of CIB
Marine since July 1999 and Chief Operations Officer since
April 2000. He was CIB-Chicago's Vice Chairman and Chief
Operating Officer from January 1997 to June 1998 and its
President and Chief Executive Officer from July 1994 to
December 1996. Prior to joining CIB-Chicago, Mr. Rechkemmer
was President and Chief Executive Officer of Mid America
Bank N.A. from January 1991 to June 1994.
Steven T. Klitzing, 40............... Mr. Klitzing is Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of CIB Marine and
has held those positions since December 1993. Mr. Klitzing
has been with CIB Marine since 1986 and has held various
positions with CIB Marine and its subsidiaries since that
date.
Donald J. Straka, 40(1).............. Mr. Straka is Senior Vice President, Chief Legal Officer and
Secretary of CIB Marine and has held those positions since
July 1997. Mr. Straka has been engaged in the practice of
law since 1987. In 1992, Mr. Straka joined the law firm of
Brashear & Ginn and he was a partner of that firm from 1995
to 1997.
Stephen C. Bonnell, 52............... Mr. Bonnell has been a Senior Vice President of CIB Marine
since October 1994 and Chief Credit Officer since January
1996. Mr. Bonnell served in various capacities with CIB
Marine, its subsidiaries and their predecessors from 1972 to
October 1994.
</Table>
19
<Table>
<Caption>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
Patrick J. Straka, 36(1)............. Mr. Straka is Senior Vice President and Chief Investment
Officer of CIB Marine and has held those positions since
February 1999. He was a Vice President, Investment Officer
and General Auditor of CIB Marine from 1995 to February
1999. Mr. Straka served in various positions with CIB Marine
from 1992 to 1995.
</Table>
- -------------------------
(1) J. Michael Straka is the father of Donald J. Straka and Patrick J. Straka.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for CIB Marine's common
stock. CIB Marine has offered and sold, from time to time, shares of its common
stock in private placement transactions. As of March 14, 2003, there were
approximately 1,676 holders of record of CIB Marine's common stock.
CIB Marine has not paid cash dividends on its common stock. CIB Marine
currently reinvests earnings to support continued growth, but will periodically
consider whether to pay cash dividends in the future. Restrictions on CIB
Marine's ability to pay dividends and the ability of its subsidiaries to
transfer funds to it for the payment of dividends are discussed elsewhere in
this Form 10-K. See, "Business -- Supervision and Regulation -- Dividend
Restrictions." See also Note 13 to the Consolidated Financial Statements
contained in Item 8 of this Form 10-K.
On December 20, 2000, CIB Marine commenced a $1.0 million private placement
offering of its common stock at $19.71 per share, which terminated on January
31, 2001. Although no funds were received in December 2000, CIB Marine sold
22,709 shares in this offering in January 2001 for a total of $0.4 million. On
April 18, 2001, CIB Marine commenced a $3.0 million private placement offering
of its common stock at $20.95 per share, which terminated on June 22, 2001. CIB
Marine sold 264,329 shares in this offering for a total of $5.5 million. On
February 1, 2002, CIB Marine commenced a $5.0 million private placement offering
of its common stock at $23.22 per share, which terminated on April 5, 2002. CIB
Marine sold 341,772 shares in this offering for a total of $7.9 million. All of
these offerings were made to a limited number of accredited investors. Each of
the offerings was made pursuant to Section 4(2) of the Securities Act of 1933
(the "Act") and the provisions of Rule 506 of Regulation D under the Act. CIB
Marine did not incur any commissions or underwriting discounts in any of these
offerings.
20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth CIB Marine's selected consolidated financial
data. The selected financial data as it relates to the five-year period ended
December 31, 2002, has been derived from CIB Marine's audited Consolidated
Financial Statements. The following information should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA
Interest and dividend income............ $ 204,070 $ 203,130 $ 190,565 $ 122,300 $ 87,068
Interest expense........................ 97,335 115,723 112,722 64,712 45,139
----------- ----------- ----------- ----------- -----------
Net interest income..................... 106,735 87,407 77,843 57,588 41,929
Provision for loan losses............... 34,725 12,743 9,454 6,785 4,756
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses.................. 72,010 74,664 68,389 50,803 37,173
Noninterest income(1)................... 21,600 20,795 8,529 6,502 6,212
Noninterest expense..................... 71,079 54,553 45,272 36,796 29,319
----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 22,531 40,906 31,646 20,509 14,066
Income tax expense...................... 6,900 13,989 10,975 7,250 4,848
----------- ----------- ----------- ----------- -----------
Net income............................ $ 15,631 $ 26,917 $ 20,671 $ 13,259 $ 9,218
=========== =========== =========== =========== ===========
COMMON SHARE DATA
Basic earnings per share................ $ 0.86 $ 1.52 $ 1.19 $ 0.80 $ 0.59
Diluted earnings per share.............. 0.84 1.49 1.17 0.79 0.59
Dividends............................... -- -- -- -- --
Book value per share.................... $ 14.30 $ 13.27 $ 11.57 $ 9.94 $ 9.12
Weighted average shares outstanding
-- basic............................. 18,167,379 17,751,752 17,381,478 16,528,981 15,508,958
Weighted average shares outstanding
-- diluted........................... 18,547,515 18,083,013 17,622,964 16,741,410 15,743,745
FINANCIAL CONDITION DATA
Total assets............................ $ 3,665,561 $ 2,949,169 $ 2,463,951 $ 1,912,899 $ 1,270,574
Loans................................... 2,707,538 2,389,482 1,831,231 1,455,581 968,720
Securities.............................. 514,003 418,357 505,871 369,988 222,229
Deposits................................ 2,848,404 2,269,710 2,038,093 1,607,547 1,087,736
Borrowings, including guaranteed trust
preferred securities.................. 494,086 421,870 204,779 123,206 23,471
Stockholders' equity.................... 261,801 237,142 203,367 169,703 150,543
FINANCIAL RATIOS AND OTHER DATA
Performance Ratios:
Net interest margin(2).................. 3.44% 3.45% 3.73% 3.95% 4.19%
Net interest spread(3).................. 3.04 2.85 3.04 3.26 3.31
Noninterest income to average
assets(4)............................. 0.57 0.63 0.38 0.42 0.55
Noninterest expense to average assets... 2.19 2.06 2.05 2.38 2.76
Efficiency ratio(5)..................... 55.91 51.52 51.45 56.49 60.19
Return on average assets(6)............. 0.48 1.01 0.94 0.86 0.87
Return on average equity(7)............. 6.10 12.11 11.14 8.45 7.00
</Table>
21
<Table>
<Caption>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Asset Quality Ratios:
Nonaccrual loans, restructured and 90
days or more past due and still
accruing loans to loans............... 1.71% 1.52% 1.00% 0.61% 1.11%
Nonperforming assets and 90 days or more
past due and still accruing loans to
total assets.......................... 1.36 1.34 0.81 0.52 0.88
Allowance for loan losses to loans...... 1.93 1.43 1.31 1.11 1.15
Allowance for loan losses to nonaccrual,
restructured and 90 days or more past
due and still accruing loans.......... 113.29 94.12 130.71 183.67 103.16
Net charge-offs to average loans........ 0.64 0.13 0.10 0.15 0.10
Capital Ratios:
Total equity to total assets............ 7.14% 8.04% 8.25% 8.87% 11.85%
Total risk-based capital ratio.......... 10.45 10.64 10.69 10.29 14.39
Tier 1 risk-based capital ratio......... 9.19 9.42 9.61 9.33 13.37
Leverage capital ratio.................. 8.75 9.32 8.88 8.99 12.21
Other Data:
Number of employees (full-time
equivalent)(8)........................ 844 685 612 551 462
Number of banking facilities............ 52 49 45 41 33
</Table>
- -------------------------
(1) Noninterest income includes pre-tax gains on investment securities of $3.1
million for the year ended December 31, 2002, $4.0 million for the year
ended December 31, 2001, $0.03 million for the year ended December 31, 2000,
$0.002 million for the year ended December 31, 1999 and $0.3 million for the
year ended December 31, 1998.
(2) Net interest margin is the ratio of net interest income, on a tax-equivalent
basis, to average interest-earning assets.
(3) Net interest spread is the yield on average interest-earning assets less the
rate on average interest-bearing liabilities.
(4) Noninterest income to average assets excludes gains and losses on
securities.
(5) The efficiency ratio is noninterest expense divided by the sum of net
interest income, on a tax-equivalent basis, plus noninterest income
excluding gains and losses on securities.
(6) Return on average assets is net income divided by average total assets.
(7) Return on average equity is net income divided by average common equity.
(8) Does not include employees of companies held for disposal of 914 in 2002, 40
in 2001 and 42 in 2000.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The financial condition and results of operations presented in the
Consolidated Financial Statements, accompanying notes to the Consolidated
Financial Statements, selected financial data appearing elsewhere within this
report, and management's discussion and analysis are, to a large degree,
dependent upon CIB Marine's accounting policies. The selection and application
of these accounting policies involve judgments, estimates and uncertainties that
are susceptible to change.
Presented below are discussions of those accounting policies that
management believes are the most important (Critical Accounting Policies) to the
portrayal and understanding of CIB Marine's financial condition and results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a
reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial
Statements.
ALLOWANCE FOR LOAN LOSSES
CIB Marine monitors and maintains an allowance for loan losses to absorb an
estimate of probable losses inherent in the loan portfolio. CIB Marine maintains
policies and procedures that address the systems of controls over the following
areas of the allowance: the systematic methodology used to determine the
appropriate level of the allowance to provide assurances they are maintained in
accordance with GAAP; the accounting policies for loan charge-offs and
recoveries; the assessment and measurement of impairment in the loan portfolio;
and the loan grading system.
CIB Marine evaluates various loans individually for impairment as required
by Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures. Loans evaluated
individually for impairment include nonaccrual loans, loans past due 90 days or
more and still accruing, restructured loans and other loans selected by
management. The evaluations are based upon discounted expected cash flows from
the loan or collateral valuations and all other known relevant information. If
the evaluation shows that a loan is individually impaired, then a specific
reserve is established for the amount of impairment. If a loan evaluated
individually is not impaired, then the loan is assessed for impairment under
SFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loans that
have similar characteristics.
For loans without individual measures of impairment, CIB Marine makes
estimates of losses for groups of loans as required by SFAS 5. Loans are grouped
by similar characteristics, including the type of loan, the assigned loan grade
and the general collateral type. A loss rate reflecting the expected losses
inherent in a group of loans is derived based upon estimates of expected default
rates and loss for the group of loans. The resulting estimate of losses for
groups of loans are adjusted for relevant environmental factors and other
conditions, including: borrower and industry concentrations; levels and trends
in delinquencies, charge-offs and recoveries; changes in underwriting standards
and risk selection; level of experience, and ability of lending management;
national and local economic conditions; and off-balance sheet positions.
The amount of estimated impairment for individually evaluated loans and the
estimate of losses for groups of loans is added together for a total estimate of
loans losses. This estimate of losses is compared to the allowance for loan
losses of CIB Marine as of the evaluation date, and if the estimate of losses is
greater than the allowance, an additional provision to the allowance would be
made. If the estimate of losses is less than the allowance, the degree to which
the allowance exceeds the estimate is evaluated to determine whether the
allowance falls outside of a range of estimates. If the estimate of losses is
below the range of reasonable estimates, the allowance would be reduced by way
of a credit to the provision for loan losses. CIB Marine recognizes the inherent
imprecision in estimates of losses due to various uncertainties and variability
related to
23
the factors used, and therefore a reasonable range around the estimate of losses
is derived and used to ascertain whether the allowance is too high. If different
assumptions or conditions were to prevail and it is determined that the
allowance is not adequate to absorb the new estimate of probable losses, an
additional provision for loan losses would be made, which amount may be material
to the Consolidated Financial Statements.
OTHER INVESTMENTS
Other investments in limited partnerships and other equity investments
which are not readily marketable are accounted for using the equity method when
CIB Marine's ownership is at least 3% in a limited partnership and 20% in a
corporation, but less than 51%. Investments not accounted for on the equity
method are accounted for using the cost method. All of these investments are
illiquid. All other investments are periodically evaluated for impairments. If
an investment is impaired, a loss is recognized. To determine whether an
investment is impaired CIB Marine looks to previous transactions, if any, and
the investees discounted cash flows. No investments were considered impaired at
December 31, 2002. If different assumptions or conditions were to prevail, the
carrying value of these investments may need to be reduced and a loss recorded.
ASSETS OF COMPANIES HELD FOR SALE OR DISPOSAL
Companies which have been acquired through loan collection activities and
held for sale or disposal are initially valued at their fair market value based
upon independent valuations. The valuations of such businesses are allocated to
the assets and liabilities of the businesses. The asset groups are then
periodically evaluated for impairment as required under FASB Statement No. 144,
based upon the estimated undiscounted cash flows of the asset group. If the
estimated undiscounted cash flows of the asset group are not sufficient to
recover the asset group, then the fair value of the asset group is determined
using a discounted cash flow approach. If the fair value of the asset group is
less than the carrying amount, a loss is recognized. Should future estimated
cash flows be reduced or if applicable discount rates increase then the carrying
value of the asset groups may need to be reduced and a loss recorded.
INCOME TAXES
CIB Marine recognizes expense for federal and state income taxes currently
payable as well as for deferred federal and state taxes for estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the consolidated balance sheets, as well as operating
loss and tax credit carry-forwards. Realization of deferred tax assets is
dependent upon CIB Marine generating sufficient taxable income in either the
carry-forward or carry-back periods to cover net operating losses generated by
the reversal of temporary differences. A valuation allowance is provided by way
of a charge to income tax expense if it is determined that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. If different assumptions and conditions were to prevail, the valuation
allowance may not be adequate to absorb unrealized deferred taxes and the amount
of income taxes payable may need to be adjusted by way of a charge or credit to
expense. Furthermore, income tax returns are subject to audit by the IRS, state
taxing authorities, and foreign government taxing authorities. Income tax
expense for current and prior periods is subject to adjustment based upon the
outcome of such audits. CIB Marine believes it has adequately accrued for all
probable income taxes payable and provided valuation allowances for deferred tax
assets where it has been determined to be more likely than not that such assets
are not realizable. Accrual of income taxes payable and valuation allowances
against deferred tax assets are estimates subject to change based upon the
outcome of future events.
INTRODUCTION
The following is a discussion and analysis of CIB Marine's consolidated
financial condition as of December 31, 2002 and 2001, and its changes in
financial condition and results of operations for the three years ended December
31, 2002, 2001 and 2000. References in the discussion below to "CIB Marine"
include CIB Marine's subsidiaries unless otherwise specified.
24
On September 17, 2001, CIB Marine acquired Citrus Financial Services, Inc.,
including its banking subsidiary, Citrus Bank, N.A., through a merger
transaction. The merger was accounted for as a pooling of interests and the
Consolidated Financial Statements for all prior periods have been restated to
include the financial information of Citrus Financial as if CIB Marine and
Citrus Financial had always been combined. This discussion and analysis should
be read in conjunction with the Consolidated Financial Statements and Notes
contained in Item 8 of this Form 10-K.
On June 19, 2000, CIB Marine announced that its Board of Directors approved
a 150-for-1 split of the Company's outstanding shares of common stock. The stock
split was affected in the form of a stock dividend and each shareholder of
record at the close of business on July 1, 2000, received 149 additional shares
of common stock for every share of common stock held. All share and per share
data contained in this Form 10-K document have been restated to reflect the
effect of this stock split.
OVERVIEW
CIB Marine had net income of $15.6 million in 2002, as compared to $26.9
million in 2001 and $20.7 million in 2000. Total assets at December 31, 2002
were $3.7 billion, which represented a 24.4% increase from total assets of $2.9
billion at December 31, 2001. Total assets increased 19.7% during 2001, from
$2.5 billion at December 31, 2000.
CIB Marine's asset growth has been largely attributable to the
implementation of its business strategy, which includes focusing on the
development of banking relationships with small to medium-sized businesses,
offering more personalized service to banking customers, hiring experienced
personnel, and expanding in both new and existing markets. During 2002, CIB
Marine established three new banking facilities, acquired the operations of a
mortgage banking company and established an entity engaged in the business of
factoring receivables. During 2001, CIB Marine established four new banking
facilities and acquired Citrus Financial, which at the time of acquisition had
total assets of $84.2 million and three full-service banking facilities. During
2000, CIB Marine established four new banking facilities.
CIB Marine raised a significant portion of the capital necessary to
facilitate its growth through the sales of its common stock in private placement
offerings and through the issuance of guaranteed trust preferred securities. The
guaranteed trust preferred securities qualify as Tier 1 capital for regulatory
purposes, but are accounted for as debt for financial reporting purposes.
The following table provides an overview of CIB Marine's asset and income
trends. The table indicates the percentage increase or (decrease) in the average
balance sheet or income statement items for the years ended December 31, 2002,
2001, and 2000, in each case as compared to the prior year.
<Table>
<Caption>
2002 VS. 2001 2001 VS. 2000 2000 VS. 1999
------------- ------------- -------------
SELECTED AVERAGE BALANCE SHEET ITEMS
Total loans.............................................. 23.58% 25.15% 43.24%
Total interest-earning assets............................ 22.27 21.08 43.64
Total assets............................................. 22.48 20.00 43.04
Total deposits........................................... 24.25 12.31 39.36
Total interest-bearing liabilities....................... 22.59 20.67 47.35
SELECTED INCOME STATEMENT ITEMS
Net interest income(TE).................................. 21.90% 12.12% 35.57%
Provision for loan losses................................ 172.50 34.79 39.34
Noninterest income....................................... 3.87 143.82 31.18
Noninterest expense...................................... 30.29 20.50 23.04
Net income............................................... (41.93) 30.22 55.90
Diluted earnings per share............................... (43.62) 27.35 48.10
</Table>
- -------------------------
(TE) - Tax equivalent basis of 35%
25
RESULTS OF OPERATIONS
NET INCOME
CIB Marine's net income was $15.6 million in 2002 compared to $26.9 million
in 2001. The decrease in net income in 2002 was primarily attributable to a
$22.0 million increase in the provision for loan losses and a $16.5 million
increase in noninterest expense. This was partially offset by a $19.3 million
increase in net interest income. The increase in the provision for loan losses
was primarily the result of an increase in net loan charge-offs of $13.9 million
and an increase in the level of nonperforming loans.
Net income for 2001 was $26.9 million compared to $20.7 million in 2000.
This increase was primarily attributable to higher net interest income and
noninterest income partially offset by increased noninterest expense and
provision for loan losses.
Diluted earnings per share were $0.84 in 2002 compared to $1.49 in 2001 and
$1.17 in 2000. Return on average assets was 0.48% in 2002, 1.01% in 2001, and
0.94% in 2000. The return on average equity was 6.10% in 2002, 12.11% in 2001,
and 11.14% in 2000.
NET INTEREST INCOME
Net interest income is the most significant component of CIB Marine's
earnings. Net interest income is the difference between interest earned, on a
tax equivalent basis, on interest-earning assets and interest paid on deposits
and other borrowed funds. Net interest margin is this difference expressed as a
percentage of average interest-earning assets. The amount of CIB Marine's net
interest income is affected by several factors, including interest rates and the
volume and relative mix of interest-earning assets and interest-bearing
liabilities. Although CIB Marine can control certain of these factors, others,
such as the general level of credit demand, fiscal policy and Federal Reserve
Board monetary policy, are beyond CIB Marine's control.
26
The following table sets forth information regarding average balances,
interest income, or interest expense, and the average rates earned or paid for
each of CIB Marine's major asset, liability and stockholders' equity categories.
The following table expresses interest income on a tax-equivalent basis in order
to compare the effective yield on earning assets. This means that the interest
income on tax-exempt loans and tax-exempt securities has been adjusted to
reflect the income tax savings at a federal income tax rate of 35% provided by
these tax-exempt assets.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
---------- ----------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS (TE):
Securities:
Taxable................................. $ 424,360 $ 18,284 4.31% $ 387,186 $ 23,026 5.95%
Tax-exempt.............................. 60,361 3,910 6.48 59,545 4,372 7.34
---------- -------- ---- ---------- -------- -----
Total Securities........................ 484,721 22,194 4.58 446,731 27,398 6.13
Loans (1)(2):
Commercial.............................. 805,620 53,029 6.58 717,063 57,923 8.08
Commercial real estate.................. 1,706,983 122,056 7.15 1,296,687 110,837 8.55
Consumer................................ 61,291 4,029 6.57 69,025 5,652 8.19
---------- -------- ---- ---------- -------- -----
Total loans........................... 2,573,894 179,114 6.96 2,082,775 174,412 8.37
Federal funds sold....................... 27,480 539 1.96 25,267 1,121 4.44
Loans held for sale...................... 71,611 4,137 5.78 27,756 1,919 6.91
---------- -------- ---- ---------- -------- -----
Total interest-earning assets (TE).... 3,157,706 205,984 6.52 2,582,529 204,850 7.93
-------- ---- -------- -----
NONINTEREST-EARNING ASSETS:
Cash and due from banks.................. 38,066 20,603
Premises and equipment................... 27,979 25,837
Allowance for loan losses................ (42,201) (28,918)
Accrued interest receivable and other
assets.................................. 67,629 52,826
---------- ----------
Total noninterest-earning assets........ 91,473 70,348
---------- ----------
Total Assets.......................... $3,249,179 $2,652,877
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand deposits........ $ 57,831 $ 590 1.02% $ 53,670 $ 1,061 1.98%
Money market............................ 285,178 5,842 2.05 245,754 8,810 3.58
Other savings deposits.................. 124,189 2,936 2.36 45,893 1,210 2.64
Time deposits........................... 1,960,349 76,110 3.88 1,615,016 89,504 5.54
---------- -------- ---- ---------- -------- -----
Total interest-bearing deposits....... 2,427,547 85,478 3.52 1,960,333 100,585 5.13
Borrowings -- short-term................. 274,490 5,964 2.17 223,369 8,481 3.80
Borrowings -- long-term.................. 46,396 1,370 2.95 57,301 2,633 4.60
Guaranteed trust preferred securities.... 45,260 4,523 9.99 37,863 4,024 10.63
---------- -------- ---- ---------- -------- -----
Total borrowed funds.................. 366,146 11,857 3.24 318,533 15,138 4.75
Total interest-bearing liabilities.... 2,793,693 97,335 3.48 2,278,866 115,723 5.08
-------- ---- -------- -----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing demand deposits...... 173,080 132,731
Accrued Interest and other liabilities... 26,365 19,038
---------- ----------
Total noninterest-bearing
liabilities......................... 199,445 151,769
---------- ----------
Stockholders' Equity..................... 256,041 222,242
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $3,249,179 $2,652,877
========== ==========
NET INTEREST INCOME (TE) AND NET INTEREST
SPREAD(3)............................... $108,649 3.04% $ 89,127 2.85%
======== ==== ======== =====
NET INTEREST MARGIN (TE)(4).............. 3.44% 3.45%
==== =====
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------
2000
-------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS (TE):
Securities:
Taxable................................. $ 387,948 $ 24,199 6.24%
Tax-exempt.............................. 55,275 4,340 7.85
---------- -------- -----
Total Securities........................ 443,223 28,539 6.44
Loans (1)(2):
Commercial.............................. 572,622 55,926 9.77
Commercial real estate.................. 1,021,491 99,712 9.76
Consumer................................ 70,133 6,247 8.91
---------- -------- -----
Total loans........................... 1,664,246 161,885 9.73
Federal funds sold....................... 20,230 1,340 6.62
Loans held for sale...................... 5,224 454 8.69
---------- -------- -----
Total interest-earning assets (TE).... 2,132,923 192,218 9.01
-------- -----
NONINTEREST-EARNING ASSETS:
Cash and due from banks.................. 21,971
Premises and equipment................... 25,074
Allowance for loan losses................ (20,461)
Accrued interest receivable and other
assets.................................. 51,252
----------
Total noninterest-earning assets........ 77,836
----------
Total Assets.......................... $2,210,759
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand deposits........ $ 49,556 $ 1,273 2.57%
Money market............................ 183,970 10,103 5.49
Other savings deposits.................. 44,378 1,405 3.17
Time deposits........................... 1,464,359 89,685 6.12
---------- -------- -----
Total interest-bearing deposits....... 1,742,263 102,466 5.88
Borrowings -- short-term................. 103,853 7,113 6.85
Borrowings -- long-term.................. 29,811 1,792 6.01
Guaranteed trust preferred securities.... 12,514 1,351 10.80
---------- -------- -----
Total borrowed funds.................. 146,178 10,256 7.02
Total interest-bearing liabilities.... 1,888,441 112,722 5.97
-------- -----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing demand deposits...... 121,380
Accrued Interest and other liabilities... 15,430
----------
Total noninterest-bearing
liabilities......................... 136,810
----------
Stockholders' Equity..................... 185,508
----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $2,210,759
==========
NET INTEREST INCOME (TE) AND NET INTEREST
SPREAD(3)............................... $ 79,496 3.04%
======== =====
NET INTEREST MARGIN (TE)(4).............. 3.73%
=====
</Table>
- -------------------------
(TE) -- Tax-equivalent basis of 35%
(1) Loan balance totals include nonaccrual loans.
(2) Interest earned on loans include amortized loan fees of $9.1 million, $8.6
million and $5.5 million for the years ended December 31, 2002, 2001 and
2000, respectively.
(3) Net interest spread is the yield on average interest-earning assets less the
rate on average interest-bearing liabilities.
(4) Net interest margin is the ratio of net interest income, on a tax-equivalent
basis, to average interest-earning assets.
27
Net interest income, on a tax-equivalent basis, increased $19.5 million, or
21.9%, from $89.1 million in 2001 to $108.6 million in 2002. This increase was
primarily the result of a 22.3% increase in average interest-earning assets. Net
interest income on a tax-equivalent basis increased $9.6 million, or 12.1%,
during 2001 from $79.5 million in 2000. This increase was primarily the result
of a 21.1% increase in average interest-earning assets partially offset by a 28
basis point decline in the net interest margin.
The following table presents an analysis of changes in net interest income,
on a tax-equivalent basis, resulting from changes in average volumes of
interest-earning assets and interest-bearing liabilities and average rates
earned and paid.
<Table>
<Caption>
YEAR ENDED DECEMBER 30, 2002 YEAR ENDED DECEMBER 30, 2001
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 2001(1) YEAR ENDED DECEMBER 31, 2000(1)
---------------------------------------- ----------------------------------------
VOLUME RATE TOTAL % CHANGE VOLUME RATE TOTAL % CHANGE
------- -------- -------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST INCOME (TE)
Securities -- taxable......... $ 2,054 $ (6,796) $ (4,742) (20.59)% $ (47) $ (1,126) $ (1,173) (4.85)%
Securities -- tax-exempt...... 59 (521) (462) (10.57) 324 (292) 32 0.74
------- -------- -------- -------- ------- -------- -------- --------
Total Securities.......... 2,113 (7,317) (5,204) (18.99) 277 (1,418) (1,141) (4.00)
Commercial.................... 6,623 (11,517) (4,894) (8.45) 12,660 (10,663) 1,997 3.57
Commercial real estate........ 31,291 (20,072) 11,219 10.12 24,578 (13,453) 11,125 11.16
Consumer...................... (588) (1,035) (1,623) (28.72) (98) (497) (595) (9.52)
------- -------- -------- -------- ------- -------- -------- --------
Total Loans (including
fees)................... 37,326 (32,624) 4,702 2.70 37,140 (24,613) 12,527 7.74
Federal funds sold............ 91 (673) (582) (51.92) 286 (505) (219) (16.34)
Loans held for sale........... 2,581 (363) 2,218 115.58 1,576 (111) 1,465 322.69
------- -------- -------- -------- ------- -------- -------- --------
TOTAL INTEREST INCOME
(TE)...................... 42,111 (40,977) 1,134 0.55 39,279 (26,647) 12,632 6.57
------- -------- -------- -------- ------- -------- -------- --------
INTEREST EXPENSE
Interest-bearing demand
deposits.................... 77 (548) (471) (44.39) 99 (311) (212) (16.65)
Money market.................. 1,249 (4,217) (2,968) (33.69) 2,814 (4,107) (1,293) (12.80)
Other savings deposits........ 1,863 (137) 1,726 142.64 47 (242) (195) (13.88)
Time deposits................. 16,751 (30,145) (13,394) (14.96) 8,771 (8,952) (181) (0.20)
------- -------- -------- -------- ------- -------- -------- --------
Total Deposits............ 19,940 (35,047) (15,107) (15.02) 11,731 (13,612) (1,881) (1.84)
Borrowings -- short term...... 1,652 (4,169) (2,517) (29.68) 5,556 (4,188) 1,368 19.23
Borrowings -- long term....... (439) (824) (1,263) (47.97) 1,342 (501) 841 46.93
Guaranteed trust preferred
securities.................. 750 (251) 499 12.40 2,695 (22) 2,673 197.85
------- -------- -------- -------- ------- -------- -------- --------
Total Borrowed Funds...... 1,963 (5,244) (3,281) (21.67) 9,593 (4,711) 4,882 47.60
------- -------- -------- -------- ------- -------- -------- --------
TOTAL INTEREST EXPENSE...... 21,903 (40,291) (18,388) (15.89) 21,324 (18,323) 3,001 2.66
------- -------- -------- -------- ------- -------- -------- --------
NET INTEREST INCOME
(TE).................... $20,208 $ (686) $ 19,522 21.90% $17,955 $ (8,324) $ 9,631 12.12%
======= ======== ======== ======== ======= ======== ======== ========
</Table>
- -------------------------
(TE) Tax-equivalent basis of 35%.
(1) Variances which were not specifically attributable to volume or rate have
been allocated proportionally between volume and rate using absolute values
as a basis for the allocation. Nonaccruing loans were included in the
average balances used in determining yields.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, increased $1.1 million,
or 0.6%, from $204.9 million in 2001 to $206.0 million in 2002. The increase was
primarily the result of a 22.3% increase in average interest-earning assets,
offset by a 141 basis point decrease in the yield on average interest-earning
assets. Interest income on loans increased 2.7% due to increased average loan
balances, partially offset by a 141 basis point decrease in the loan yield.
Interest income on securities declined 19.0% due to lower yields, partially
offset by higher investment balances. Interest income on loans held for sale
increased 115.6% due to higher average balances.
28
Total interest income, on a tax-equivalent basis, increased $12.6 million,
or 6.6%, during 2001 from $192.2 million in 2000. The increase was the result of
a 21.1% increase in average interest-earning assets, partially offset by a 108
basis point reduction in the yield on average earning assets. Interest income on
loans increased 7.7% due to increased average loan balances, partially offset by
lower loan yields. Interest income on securities declined by 4.0% due to lower
yields, partially offset by an increase in the average balance of securities.
Interest income on loans held for sale increased 322.7% due to the higher
average balances.
INTEREST EXPENSE
Total interest expense decreased $18.4 million, or 15.9%, from $115.7
million in 2001, to $97.3 million in 2002. This reduction was primarily the
result of a 160 basis point decline in the rate paid on total interest-bearing
liabilities partially offset by an increase in the average balance of
interest-bearing liabilities. Interest expense on deposits decreased 15.0% due
to lower interest rates paid, partially offset by an increase in average deposit
balances. Interest expense on borrowed funds declined 21.7%, primarily as a
result of a reduction in the rate paid on borrowed funds offset by an increase
in the average amount of borrowed funds outstanding.
Total interest expense increased $3.0 million, or 2.7%, during 2001, from
$112.7 million in 2000 to $115.7 million in 2001. This increase was primarily
the result of a 20.7% increase in average interest-bearing liabilities, offset
by an 89 basis point reduction in the interest rate paid on average
interest-bearing liabilities. Interest expense on deposits declined by 1.8% due
to lower rates, partially offset by an increase in average deposit balances.
Interest expense on borrowed funds increased 47.6% primarily due to higher
borrowing levels, including the issuance of additional trust preferred
securities, partially offset by lower interest rates paid.
NET INTEREST MARGIN/NET INTEREST SPREAD
CIB Marine's net interest spread, which is the difference between the rate
earned on average interest-earning assets and the rate paid on average
interest-bearing liabilities, increased by 19 basis points in 2002. This
increase was primarily the result of the rate paid on interest-bearing
liabilities decreasing more rapidly than earning asset yields in the declining
rate environment. The net interest margin, which is net interest income as a
percent of average interest-earning assets, was essentially unchanged in 2002,
decreasing one basis point from the previous year.
While interest rate spreads improved during 2002, the contribution to net
interest margin attributable to interest-free funds supporting earning assets
was an offsetting factor. The higher interest rate environment of 2001 created
an increased value on those interest-free funds.
CIB Marine's net interest spread declined by 19 basis points in 2001 as a
result of reductions in earning asset yields exceeding the reduced rate paid for
interest-bearing liabilities. The net interest margin declined by 28 basis
points in 2001 compared to 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges made to earnings in order
to maintain an allowance for loan losses. The provision for loan losses was
$34.7 million for 2002, as compared to $12.7 million in 2001 and $9.5 million in
2000. The increase in the provision in 2002 over 2001 was the result of the
increases in net charge-offs from $2.7 million in 2001 to $16.6 million in 2002,
nonperforming loans, loans 90 days or more past due and still accruing, the
credit risk associated with certain borrowing relationships, and the growth of
the loan portfolio. The increase in the provision in 2001 over 2000 was the
result of increased net charge-offs, nonperforming loans and loans 90 days or
more past due and still accruing, and growth of the loan portfolio. See,
"Allowance for Loan Losses" and "Nonperforming Assets and Loans 90 Days or More
Past Due and Still Accruing" for more information.
29
NONINTEREST INCOME
Noninterest income increased $0.8 million, or $3.9%, from $20.8 million in
2001 to $21.6 million in 2002. The increase was primarily the result of an
increase in mortgage banking revenue. Mortgage banking revenue increased $2.2
million, or 26.3%, from $8.4 million in 2001 to $10.6 million in 2002. The
increase in mortgage banking revenue was due primarily to an increase in the
sale of residential mortgage loans, resulting from a relatively low interest
rate environment and the expansion of CIB Marine's mortgage operations.
Deposit service charges and other service fees increased $0.4 million, or
14.1%, from $3.1 million in 2001 to $3.5 million in 2002. This increase is in
part the result of a 4.03% increase in the number of deposit accounts serviced
from 2001 to 2002. The decrease in other income of $0.5 million was primarily
due to the two-month pre-tax loss of $0.8 million from Canron operations.
Securities gains were $4.0 million in 2001 and $3.1 million in 2002. CIB Marine
repositioned its securities portfolio during 2001 and 2002, including the sales
of securities during market rate decreases, in order to promote long-term
earnings.
Noninterest income increased $12.3 million, or 143.8% during 2001, from
$8.5 million in 2000. Mortgage banking revenue increased $6.1 million, or
269.6%, from $2.3 million in 2000 to $8.4 million in 2001. The increase in
mortgage banking revenue was due primarily to an increase in the sale of
residential mortgage loans as described above. Loan fees increased $2.0 million,
or 110.8%, due to the increase in the loan portfolio and letter of credit fees.
Other income increased $0.7 million due to the full year of pre-tax MICR income
in 2001 compared to the two months of income in 2000. Also affecting the 2000 to
2001 comparison was the $4.0 million increase in net securities gains.
NONINTEREST EXPENSE
Total noninterest expense increased $16.5 million, or 30.3%, from $54.6
million in 2001, to $71.1 million in 2002. The increase was primarily the result
of CIB Marine's growth, including internal growth, the opening of new banking
facilities and the expansion of its mortgage operations, and increased legal and
collection fees related to problem credits and litigation settlements.
Compensation and employee benefits expense is the largest component of
noninterest expense and represented 58.3% of total noninterest expense for 2002
compared to 60.8% for 2001. Compensation and employee benefits expense increased
$8.3 million, or 25.1%, from $33.2 million in 2001 to $41.5 million in 2002. The
increase in compensation and employee benefits is the result of a number of
factors, including the hiring of personnel to staff the new banking facilities,
expansion of mortgage banking operations, the hiring of additional management
personnel, and increases in the salaries of existing personnel. The total number
of full-time equivalent employees increased 23.2% from 685 at December 31, 2001
to 844 at December 31, 2002, excluding the employees of Canron and MICR.
Compensation and employee benefits related to employees of Canron and MICR, Inc
are not included in compensation and employee benefits expense because these
companies are held for disposal and not part of CIB Marine's banking operations.
Equipment and occupancy expenses increased $1.1 million, or 13.9%, from
$8.2 million in 2001 to $9.4 million in 2002. The increases in these
expenditures were primarily attributable to the addition of banking facilities
and the purchase of new software systems and equipment.
Professional services expense increased $1.1 million, or 56.4%, from $1.9
million in 2001 to $3.0 million in 2002. This increase was primarily the result
of additional legal expenses related to loan collection activities.
Amortization of intangibles expense decreased $0.8 million, or 63.4%, from
$1.3 million in 2001 to $0.5 million in 2002. This decrease was primarily the
result of the adoption of SFAS 142 and SFAS 147, which eliminated the
amortization of certain intangible assets. See Note 7 to the Consolidated
Financial Statements for additional information.
Litigation settlements expense was $1.8 million during 2002. The majority
of this expense related to the settlement of two separate, but related lawsuits,
which arose from CIB Marine's commercial lending business. Litigation
settlements expense was $0.1 million in 2001.
30
Merger-related charges of $0.5 million were incurred during 2001 related to
the acquisition of Citrus Financial. These merger-related charges included asset
write-downs, contract cancellations, and professional fees.
Other noninterest expense increased $5.1 million, or 75.7%, from $6.8
million in 2001 to $11.9 million in 2002. The increase in other noninterest
expense was due to a $1.6 million increase in underwriting, appraisal, recording
and filing fees, and other closing expenses resulting from the increase in
residential mortgage volume, a $1.0 million increase in collection expenses, a
$1.0 million loss accrual for a $7.5 million unfunded letter of credit to a
company which is experiencing financial difficulties, and a $0.6 million
increase in losses resulting from CIB Marine's equity ownership in low-income
housing partnerships.
Total noninterest expense increased $9.3 million, or 20.5% during 2001,
from $45.3 million in 2000. The increase was primarily attributable to CIB
Marine's growth, including internal growth, and the acquisition and opening of
new banking facilities.
Compensation and employee benefits expense increased $5.8 million, or
21.0%, from $27.4 million in 2000 to $33.2 million in 2001. The increase in
compensation and employee benefits is the result of the hiring of personnel to
staff new banking facilities, the hiring of additional management personnel, and
increases in the salaries of existing personnel. As a result of CIB Marine's
growth, the total number of full-time equivalent employees, excluding Canron and
MICR, increased 11.9% from 612 at December 31, 2000 to 685 at December 31, 2001.
Equipment and occupancy expenses increased $1.4 million, or 20.1%, from
$6.9 million in 2000 to $8.2 million in 2001. The increases in equipment and
occupancy expenses were primarily the result of new banking facilities in 2001
and 2000.
Other noninterest expense increased $1.1 million, or 20.1%, from $5.6
million in 2000 to $6.8 million in 2001. The increases in other noninterest
expense were primarily the result of increased expenses related to the
origination and sale of mortgage loans, increased travel expenses, FDIC and
state assessments, postage and delivery expenses, and supplies expense.
CIB Marine's efficiency ratio was 55.91% in 2002, as compared to 51.52% in
2001 and 51.45% in 2000. Total noninterest expense as a percentage of average
assets was 2.19% in 2002, as compared to 2.06% in 2001 and 2.05% in 2000.
INCOME TAXES
CIB Marine records a provision for income taxes currently payable, along
with a provision for income taxes payable or receivable in the future. Deferred
taxes arise from temporary differences between financial statement and income
tax reporting of assets and liabilities. The effective tax rates for the years
ended December 31, 2002, 2001, and 2000 were 30.6%, 34.2% and 34.7%,
respectively. The decrease in the effective tax rates was primarily due to lower
income before taxes, the increase in the percentage of tax-exempt municipal
interest as compared to pre-tax income, low income housing tax credits and the
implementation of certain tax planning strategies relative to state income
taxes.
FINANCIAL CONDITION
OVERVIEW
At December 31, 2002, CIB Marine had total assets of $3.7 billion, an
increase of $716.4 million, or 24.3%, from $2.9 billion at December 31, 2001.
This increase was primarily the result of the implementation of CIB Marine's
business strategy. Asset growth occurred in loans which increased $318.1
million, loans held for sale which increased $193.8 million, and investment
securities which increased $95.6 million. These increases were funded by
increases in deposits of $578.7 million, borrowings of $72.2 million, and equity
of $24.7 million. The increase in equity was primarily due to net income of
$15.6 million. Additionally, the sale of common stock pursuant to private
placement offerings and stock option exercises, in total, raised $9.2 million.
31
CIB Marine's ratio of stockholders' equity to total assets was 7.1% at December
31, 2002, as compared to 8.0% at December 31, 2001.
LOANS HELD FOR SALE
Loans held for sale which are comprised primarily of residential first
mortgage loans, increased $193.8 million from $34.3 million at December 31, 2001
to $228.1 million at December 31, 2002. This increase was primarily attributable
to increases in the volume of loans originated and purchased for resale and an
increase in the number of days CIB Marine held the loans prior to being funded
by the purchasing investor during the latter part of 2002. The increase in
volume was primarily due to a lower interest rate environment in 2002 and the
expansion of CIB Marine's mortgage banking operations. The increase in funding
time was primarily the result of the increase in the volume of loans being
processed and purchased by secondary market investors. In 2002, CIB Marine
originated $356.8 million, purchased $901.0 million and sold $1.1 billion of
loans held for sale. In 2001, originations, purchases, and sales were $254.4
million, $695.1 million, and $931.5 million, respectively. Comcor accounted for
$29.4 million of total mortgage originations and purchases during 2002.
SECURITIES
CIB Marine seeks to manage its investment portfolio in a manner that
promotes the achievement of its liquidity goals, optimizes after-tax net income,
provides collateral to secure borrowings, assists CIB Marine in meeting various
regulatory requirements and is consistent with its market risk policies. CIB
Marine manages the maturity structure of the investment portfolio to provide a
stream of cash flows to complement market risk management and to promote
long-term earnings.
The carrying value and tax-equivalent yield of CIB Marine's securities are
set forth in the following table.
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- --------------------
YIELD TO YIELD TO
AMOUNT MATURITY AMOUNT MATURITY
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
U.S. Treasuries & agencies............................. $ 4,499 6.72% $ 21,484 6.63%
States and political subdivisions...................... 56,107 6.22 59,527 6.88
Other notes and bonds.................................. 450 7.10 450 7.10
Mortgage-backed securities............................. 9,076 7.62 15,148 7.11
-------- ---- -------- ----
TOTAL SECURITIES HELD TO MATURITY................. 70,132 6.44 96,609 6.86
-------- ---- -------- ----
AVAILABLE FOR SALE
U.S. Treasuries & agencies............................. 150,710 3.03 104,601 5.47
States and political subdivisions...................... 6,478 3.74 2,629 9.18
Other notes and bonds.................................. 600 6.63 600 6.63
Commercial paper....................................... 8,300 1.77 6,999 2.30
Mortgage-backed securities............................. 262,674 3.91 195,386 5.81
Federal Home Loan Bank stock........................... 10,394 5.97 6,575 5.78
-------- ---- -------- ----
TOTAL SECURITIES AVAILABLE FOR SALE............... 439,156 3.62 316,790 5.65
-------- ---- -------- ----
Total Securities Before Market Value Adjustment... 509,288 4.01% 413,399 5.93%
==== ====
Available for sale market value adjustment............. 4,715 4,958
-------- --------
TOTAL SECURITIES.................................. $514,003 $418,357
======== ========
</Table>
Total securities outstanding at December 31, 2002, were $514.0 million, an
increase of $95.6 million, or 22.9%, from $418.4 million at December 31, 2001.
The increase in the securities portfolio was due primarily to CIB Marine's
strategy to maintain an appropriate level of liquid assets to total assets. The
ratio of total securities to total assets was 14.0%, 14.2%, and 20.5% at
December 31, 2002, 2001 and 2000, respectively.
32
At December 31, 2002, 30.5% of the portfolio consisted of U.S. Treasuries
and agency securities, as compared to 30.9% at December 31, 2001. Mortgage
backed securities represented 53.5% of the portfolio at December 31, 2002 as
compared to 50.7% at December 31, 2001. Obligations of states and political
subdivisions of states represented 12.2% of the portfolio at December 31, 2002,
as compared to 14.9% at December 31, 2001. Most of these obligations were
general obligations of states or political subdivisions of states in which CIB
Marine's subsidiaries are located. Commercial paper accounted for 1.6% of the
portfolio at December 31, 2002 and 1.7% of the portfolio in 2001.
CIB Marine has classified certain of its securities as held to maturity and
certain of its securities as available for sale. Securities classified as held
to maturity are those that CIB Marine has both the positive intent and ability
to hold to maturity, and are reported at amortized cost. Securities classified
as available for sale are those that CIB Marine has not classified as held to
maturity or as trading securities. CIB Marine has not maintained any securities
for trading purposes. CIB Marine may sell securities classified as available for
sale if it believes the sale is necessary for liquidity, asset/liability
management or other reasons. Securities available for sale are reported at fair
value, with unrealized gains and losses, net of taxes, included as a separate
component of accumulated other comprehensive income in equity. The
classification of securities as available for sale and held to maturity is based
on a number of factors, including CIB Marine's current and projected liquidity
position and loan to deposit ratios.
At December 31, 2002, $443.9 million, or 86.4%, of the securities portfolio
was classified as available for sale and $70.1 million, or 13.6%, of the
portfolio as held to maturity. At December 31, 2001, 76.9% was classified as
available for sale and 23.1% was classified as held to maturity. The increase in
the percentage of securities classified as available for sale in 2002 reflects
CIB Marine's decision, to make a larger percentage of its securities portfolio
available to meet CIB Marine's liquidity needs, if necessary, and to allow CIB
Marine the opportunity to react to changes in market interest rates and changes
in the spread relationships between alternative investments.
33
The following table presents the maturities and weighted average yields of
securities as of December 31, 2002.
<Table>
<Caption>
DECEMBER 31, 2002
--------------------------------------------------------------
1 YEAR AND LESS 1 TO 5 YEARS 5 TO 10 YEARS
------------------ ------------------- -------------------
YIELD TO YIELD TO YIELD TO
BALANCE MATURITY BALANCE MATURITY BALANCE MATURITY
------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
U.S. Treasuries &
agencies................ $ 4,499 6.72% $ -- --% $ -- --%
States and political
subdivisions............ 20,005 4.29 16,000 6.95 14,289 7.52
Other notes and bonds..... 250 6.30 200 8.10 -- --
Mortgage-backed
securities.............. 56 6.97 130 7.13 5,686 8.10
------- ---- -------- ---- -------- ----
TOTAL HELD TO
MATURITY.............. 24,810 4.76 16,330 6.97 19,975 7.69
------- ---- -------- ---- -------- ----
AVAILABLE FOR SALE
U.S. Treasuries &
agencies................ 51,681 3.80 99,029 2.63 -- --
States and political
subdivisions............ 5,001 2.65 984 6.90 493 8.47
Other notes and bonds..... -- -- 400 6.76 200 6.37
Commercial paper.......... 8,300 1.77 -- -- -- --
Mortgage-backed
securities.............. 377 6.11 41,528 2.83 90,522 3.55
Federal Home Loan Bank
stock................... -- -- -- -- -- --
------- ---- -------- ---- -------- ----
TOTAL AVAILABLE FOR
SALE.................. 65,359 3.47 141,941 2.73 91,215 3.58
------- ---- -------- ---- -------- ----
Total Securities Before
Market Value
Adjustment............ $90,169 3.82% $158,271 3.16% $111,190 4.32%
------- ---- -------- ---- -------- ----
Available for sale market
value adjustment........
TOTAL SECURITIES........
<Caption>
DECEMBER 31, 2002
-----------------------------------------
OVER 10 YEARS TOTAL
------------------- -------------------
YIELD TO YIELD TO
BALANCE MATURITY BALANCE MATURITY
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
U.S. Treasuries &
agencies................ $ -- --% $ 4,499 6.72%
States and political
subdivisions............ 5,813 7.69 56,107 6.22
Other notes and bonds..... -- -- 450 7.10
Mortgage-backed
securities.............. 3,204 6.81 9,076 7.62
-------- ---- -------- ----
TOTAL HELD TO
MATURITY.............. 9,017 7.38 70,132 6.44
-------- ---- -------- ----
AVAILABLE FOR SALE
U.S. Treasuries &
agencies................ -- -- 150,710 3.03
States and political
subdivisions............ -- -- 6,478 3.74
Other notes and bonds..... -- -- 600 6.63
Commercial paper.......... -- -- 8,300 1.77
Mortgage-backed
securities.............. 130,247 4.50 262,674 3.91
Federal Home Loan Bank
stock................... 10,394 5.97 10,394 5.97
-------- ---- -------- ----
TOTAL AVAILABLE FOR
SALE.................. 140,641 4.61 439,156 3.62
-------- ---- -------- ----
Total Securities Before
Market Value
Adjustment............ $149,658 4.78% $509,288 4.01%
-------- ---- -------- ----
Available for sale market
value adjustment........ 4,715
--------
TOTAL SECURITIES........ $514,003
========
</Table>
LOANS
GENERAL. CIB Marine offers a broad range of loan products, including
commercial loans, commercial real estate loans, commercial and residential real
estate construction loans, residential real estate loans, and various types of
consumer loans. CIB Marine's underwriting standards, as contained within its
loan policy, are based on the general assumption that the primary source of
repayment should be the regular operating cash flows and the secondary source
should be the liquidation and disposition of collateral.
Loans, net of the allowance for loan losses, were $2.7 billion at December
31, 2002, an increase of $299.8 million, or 12.7%, from $2.4 billion at December
31, 2001, and represented 72.4% and 79.9% of CIB Marine's total assets at
December 31, 2002 and December 31, 2001, respectively. A significant amount of
the growth in the loan portfolio occurred in commercial real estate and
construction loans, which increased 20.3% and 30.4%, respectively, during 2002.
The total of all categories of commercial loans represented 97.9% of gross loans
at December 31, 2002, and 97.2% of gross loans at December 31, 2001. These
increases in loans are consistent with CIB Marine's business development
strategy to focus on establishing banking relationships with small to
medium-sized businesses and have been achieved by hiring lenders who have
experience and expertise in making loans to these customers.
34
The following table sets forth a summary of CIB Marine's loan portfolio by
category for each of the periods indicated. The data for each category is
presented in terms of total dollars outstanding and as a percentage of the total
loans outstanding.
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------------------------------------------
2002 2001 2000 1999
----------------------- ----------------------- ----------------------- ----------
BALANCE % OF LOANS BALANCE % OF LOANS BALANCE % OF LOANS BALANCE
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial................ $ 803,928 29.6% $ 829,828 34.6% $ 626,270 34.1% $ 577,051
Factored receivables...... 6,779 0.2 -- 0.0 -- 0.0 --
Commercial real estate.... 1,332,455 49.1 1,107,229 46.2 855,390 46.6 585,386
Commercial real estate
construction............. 513,805 19.0 394,081 16.4 282,000 15.4 214,251
Residential real estate... 37,628 1.4 37,727 1.6 36,508 2.0 52,161
Home equity loans......... 14,526 0.5 20,175 0.9 16,364 0.9 10,395
Consumer loans............ 5,895 0.2 8,126 0.3 18,852 1.0 20,016
---------- ----- ---------- ----- ---------- ----- ----------
Gross Loans.............. 2,715,016 100.0% 2,397,166 100.0% 1,835,384 100.0% 1,459,260
===== ===== =====
Deferred loan fees........ (7,478) (7,684) (4,153) (3,679)
Allowance for loan
losses................... (52,369) (34,078) (23,988) (16,214)
---------- ---------- ---------- ----------
Net loans................ $2,655,169 $2,355,404 $1,807,243 $1,439,367
========== ========== ========== ==========
<Caption>
DECEMBER 31,
----------------------------------
1999 1998
---------- ---------------------
% OF LOANS BALANCE % OF LOANS
---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial................ 39.5% $420,313 43.3%
Factored receivables...... 0.0 271 0.0
Commercial real estate.... 40.1 344,514 35.6
Commercial real estate
construction............. 14.7 117,703 12.1
Residential real estate... 3.6 50,839 5.2
Home equity loans......... 0.7 7,812 0.8
Consumer loans............ 1.4 28,629 3.0
----- -------- -----
Gross Loans.............. 100.0% 970,081 100.0%
===== =====
Deferred loan fees........ (1,361)
Allowance for loan
losses................... (11,118)
--------
Net loans................ $957,602
========
</Table>
COMMERCIAL LOANS. At December 31, 2002, commercial loans totaled $803.9
million, a decrease of $25.9 million, or 3.1%, from the prior year-end and
represented 29.6% of gross loans. Commercial loans increased $203.6 million, or
32.5%, during 2001. Commercial loans consist of loans to small and medium-sized
businesses in a wide variety of industries, including wholesalers, manufacturers
and business service companies. CIB Marine provides a broad range of commercial
loans, including lines of credit for working capital purposes, accounts
receivable and inventory financing, and term notes for the acquisition of
equipment and for other purposes. In general, commercial loans are
collateralized by inventory, accounts receivable, equipment, real estate and
other commercial assets, and may be supported by other credit enhancements, such
as personal and corporate guarantees on these borrowings. When warranted by the
overall financial condition of the borrower, loans may also be made on an
unsecured basis. Terms of commercial loans generally range from one to five
years, and the majority of these loans have floating interest rates.
FACTORING RECEIVABLES. In August 2002, CIB Marine acquired certain of the
assets of a business engaged in the factoring of receivables through CIB Marine
Commercial Finance. This company provides financing to smaller businesses that
need more rapid cash flow from their receivables. Advances are secured by the
receivables and other assets of the customer, and are made to the customer with
recourse. At December 31, 2002, the total balance of the receivables from
factoring was $6.8 million.
COMMERCIAL REAL ESTATE LOANS. At December 31, 2002, commercial real estate
loans totaled $1.3 billion, an increase of $225.2 million, or 20.3%, over the
prior year-end and represented 49.1% of gross loans. Commercial real estate
loans increased $251.8 million, or 29.4%, during 2001. Commercial real estate
loans are made to finance commercial properties such as office buildings,
multi-family residences, motels, strip malls, warehouses and other commercial
properties for which CIB Marine primarily holds real property as collateral. CIB
Marine may also require other credit enhancements, such as personal and
corporate guarantees, on these borrowings. Commercial real estate loans are made
at both fixed and variable interest rates with terms generally ranging from one
to five years. CIB Marine's underwriting standards generally require that a
commercial real estate loan not exceed 80% of the appraised value of the
property securing the loan.
COMMERCIAL REAL ESTATE CONSTRUCTION LOANS. At December 31, 2002, real
estate construction loans totaled $513.8 million, an increase of $119.7 million,
or 30.4%, over the prior year-end and represented 19.0% of gross loans. Real
estate construction loans increased $112.1 million, or 39.7%, during 2001. Real
estate construction loans include loans for the construction of office
buildings, multi-family residences, motels, strip malls, warehouses, and other
commercial real estate projects. Before approving a construction loan, CIB
Marine generally requires that permanent financing for the project be approved
by CIB Marine or a nonaffiliated third party lender. These loans are typically
secured by the real estate on which the project is
35
being constructed, and generally require that the principal amount of the loan
be no more than the lesser of 80% of the projects appraised value upon
completion or 100% of the estimated construction costs. CIB Marine may also
require other credit enhancements, such as personal and corporate guarantees, on
these borrowings. Generally, site inspections and various affidavits and
statements are required before a draw on the loan is disbursed. Real estate
construction loans are made at both fixed and variable rates and generally are
for a term of 12 to 18 months.
RESIDENTIAL REAL ESTATE LOANS. At December 31, 2002, residential mortgage
loans, which are not held for sale totaled, $37.6 million, and represented 1.4%
of gross loans as compared to $37.7 million and 1.6%, respectively, at December
31, 2001. Residential mortgage loans held in CIB Marine's portfolio are made
with both floating and fixed interest rates and terms of one to 30 years.
HOME EQUITY AND CONSUMER LOANS. CIB Marine also offers a variety of other
types of consumer loans, including installment, home equity, and credit card
loans. These consumer loans totaled $20.4 million at December 31, 2002 and
represented 0.7% of gross loans, as compared to $28.3 million and 1.2%,
respectively, at December 31, 2001. During the fourth quarter of 2001, CIB
Marine sold $1.7 million of its credit card portfolio.
LEVERAGED FINANCING. CIB Marine also provides leveraged financing,
including mezzanine loans, to certain of its borrowers through its subsidiary
banks and CIB Marine Capital. Typically, the collateral coverage on these loans
is insufficient to secure a senior debt position. These loans are generally
commercial, commercial real estate or commercial construction loans. These types
of credit facilities are generally provided to borrowers with whom CIB Marine
has an established banking relationship, where CIB Marine has or is making the
senior debt position loan, and where the borrower has projected or established
assets or cash flow to support such loan. As mezzanine loans are, by their
nature, inherently riskier than senior debt position loans, CIB Marine
structures such credit facilities with a goal of generating a rate of return
commensurate with the level of risk. The various factors that are considered
when measuring the rate of return include the interest rate, loan origination
fees, success fees, continuing payment obligations, and/or warrants. CIB Marine
applies the same underwriting standards to mezzanine loans as those used for
commercial, commercial real estate and construction loans. These loans are
typically secured by a junior position on some or all of the assets of the
borrower. CIB Marine may also require other credit enhancements, such as
personal and corporate guarantees, on these borrowings. At December 31, 2002,
CIB Marine Capital had approximately $26.3 million in mezzanine loans
outstanding which are included in the applicable loan categories. The additional
inherent risk on these loans is taken into consideration in establishing the
allowance for loan losses. CIB Marine does not expect that the mezzanine loan
portfolio will represent a significant portion of the loan portfolio.
36
LOAN MATURITIES. The following table sets forth the maturity distribution
and interest rate sensitivity of selected loan categories as of December 31,
2002. Maturities are based upon contractual terms of the underlying loans.
<Table>
<Caption>
LOAN MATURITIES AT DECEMBER 31, 2002
--------------------------------------------------
1 YEAR 1 TO 5 OVER 5
AND LESS YEARS YEARS TOTAL
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial...................................... $ 476,818 $ 318,666 $ 8,444 $ 803,928
Factored receivables............................ 6,779 -- -- 6,779
Commercial real estate.......................... 428,049 709,200 195,206 1,332,455
Commercial real estate construction............. 327,476 186,142 187 513,805
Residential real estate......................... 12,260 14,726 10,642 37,628
Home equity loans............................... 2,326 12,052 148 14,526
Consumer loans.................................. 2,888 2,303 704 5,895
---------- ---------- -------- ----------
Total gross loans............................. $1,256,596 $1,243,089 $215,331 $2,715,016
========== ========== ======== ==========
SENSITIVITY TO CHANGES IN INTEREST RATES
Fixed rates..................................... $ 185,349 $ 529,860 $ 46,217 761,426
Variable rates.................................. 1,071,247 713,229 169,114 1,953,590
---------- ---------- -------- ----------
Total gross loans............................. $1,256,596 $1,243,089 $215,331 $2,715,016
========== ========== ======== ==========
</Table>
CREDIT CONCENTRATIONS
Pursuant to CIB Marine's loan policy, a concentration of credit is deemed
to exist when the total credit relationship to one borrower, a related group of
borrowers, or borrowers within or dependent upon a related industry, exceeds 25%
of the stockholders' equity of CIB Marine. At December 31, 2002, CIB Marine had
four secured borrowing relationships that exceeded 25% of stockholders' equity.
These relationships include:
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $115.1 million, or 44.0%, of CIB
Marine's stockholders' equity and 4.3% of total loans. The aggregate
principal amount actually drawn and outstanding was $112.4 million at
December 31, 2002. The majority of these loans are in the
nursing/convalescent home industry. These loans are primarily secured by
first mortgages on commercial real estate and security interests in other
business assets including stock in a community bank. At December 31,
2002, all of the loans to this borrower and its related interests were
current.
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $109.7 million, or 41.9%, of CIB
Marine's stockholders' equity and 4.0% of total loans. The aggregate
principal amount actually drawn and outstanding was $82.3 million at
December 31, 2002. The majority of these loans are commercial real estate
and construction loans. These loans are primarily secured by first
mortgages on commercial real estate. At December 31, 2002, all of the
loans to this borrower and its related interests were current.
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $75.3 million, or 28.7%, of CIB
Marine's stockholders' equity and 2.8% of total loans. The aggregate
principal amount actually drawn and outstanding was $66.8 million at
December 31, 2002. The majority of these loans are in the commercial real
estate development and the nursing/convalescent home industries. These
loans are primarily secured by first mortgages on commercial real estate
and security interests in other business assets. At December 31, 2002,
all of the loans to this borrower and its related interests were current.
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $73.5 million, or 28.1%,
37
of CIB Marine's stockholders' equity and 2.7% of total loans. The
aggregate principal amount actually drawn and outstanding was $52.6
million at December 31, 2002. The majority of these loans are commercial
real estate and construction loans. These loans are primarily secured by
first mortgages on commercial real estate. In January 2002, a commercial
real estate loan to a related interest of this borrower with an
outstanding balance of $3.2 million was classified as restructured. CIB
Marine does not believe that there will be any loss with respect to this
restructured loan. At December 31, 2002, all of the loans to this
borrower and its related interests were current.
Approximately $27.5 million of the above described outstanding loan
balances are counted in more than one of the described relationships.
At December 31, 2002, CIB Marine also had credit relationships within five
industries or industry groups that exceeded 25% of its stockholders' equity. The
total outstanding balance to commercial real estate developers, investors and
contractors was approximately $595.7 million, or 22.0%, of total loans and
227.5% of stockholders' equity. The total outstanding balance to residential
real estate developers, investors and contractors was approximately $665.8
million, or 24.6%, of total loans and 254.3% of stockholders' equity. The total
outstanding balance of loans made in the motel and hotel industry was
approximately $214.6 million, or 7.9%, of total loans and 82.0% of stockholders'
equity. The total outstanding balance of loans made in the nursing/convalescent
home industry was approximately $146.3 million, or 5.4%, of total loans and
55.9% of stockholders' equity. The total outstanding balance of loans made in
the health care facility industry was approximately $116.0 million, or 4.3%, of
total loans and 44.3% of stockholders' equity.
CREDIT PROCEDURES AND REVIEW
In order to manage credit risk and the growth of the loan portfolio, CIB
Marine has developed, implemented and periodically updates various policies and
procedures, including a comprehensive loan policy, and has established various
loan committees. The loan policy establishes underwriting standards, a loan
approval process, loan officer lending limits, loan pricing guidelines, a credit
rating system, delinquency monitoring procedures, credit collection procedures
and a comprehensive loan review system. The loan underwriting approval and
review processes are designed to protect asset quality by assuring that credit
requests are independently reviewed on at least two different levels, and to
promote uniform lending standards among CIB Marine and its subsidiaries.
LOAN UNDERWRITING. The underwriting standards contained within CIB Marine's
loan policy address various aspects of the lending function, including an
analysis of a borrower's ability to repay, collateral requirements,
loan-to-value ratios, appraisals and personal guarantees. CIB Marine's
underwriting standards are based on the assumption that the principal source of
repayment should be the regular operating cash flows of the borrower and the
secondary source should be the liquidation and disposition of collateral. The
extent to which collateral is required for a loan is determined by the loan
policy and management's assessment of the creditworthiness of the borrower. The
amount and type of collateral required varies, but may include real estate,
marketable securities, deposits held in financial institutions, accounts
receivable, equipment and inventory. CIB Marine may also require personal and
corporate guarantees when deemed necessary. Collateral values are monitored on a
regular basis to ensure that they are maintained at an adequate level. CIB
Marine obtains and updates appraisals on collateral when management believes
they are necessary and as required by applicable laws or regulations.
LOAN APPROVAL. The approval process for a loan depends upon the size of the
prospective borrowing relationship. Depending on size, new loans and
modifications or renewals of existing loans are generally approved by the
individual lending officer, approved or ratified by the applicable loan
committee, or approved by CIB Marine's President and CEO and/or the Chief Credit
Officer, each of whom has the authority to approve loans under certain
circumstances. Generally, each small loan committee is comprised of various
officers of CIB Marine and the applicable subsidiary, and approves loans where
the borrowing relationship is greater than $0.1 million, but less than or equal
to $1.0 million. Each large loan committee is comprised of various officers and
outside directors of CIB Marine and/or the applicable subsidiary, and approves
loans where the borrowing relationship is greater than $1.0 million. CIB Marine
amended its loan policy, effective
38
April 1, 2003, relative to the approval process for large credit relationships.
As part of the amendment, the Board created an Executive Loan Committee to
review all new loans and extensions, renewals or modifications of existing loans
to a borrower, or related group of borrowers, which are individually or in the
aggregate, including existing credits to such borrower or related group of
borrowers, equal to or greater than $15.0 million and to forward the request to
the applicable loan committee for consideration or to deny the request. The
amendment also requires all new loans involving credit relationships that exceed
$25.0 million be authorized by the Executive Loan Committee and CIB Marine's
Board prior to consideration by the applicable loan committee. CIB Marine
believes that these new procedures will strengthen its underwriting processes
and provide additional controls to monitor and evaluate credit concentrations
LOAN REVIEW. CIB Marine's Credit Administration Department is responsible
for CIB Marine's loan review function, which includes assessing the credit
quality of the loan portfolio, establishing and monitoring adherence to
underwriting standards, promptly identifying loans with potential credit
exposure, handling loan collections and determining the adequacy of the
allowance for loan losses. Loan reviews are conducted on a regular basis as
established by the loan policy. In general, all loans of $1.0 million or greater
and 70% of loans between $0.2 million and $1.0 million are reviewed on an annual
basis, or more frequently when management believes additional reviews are
necessary. Loans with identified weaknesses are monitored on an on-going basis
by management, the applicable subsidiary's Board of Directors, and the Senior
Credit Review Committee, which is comprised of CIB Marine's President and CEO,
its Chief Credit Officer, a designee of CIB Marine's legal department, and other
credit administration and bank-lending officers.
In addition, the Credit Administration Department performs extensive loan
review analyses on CIB Marine's largest borrowing relationships, as well as
borrowers operating in industries where CIB Marine has a credit concentration.
These analyses are completed annually, or more frequently if warranted, and
include a comprehensive assessment of collateral and debt service ability of
these borrowers at both CIB Marine and other creditors. These analyses also
include an evaluation of geographic, industry and other credit risks.
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. At December 31,
2002, the allowance for loan losses was $52.4 million, or 1.93%, of total loans,
compared to $34.1 million, or 1.43% of total loans, at December 31, 2001. 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 loan
charge-offs. Total charge-offs for 2002 were $17.5 million, while recoveries
were $0.9 million, as compared to $3.0 million and $0.3 million, respectively,
for 2001. On March 28, 2003, CIB Marine charged-off an additional $3.6 million
against two borrowing relationships which were on nonaccrual at December 31,
2002, of which $3.2 million had been allocated as specific reserves . As a
result of the significant increase in the allowance during 2002, the ratio of
the allowance to nonaccrual, restructured and 90 day or more past due and still
accruing loans increased from 94.12% at December 31, 2001 to 113.29% at December
31, 2002. The increase in the allowance was primarily the result of increases in
nonperforming loans, loans 90 days or more past due and still accruing, the
credit risk associated with certain borrowing relationships, and the growth of
the loan portfolio. Although CIB Marine believes that the allowance for loan
losses is adequate to absorb probable losses on existing loans that may become
uncollectible, 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. Such agencies may require CIB Marine to make additional provisions
to the allowance or may downgrade loan ratings which will result in additional
provisions to the allowance based upon their judgments about information
available to them at the time of their examinations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Matters" and Note 13 to the Consolidated Financial
Statements.
39
The following table summarizes changes in the allowance for loan losses for
each of the periods indicated.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF YEAR................. $ 34,078 $ 23,988 $ 16,214 $ 11,118 $ 7,123
Loans charged off:
Commercial................................. (14,443) (1,893) (930) (1,280) (305)
Factored receivables....................... -- -- -- -- --
Commercial real estate..................... (2,752) (660) (470) (191) (398)
Commercial real estate construction........ -- (100) -- (36) (30)
Residential real estate.................... (79) (74) (152) -- (9)
Home equity................................ (70) -- -- -- --
Consumer................................... (155) (272) (372) (351) (231)
---------- ---------- ---------- ---------- --------
TOTAL CHARGED-OFF........................ (17,499) (2,999) (1,924) (1,858) (973)
---------- ---------- ---------- ---------- --------
Recoveries of loans charged-off:
Commercial................................. 566 232 59 60 135
Factored receivables....................... -- -- -- 25 --
Commercial real estate..................... 294 39 20 -- 8
Commercial real estate construction........ -- -- -- 46 --
Residential real estate.................... 26 16 -- 9 54
Home equity................................ -- -- -- -- 2
Consumer................................... 57 59 165 29 13
---------- ---------- ---------- ---------- --------
TOTAL RECOVERIES......................... 943 346 244 169 212
---------- ---------- ---------- ---------- --------
NET LOANS CHARGED-OFF........................ (16,556) (2,653) (1,680) (1,689) (761)
Allowance acquired........................... 122 -- -- -- --
Provision for loan losses.................... 34,725 12,743 9,454 6,785 4,756
---------- ---------- ---------- ---------- --------
BALANCE AT END OF YEAR....................... $ 52,369 $ 34,078 $ 23,988 $ 16,214 $ 11,118
========== ========== ========== ========== ========
RATIOS
Allowance for loan losses to total loans..... 1.93% 1.43% 1.31% 1.11% 1.15%
Allowance for loan losses to nonaccrual,
restructured and 90 days or more past due
and still accruing loans................... 113.29 94.12 130.71 183.67 103.16
Net charge-offs to average loans:
Commercial................................. 1.72 0.23 0.15 0.25 0.04
Commercial real estate..................... 0.14 0.06 0.04 0.03 0.13
Consumer................................... 0.36 0.39 0.51 0.41 0.21
Total loans.............................. 0.64 0.13 0.10 0.15 0.10
Ratio of recoveries to loans charged-off..... 5.39 11.54 12.67 9.10 21.79
Total loans.................................. $2,707,538 $2,389,482 $1,831,231 $1,455,581 $968,720
Average total loans.......................... 2,573,894 2,082,775 1,664,246 1,161,876 788,874
</Table>
40
The following table sets forth CIB Marine's allocation of the allowance for
loan losses by type of loan as of the dates indicated.
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999
---------------------- ---------------------- ---------------------- ---------
% OF LOANS % OF LOANS % OF LOANS
ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Commercial............... $16,420 2.04% $14,037 1.69% $ 8,742 1.40% $ 7,383
Factored receivables..... 151 2.23 -- -- -- -- --
Commercial real estate... 25,889 1.94 13,511 1.22 8,616 1.01 3,486
Commercial real estate
construction............ 7,028 1.37 4,002 1.02 2,006 0.71 1,186
Residential real
estate.................. 1,324 3.52 632 1.67 317 0.87 332
Home equity loans........ 511 3.52 338 1.67 142 0.87 66
Consumer loans........... 149 2.53 232 2.85 212 1.12 222
Unallocated.............. 897 -- 1,326 -- 3,953 -- 3,539
------- ---- ------- ---- ------- ---- -------
Total Allowance.......... $52,369 1.93% $34,078 1.43% $23,988 1.31% $16,214
======= ==== ======= ==== ======= ==== =======
<Caption>
DECEMBER 31,
-----------------------------------
1999 1998
---------- ----------------------
% OF LOANS % OF LOANS
IN EACH ALLOWANCE IN EACH
CATEGORY AMOUNT CATEGORY
---------- --------- ----------
(DOLLARS IN THOUSANDS)
Commercial............... 1.28% $ 6,301 1.50%
Factored receivables..... -- 4 1.49
Commercial real estate... 0.60 2,054 0.60
Commercial real estate
construction............ 0.55 603 0.51
Residential real
estate.................. 0.64 296 0.58
Home equity loans........ 0.64 46 0.58
Consumer loans........... 1.11 298 1.04
Unallocated.............. -- 1,516 --
---- ------- ----
Total Allowance.......... 1.11% $11,118 1.15%
==== ======= ====
</Table>
NONPERFORMING ASSETS AND LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The level of nonperforming assets is an important element in assessing CIB
Marine's asset quality and the associated risk in its loan portfolio.
Nonperforming assets include nonaccrual loans, restructured loans and foreclosed
property. Loans are placed on nonaccrual status when CIB Marine determines that
it is probable that principal and interest amounts will not be collected
according to the terms of the loan documentation. A loan is classified as
restructured when a concession is granted to a borrower for economic or legal
reasons related to the borrower's financial difficulties that would not
otherwise be considered. CIB Marine may restructure the loan by modifying the
terms to reduce or defer cash payments required by the borrower, reduce the
interest rate below current market rates for new debt with similar risk, reduce
the face amount of the debt, or reduce the accrued interest. Foreclosed property
represents properties acquired by CIB Marine as a result of loan defaults by
customers.
41
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.
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS
Nonaccrual Loans:
Commercial................... $ 15,071 $ 17,746 $ 2,391 $ 1,465 $ 1,468
Factored receivables......... -- -- -- -- --
Commercial real estate....... 15,523 15,678 12,682 798 2,213
Commercial real estate
construction............... 5,221 -- -- 180 281
Residential real estate...... 654 610 586 654 110
Home equity loans............ 104 220 -- -- --
Consumer loans............... 45 110 93 362 77
---------- ---------- ---------- ---------- --------
Total Nonaccrual Loans..... 36,618 34,364 15,752 3,459 4,149
---------- ---------- ---------- ---------- --------
Foreclosed property.......... 3,678 3,168 1,626 1,099 390
Restructured loans........... 3,210 309 1,505 1,853 685
---------- ---------- ---------- ---------- --------
Total Nonperforming
Assets.................. $ 43,506 $ 37,841 $ 18,883 $ 6,411 $ 5,224
========== ========== ========== ========== ========
LOANS 90 DAYS OR MORE PAST DUE AND
STILL ACCRUING
Commercial................... $ 3,022 $ 758 $ 235 $ 1,092 $ 3,551
Factored receivables......... -- -- -- -- --
Commercial real estate....... 2,292 195 20 1,421 787
Commercial real estate
construction............... -- 152 -- 850 992
Residential real estate...... 1,076 408 797 126 478
Home equity loans............ -- -- -- -- --
Consumer loans............... 6 22 43 27 135
---------- ---------- ---------- ---------- --------
Total Loans 90 Days or More
Past Due and Still
Accruing................ $ 6,396 $ 1,535 $ 1,095 $ 3,516 $ 5,943
========== ========== ========== ========== ========
Allowance for loan losses......... $ 52,369 $ 34,078 $ 23,988 $ 16,214 $ 11,118
Loans at end of period............ 2,707,538 2,389,482 1,831,231 1,455,581 968,720
RATIOS
Nonaccrual loans to total loans... 1.35% 1.44% 0.86% 0.24% 0.43%
Foreclosed properties to total
assets.......................... 0.10 0.11 0.07 0.06 0.03
Nonperforming assets to total
assets.......................... 1.19 1.28 0.77 0.34 0.41
Nonaccrual loans, restructured
loans and 90 days or more past
due and still accruing to total
loans........................... 1.71 1.52 1.00 0.61 1.11
Nonperforming assets and 90 days
or more past due and still
accruing loans to total
assets.......................... 1.36 1.34 0.81 0.52 0.88
</Table>
Total nonaccrual loans were $36.6 million at December 31, 2002 an increase
of $2.3 million, or 6.6%, from $34.4 million at December 31, 2001. Total
nonaccrual loans increased $18.6 million, or 118.2%, during 2001 from $15.8
million at December 31, 2000. The ratio of nonaccrual loans to total loans was
1.35%, 1.44%, and 0.86% at December 31, 2002, 2001 and 2000, respectively.
Forgone interest on non-accrual loans reduced interest income by $3.1 million in
2002 and $2.3 million in 2001 and $0.7 million in 2000.
42
At December 31, 2002, $31.8 million, or 86.8% of nonaccrual loans consisted
of the following seven lending relationships:
- Commercial loans to a borrower with an aggregate outstanding balance of
$9.2 million as of December 31, 2002, secured by all business assets of
the borrower including accounts receivable, inventory, and equipment. The
principal owner of this business has guaranteed these loans up to $3.0
million. These loans were transferred to nonaccrual in December 2002. CIB
Marine allocated $2.5 million as a specific reserve to the allowance for
loan losses for these loans during the fourth quarter of 2002, which
amount was charged-off on March 28, 2003. CIB Marine cannot provide
assurances that the value of the collateral will be maintained or that
there will not be additional losses with respect to this relationship.
- Commercial real estate loans to a related group of borrowers with an
aggregate outstanding balance of $8.6 million as of December 31, 2002,
secured by first mortgages on two assisted living facilities which are
under construction. Of this total, $3.8 million was transferred to
nonaccrual in December 2000, and $4.8 million was transferred to
nonaccrual in June 2001. Although CIB Marine allocated $3.0 million as a
specific reserve to the allowance for loan losses for these loans during
the third quarter of 2002, CIB Marine cannot provide assurances that the
value of the collateral will be maintained or that there will not be
additional losses with respect to this relationship.
- A commercial real estate loan and a construction loan to a borrower with
an aggregate outstanding balance of $5.1 million as of December 31, 2002,
secured by a first mortgage on an income producing commercial property.
These loans were transferred to nonaccrual during the second quarter of
2002. Although CIB Marine allocated $1.0 million as a specific reserve to
the allowance for loan losses for these loans during the third quarter of
2002, CIB Marine cannot provide assurances that the value of the
collateral will be maintained or that there will not be additional losses
with respect to this relationship.
- A commercial real estate loan to a borrower with an outstanding balance
of $3.3 million as of December 31, 2002, secured by a first mortgage on
an improved commercial property. The loan was transferred to nonaccrual
during the third quarter of 2002. While the value of the property
securing the loan approximates the amount owed, CIB Marine cannot provide
assurances that the value will be maintained or that there will not be
losses with respect to this relationship.
- Commercial and commercial real estate loans to a related group of
borrowers with an aggregate outstanding balance of $2.0 million as of
December 31, 2002, secured by a first mortgage on commercial property and
a security interest in all business assets. These loans were transferred
to nonaccrual during the second quarter of 2002. CIB Marine allocated
$0.7 million as a specific reserve to the allowance for loan losses for
these loans during the second half of 2002, which amount, and an
additional $0.4 million, was charged-off on March 28, 2003. CIB Marine
cannot provide assurances that the value of the collateral will be
maintained or that there will not be additional losses with respect to
this relationship.
- A commercial real estate loan to a borrower with an outstanding balance
of $2.0 million as of December 31, 2002, secured by a first mortgage on a
hotel. The loan was transferred to nonaccrual during the first quarter of
2001. In August of 2002, a partial charge-off of $0.6 million was taken.
While the value of the property securing the obligation approximates the
amount owed, net of the partial charge-off, CIB Marine cannot provide
assurances that the value will be maintained or that there will be no
further losses with respect to this relationship.
- Commercial loans to the Borrower's related interests with an outstanding
balance of $1.6 million as of December 31, 2002. These loans were
transferred to nonaccrual during the third quarters of 2001 and 2002.
Although CIB Marine allocated $0.5 million as a specific reserve to the
allowance for loan losses for these loans during the second quarter of
2002, CIB Marine cannot provide assurances that the value will be
maintained or that there will be no further losses with respect to this
relationship. Additional information regarding the Borrower is contained
within "Companies Held For Disposal."
43
On March 28, 2003, CIB Marine transferred a $14.8 million loan to
nonaccrual. This loan is secured by a first mortgage on a multi-family
development and is guaranteed by equity members of the borrower. While CIB
Marine believes that the value of this property is sufficient to cover amounts
owed, it cannot provide assurances that the value will be maintained or that
there will not be any losses with respect to this relationship.
Foreclosed properties were $3.7 million at December 31, 2002 and consisted
of seven commercial properties, all of which are held for sale. At December 31,
2001, foreclosed properties were $3.2 million and consisted of three properties,
all of which are held for sale.
Restructured loans were $3.2 million at December 31, 2002 and consisted of
a commercial real estate loan to a borrower that was classified as restructured
in the first quarter of 2002 and is current as to all payments in accordance
with the restructured loan agreement. While CIB Marine believes that the value
of the property securing the obligation approximates the amount owed it cannot
provide assurances that the value will be maintained or that there will not be
losses with respect to this relationship. Restructured loans were $0.3 million
at December 31, 2001.
Loans 90 days or more past due and still accruing interest are loans which
are delinquent with respect to the payment of principal and/or interest but
which management believes all contractual principal and interest amounts due
will be collected. CIB Marine had $6.4 million in loans that were 90 days or
more past due and still accruing at December 31, 2002, and $1.5 million at
December 31, 2001. Accrued interest on loans 90 days or more past due and still
accruing as of December 31, 2002, and 2001 was $0.1 million and $0.07 million,
respectively. At March 28, 2003, the balance of loans 90 days or more past due
and still accruing was $19.4 million. The increase from December 31, 2002 was
primarily the result of a $12.8 million borrowing relationship. This
relationship is secured by business assets and equity securities. CIB Marine
believes that all contractual principal and interest amounts will be collected
and the value of the collateral is sufficient to cover amounts owed. CIB Marine,
however, cannot provide assurances that there will not be any losses with
respect to this relationship.
The ratio of nonperforming assets and loans 90 days or more past due and
still accruing to total assets was 1.36% at December 31, 2002, as compared to
1.34% and 0.81% at December 31, 2001 and 2000, respectively.
REGULATORY MATTERS
On January 30, 2003, CIB -- Chicago entered into a Memorandum of
Understanding (the "Memorandum") with the Illinois Office of Banks and Real
Estate (OBRE) and the FDIC (together the "Regulators"). The Memorandum was
entered into as a result of a deterioration in the credit quality of the loan
portfolio, the level of concentrations of credit, and weaknesses in the credit
administration process identified during the OBRE's regular examination of
CIB -- Chicago, which commenced on September 23, 2002.
Pursuant to the Memorandum, CIB -- Chicago has agreed to take certain
actions to correct the deficiencies noted within the examination report. In
addition, during the period in which the Memorandum is in effect, CIB -- Chicago
has agreed to maintain a Tier 1 capital level equal to or exceeding 8% of the
bank's total assets. In the event such ratio is less than 8% as of June 30 or
December 31 of each calendar year the Memorandum is in effect, the bank is
required within 30 days thereof to submit to the regulators a plan for the
augmentation of the bank's capital accounts. Also, unless prior written consent
is received from the Regulators, CIB -- Chicago has agreed to restrict its loan
growth to no more than 2% during any consecutive three month period and suspend
the declaration or payment of dividends.
The Memorandum is not a formal supervisory action. Failure to comply with
the Memorandum can lead to a formal enforcement action which could have a
material adverse affect on CIB Marine and its operations. CIB Marine is in the
process of developing action plans to correct the deficiencies noted in the
examination report. CIB Marine believes that the resolution of these
deficiencies will result in the termination of the Memorandum.
44
In addition, at the request of the Federal Reserve Bank of Chicago, the
Board of Directors of CIB Marine has adopted a resolution to improve credit risk
management and establish limits and plans for reducing concentrations of
credits.
COMPANIES HELD FOR DISPOSAL
CIB Marine has acquired interests in two companies from borrowers who were
in default of their obligations and which are classified as held for disposal.
The aggregate assets and liabilities of companies held for disposal are shown as
separate categories on the Consolidated Balance Sheet. Intercompany balances and
transactions between the two companies and CIB Marine have been eliminated from
the gross asset and liability totals shown on the Consolidated Balance Sheet.
The financial statements of the companies shown below include all adjustments
necessary to reflect the fair values at date of acquisition.
Canron Corporation
In 1999, one of CIB Marine's borrowers (the "Borrower") experienced a
substantial decline in net worth as a result of a similar decline in the market
value of a publicly traded common stock which comprised a large part of the
Borrower's net worth. The decline in the value of this security caused liquidity
problems for the Borrower with respect to its obligations to CIB Marine and
other lenders. A substantial amount of collateral held by CIB Marine related to
this borrowing relationship included certain assets of, and the Borrower's
approximately 84% interest in, Canron Corporation ("Canron"), a closely held
steel fabrication and erection company with operations in the United States,
Canada and Mexico. Canron has been in the business of fabricating steel since
1912. Canron has been involved in a wide variety of fabrication and erection
projects which include high-rise buildings, bridges, airports, stadiums and
other unique projects. Canron also offers construction services, including the
supervision and restoration of projects of the types noted above. Certain
directors and/or officers of CIB Marine own, in the aggregate, approximately
1.5% of Canron.
On April 24, 2002, the Borrower filed a lawsuit against CIB Marine and
certain of its officers seeking damages and to rescind the Borrower's pledge of
the Canron stock as collateral. On April 25, 2002, the Borrower filed for
bankruptcy reorganization and CIB Marine filed an action to lift the bankruptcy
stay to take possession and control of the Borrower's interest in Canron. On
August 21, 2002, CIB Marine and the Borrower agreed upon a settlement of all
claims and demands between the parties. The settlement order entered in the
Bankruptcy Court established CIB Marine's claim at $15.3 million and provided
that in the event the Borrower failed to pay CIB Marine $13.3 million on or
before October 30, 2002, CIB Marine would become the owner of the Borrower's 84%
interest in Canron, subject to an option of the Borrower to acquire the 84%
interest in Canron from CIB Marine on or before December 31, 2002 for $14.5
million, plus any funds contributed by CIB Marine to Canron after October 30,
2002. In addition, the settlement resulted in the transfer of the Borrower's
interest in a condominium development in exchange for a $0.8 million reduction
in the amount of CIB Marine's claim, and a release and dismissal by CIB Marine
and the Borrower of any claims that each might have against the other.
The Borrower failed to pay CIB Marine the $13.3 million on or before
October 30, 2002, and CIB Marine became the owner of the Borrower's 84% interest
in Canron through a newly formed and wholly-owned subsidiary, CIB Construction,
LLC. On October 31, 2002, CIB Marine recognized a $1.8 million charge-off
related to the $13.3 million of loans that were secured by the stock in Canron,
and transferred $11.5 million to Companies Held For Disposal, which represented
the book value of CIB Marine's ownership in Canron. The Borrower also failed to
exercise its option to repurchase.
Subsequent to acquisition, CIB Marine engaged an independent third party to
determine the estimated fair value of Canron as a going concern. Based upon the
fair value estimated by the independent third party and adjustments arising from
an independent audit of Canron, CIB Marine concluded that the estimated fair
value of its ownership interest in Canron was $5.9 million at October 31, 2002.
As a result of this estimate, CIB Marine recognized an additional $5.6 million
charge-off during the fourth quarter of 2002 relative to the loans secured by
the Canron stock. CIB Marine's investment in Canron is classified as an asset
held for disposal and recorded at the lower of cost or fair market value. At
December 31, 2002, CIB Marine also had
45
$26.2 million in loans receivable from Canron, which are eliminated in the
Consolidated Balance Sheet of CIB Marine. These loans are collateralized by
essentially all of the business assets of Canron, including accounts receivable,
certain inventories, equipment and real estate. The loans are eliminated in the
Consolidated Financial Statements.
CIB Marine is exploring various exit strategies relative to Canron, all of
which CIB Marine management has authority to do, including the immediate sale of
the company in its current condition, the stabilization of operations and
subsequent sale, and an orderly liquidation. Over the past two years, Canron has
been operating without, and unable to obtain, a surety bond line. As a result,
Canron has been unable to bid on many projects requiring bonding and its backlog
has decreased. At December 31, 2002, Canron's backlog was $52.4 million. The
decrease in backlog has resulted in a decrease in profitability and is expected
to continue to negatively impact earnings until a bonding line is obtained. In
order to obtain bonding, CIB Marine may also be required to make various
commitments, including letters of credit, guarantees and the providing of
collateral. CIB Marine may be required to fund the cash flow needs of Canron
until it obtains bonding and generates sufficient cash flows.
The fair value of CIB Marine's interest in Canron is assumed to be 84% of
the fair market value of Canron. Canron's balance sheet, which is included in
the notes to the Consolidated Financial Statements, reflects an allocation of
$6.7 million in negative goodwill to the non-current assets. Minority interest
of $0.9 million is included in liabilities.
Although CIB Marine believes that the current carrying value of its
investment in Canron represents its fair market value and that the loans to
Canron are adequately collateralized, CIB Marine cannot provide assurances that
these values will be maintained or that there will not be further losses arising
out of its investment in Canron.
The following table summarizes the composition of Canron's balance sheet,
adjusted for amounts necessary to reflect the fair values:
<Table>
<Caption>
DECEMBER 31,
2002
----------------------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit at CIB Marine............................. $ 327
Accounts receivable....................................... 33,610
Inventories and contracts in progress..................... 7,629
Other assets.............................................. 4,195
-------
Current assets......................................... 45,761
Deferred tax asset........................................ 3,869
Property and equipment, net............................... 18,026
-------
Total assets......................................... $67,656
=======
Liabilities and stockholder's equity:
Current portion of loans payable to CIB Marine............ $ 3,921
Other liabilities......................................... 33,880
-------
Current liabilities.................................... 37,801
Loans payable to CIB Marine............................... 22,272
Loans payable to unaffiliated banks....................... 1,814
-------
Total liabilities.................................... 61,887
Stockholder's equity...................................... 5,769
-------
Total liabilities and stockholder's equity........... $67,656
=======
</Table>
46
Canron's results of operations from October 30, 2002 are included in CIB
Marine's Other Income in the Consolidated Statements of Income. Canron's results
of operations for the years ended December 31, 2002 and 2001 are as follows:
<Table>
<Caption>
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
2002 2002 2001
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Contract revenue earned.................................. $19,876 $144,134 $209,939
Cost of contract revenue................................. 18,157 124,184 182,492
------- -------- --------
Gross profit........................................... 1,719 19,950 27,447
Selling, general and administrative expenses............. 2,370 15,950 20,328
Interest on CIB Marine debt.............................. 352 2,103 1,321
Other interest........................................... 50 239 3,163
------- -------- --------
Income (loss) before income taxes........................ (1,053) 1,658 2,635
Income tax expense....................................... 82 4,262 1,276
------- -------- --------
Net income (loss)...................................... $(1,135) $ (2,604) $ 1,359
======= ======== ========
</Table>
In April and December 2000, lawsuits were filed against the Borrower and
Canron by a lender (the "Lender"), and one of its related interests, to recover
amounts due them. The Lender and its related interests have dismissed their
lawsuits against Canron. The Lender also has an approximately 11.5% equity
interest in Canron. The Lender and certain of its related interests are also
customers of and have secured borrowing relationships with CIB Marine. As of
December 31, 2002, the total outstanding lending commitment associated with this
relationship, including lines of credit which have been fully drawn, was
approximately $33.3 million, of which $2.4 million is 90 days or more past due
and still accruing interest. A portion of the loans to this Lender is also
secured by the customer's equity interest in Canron, which is estimated to be
worth $0.8 million. CIB Marine does not consider these loans impaired because of
the financial condition of the Lender and its related interests, and its belief
that the loans are adequately collateralized pursuant to CIB Marine's loan
policy.
MICR, Inc.
In 2000, CIB Marine acquired and/or assumed, through MICR, Inc., a
wholly-owned subsidiary of CIB-Chicago, the business and certain assets and
liabilities of a manufacturer of payment processing systems. The business was
acquired from a borrower, who was in default of its obligations, in lieu of
foreclosure or other legal action. The principal business of this manufacturer,
which operates under the name Maverick International, is the design,
development, assembly, distribution and servicing of magnetic ink character
recognition check encoders and related embedded software for small and
medium-sized financial institutions, as well as to large retailers and
independent remittance processors. This business is classified as a held for
sale asset. As of the acquisition date, MICR, Inc. was recorded at $6.5 million,
which represented the approximate fair value, as determined by an independent
appraiser, of the business, less estimated costs to sell. Dividends totaling
$1.5 million and $0.8 million were paid by MICR, Inc to CIB Marine during 2002
and 2001, respectively. Income before income taxes related to this business is
classified as Other Income in the Consolidated Statements of Income. The
business has generated profits in each of the prior three years and CIB Marine
believes that it is likely the business will continue to generate profits. CIB
Marine cannot, however, provide assurances that these profits will continue or
that there will not be losses with respect to this business in the future.
Pre-tax net income was $1.2 million for both 2002 and 2001. The borrower has an
option to repurchase the business under certain conditions. This option expires
upon the earlier of the divestiture of the business or October 13, 2003. The
option, if exercised, is not expected to result in any gain or loss to CIB
Marine. CIB Marine management which has authority to do so has developed and
implemented a plan to sell this business.
47
The following table summarizes the composition of MICR, Inc.'s balance
sheet:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
------- -------
(DOLLARS IN THOUSANDS)
Assets:
Accounts receivable....................................... $ 430 $ 657
Inventory................................................. 1,024 981
Other current assets...................................... 502 979
Property and equipment, net............................... 433 482
Goodwill, net............................................. 4,156 4,212
------ ------
Total assets........................................... $6,545 $7,311
====== ======
Liabilities and stockholder's equity:
Current liabilities....................................... $ 470 $ 643
Deferred tax liability.................................... 88 40
Shareholders' equity...................................... 5,987 6,628
------ ------
Total liabilities and stockholder's equity............. $6,545 $7,311
====== ======
</Table>
OTHER ASSETS
The following table summarizes the composition of CIB Marine's other
assets:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
Prepaid expenses............................................ $ 1,293 $ 1,179
Accounts receivable......................................... 551 1,247
Fair value of derivatives................................... 8,022 4,870
Trust preferred securities underwriting fee, net of
amortization.............................................. 1,555 1,150
Other investments........................................... 9,999 6,376
Income tax receivable....................................... 2,877 --
Deferred tax assets......................................... 6,688 --
Other....................................................... 1,764 578
------- -------
$32,749 $15,400
======= =======
</Table>
Other assets increased $17.3 million or 112.7%, from $15.4 million at
December 31, 2001 to $32.7 million at December 31, 2002. The majority of this
increase was the result of an increase in current and deferred tax assets, which
resulted primarily from increased loan loss provisions and lower than projected
pre-tax income. Also contributing to the increase in other assets was a $3.6
million increase in other investments, and a $3.2 million increase in the fair
value of derivative instruments.
Other investments include interests in three limited partnerships which
were purchased from the Borrower in September 1999. The carrying value of these
investments was $3.0 million at December 31, 2002 and $2.6 million at December
31, 2001. Equity income recorded on the limited partnerships was $0.3 million in
2002, and $0.1 million in 2001. There is currently no public market for the
limited partnership interests in these private investment funds, and it is
unlikely that such a market will develop. In December 2001, CIB Marine purchased
230,770 shares of the common stock of a closely held information services
company, which represents less than a 5% interest in the company, at a public
sale conducted by one of its subsidiary banks. The common stock was owned by the
Borrower and held as collateral for certain loans made to the Borrower by a
subsidiary bank. The amount of this investment is carried at the lower of cost
or estimated fair market value which was estimated to be $1.6 million at
December 31, 2002, and which is also equal to the original purchase price.
Because of their illiquidity and the effect of market volatility on equity
investments these investments involve a higher risk of loss than other
securities in CIB Marine's portfolio.
48
Other investments include investments in various affordable housing
partnerships. The carrying value of these investments was $4.2 million at
December 31, 2002 and $1.1 million at December 31, 2001. CIB Marine has engaged
in these transactions to provide additional qualified investments under the CRA
and to receive related income tax credits. The partnerships provide affordable
housing to low income residents within CIB Marine's markets and other locations.
DEPOSITS
CIB Marine has experienced significant growth in deposits. Average total
deposits increased 24.3% to $2.6 billion in 2002, as compared to $2.1 billion in
2001. Average deposits increased 12.3% in 2001, from $1.9 billion in 2000. The
ratio of average deposits to average earning assets was 82.3% in 2002, 81.0% in
2001, and 87.4% in 2000.
The following table sets forth the average amount of, and average rate paid
on, deposit categories for the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
AVERAGE % OF TOTAL AVERAGE AVERAGE % OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing demand..... $ 57,831 2.22% 1.02% $ 53,670 2.57% 1.91%
Money market................ 285,178 10.96 2.05 245,754 11.74 3.51
Other savings............... 124,189 4.78 2.36 45,893 2.19 2.12
Time deposits............... 1,960,349 75.38 3.88 1,615,016 77.16 5.57
---------- ------ ---- ---------- ------ ----
Total Interest-bearing
Deposits................ 2,427,547 93.34 3.52 1,960,333 93.66 5.13
Noninterest-bearing......... 173,080 6.66 -- 132,731 6.34 --
---------- ------ ---- ---------- ------ ----
Total Deposits.......... $2,600,627 100.00% 3.29% $2,093,064 100.00% 4.81%
========== ====== ==== ========== ====== ====
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2000
---------------------------------
AVERAGE % OF TOTAL AVERAGE
BALANCE DEPOSITS RATE
---------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing demand..... $ 49,556 2.66% 2.57%
Money market................ 183,970 9.87 5.49
Other savings............... 44,378 2.38 3.17
Time deposits............... 1,464,359 78.58 6.12
---------- ------ ----
Total Interest-bearing
Deposits................ 1,742,263 93.49 5.88
Noninterest-bearing......... 121,380 6.51 --
---------- ------ ----
Total Deposits.......... $1,863,643 100.00% 5.50%
========== ====== ====
</Table>
Average interest-bearing deposits as a percentage of average total deposits
was 93.3% in 2002, 93.7% in 2001, and 93.5% in 2000. Time deposits represent the
largest component of interest-bearing deposit liabilities. The percentage of
average time deposits to average total interest-bearing deposits was 80.8% in
2002, 82.4% in 2001, and 84.0% in 2000. These percentages reflect CIB Marine's
significant reliance on time deposits as a source of funding. Average time
deposits increased $345.3 million, or 21.4%, in 2002; while average savings
accounts increased $78.3 million, or 170.6%, and average money market accounts
increased $39.4 million, or 16.0%. Average noninterest bearing demand deposits
increased by $40.3 million, or 30.4%, in 2002.
Total time deposits of $100,000 or more, including brokered deposits, were
$724.2 million, or 36.0%, of total time deposits at December 31, 2002, and
$629.4 million, or 35.8%, at December 31, 2001. Brokered time deposits were
$222.8 million, or 7.8% of total deposits at December 31, 2002, and $166.5
million, or 7.3% of total deposits at December 31, 2001. CIB Marine issues
brokered time deposits periodically to meet short-term funding needs and/or when
their related costs are at or below those being offered on other deposits.
The following table provides information on the maturity distribution of
time deposits of $100,000 or more.
<Table>
<Caption>
DECEMBER 31,
2002
------------
(DOLLARS IN
THOUSANDS)
MATURITY
3 months or less............................................ $229,893
Over 3 through 6 months..................................... 79,806
Over 6 through 12 months.................................... 120,836
Over 12 months.............................................. 293,691
--------
$724,226
========
</Table>
49
BORROWINGS
CIB Marine also uses various types of borrowings to meet liquidity needs,
fund asset growth and/or when the pricing on these borrowings are more favorable
then deposits.
The following table sets forth information regarding selected categories of
borrowings as of the dates indicated.
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
% OF TOTAL % OF TOTAL
BALANCE AVG RATE BORROWINGS BALANCE AVG RATE BORROWINGS
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
SHORT-TERM BORROWINGS
Fed funds purchased..................... $203,430 1.23% 41.17% $232,119 1.51% 55.02%
Securities sold under repurchase
agreements............................. 39,757 1.47 8.05 29,649 1.77 7.03
Revolving lines of credit............... 36,685 3.09 7.43 24,985 3.62 5.92
Federal Home Loan Bank -- short term.... 100,500 2.20 20.34 27,325 2.04 6.48
Commercial paper........................ 4,436 2.04 0.90 4,677 2.26 1.11
Treasury, tax and loan note............. 2,137 0.99 0.43 1,128 1.51 0.27
-------- ----- ------ -------- ----- ------
Total Short-Term Borrowings.......... 386,945 1.69 78.32 319,883 1.75 75.83
-------- ----- ------ -------- ----- ------
LONG-TERM BORROWINGS
Federal Home Loan Bank -- long term..... 42,060 6.19 8.51 59,452 5.98 14.09
Fair value adjustment related to
hedge.................................. 5,081 (3.33) 1.03 2,535 (2.05) 0.60
-------- ----- ------ -------- ----- ------
Total Long-Term FHLB Borrowings........ 47,141 2.86 9.54 61,987 3.93 14.69
Guaranteed trust preferred securities... 60,000 8.74 12.14 40,000 10.52 9.48
-------- ----- ------ -------- ----- ------
Total Long-Term Borrowings........... 107,141 6.15 21.68 101,987 6.51 24.17
TOTAL BORROWINGS..................... $494,086 2.66% 100.00% $421,870 2.90% 100.00%
======== ===== ====== ======== ===== ======
<Caption>
DECEMBER 31,
--------------------------------
2000
--------------------------------
% OF TOTAL
BALANCE AVG RATE BORROWINGS
-------- -------- ----------
(DOLLARS IN THOUSANDS)
SHORT-TERM BORROWINGS
Fed funds purchased..................... $107,974 6.13% 52.73%
Securities sold under repurchase
agreements............................. 19,899 6.44 9.72
Revolving lines of credit............... 11,590 8.28 5.66
Federal Home Loan Bank -- short term.... -- -- --
Commercial paper........................ 6,453 6.81 3.15
Treasury, tax and loan note............. 523 6.29 0.25
-------- ----- ------
Total Short-Term Borrowings.......... 146,439 6.37 71.51
-------- ----- ------
LONG-TERM BORROWINGS
Federal Home Loan Bank -- long term..... 33,340 6.45 16.28
Fair value adjustment related to
hedge.................................. -- --
-------- ----- ------
Total Long-Term FHLB Borrowings........ 33,340 6.45 16.28
Guaranteed trust preferred securities... 25,000 10.71 12.21
-------- ----- ------
Total Long-Term Borrowings........... 58,340 8.28 28.49
TOTAL BORROWINGS..................... $204,779 6.91% 100.00%
======== ===== ======
</Table>
Total borrowings were $494.1 million, $421.9 million, and $204.8 million at
December 31, 2002, 2001 and 2000, respectively, representing 14.2%, 14.7% and
8.6% of earning assets. Fed Funds purchased accounted for $203.4 million, or
41.2%, of total borrowings at December 31, 2002, as compared to $232.1 million,
or 55.0%, and $108.0 million, or 52.7%, of total borrowings at December 31, 2001
and 2000, respectively. Repurchase agreements accounted for $39.8 million, or
8.0%, of total borrowings at December 31, 2002, as compared to $29.6 million, or
7.0%, of total borrowings at December 31, 2001, and $19.9 million, or 9.7%, of
total borrowings at December 31, 2000. Federal Home Loan Bank advances accounted
for $147.6 million, or 29.9%, of total borrowings at December 31, 2002, as
compared to $89.3 million, or 21.2%, of total borrowings at December 31, 2001,
and $33.3 million, or 16.3%, at December 31, 2000. Guaranteed trust preferred
securities accounted for $60.0 million, or 12.1%, of total borrowings at
December 31, 2002, as compared to $40.0 million, or 9.5% of total borrowings at
December 31, 2001, and $25.0 million, or 12.2%, of total borrowings at December
31, 2000. A description of these securities is included in "Guaranteed Trust
Preferred Securities." CIB Marine increased its utilization of short and
long-term borrowings during the past two years in order to meet its funding
needs or when the terms on these products were as, or more favorable than, other
types of funding.
During the first quarter of 2000, CIB Marine assumed a $25.0 million
Federal Home Loan Bank of Chicago advance due June 30, 2008, with an effective
rate, including premium, of 7.07%. The $1.7 million premium is recorded as a
contra liability against the debt and is being amortized over the life of the
borrowing. CIB Marine also entered into an interest rate swap with the Federal
Home Loan Bank of Chicago with a $25.0 million notional value and maturing on
June 30, 2008. CIB Marine pays a variable rate of interest at the one month
LIBOR rate and earns a fixed rate of interest at 7.08%. CIB Marine believes the
swap transaction will effectively reduce interest rate risk by converting the
fixed rate on the advance to a variable rate similar to the loans funded with
the proceeds of these borrowings.
CIB Marine had $47.0 million of revolving lines of credit at December 31,
2002 with non-affiliated commercial banks collateralized by the common stock of
three of its banking subsidiaries. As of December 31, 2002, 2001 and 2000
outstanding balances on these lines of credit were $32.4 million, $25.0 million
and
50
$11.6 million, respectively. These funds were used to provide capital support
for the growth of the subsidiary banks, acquire branches and for working
capital. At December 31, 2002, CIB Marine was not in compliance with certain
provisions of its revolving lines of credit, CIB Marine has obtained waivers
with respect to these matters. On March 27, 2003, CIB Marine cancelled its $7.0
million revolving line of credit, which at that date had a zero balance. CIB
Marine's factoring subsidiary has a $12.0 million revolving line of credit to
support its operating needs. At December 31, 2002, the outstanding balance on
this line was $4.3 million.
GUARANTEED TRUST PREFERRED SECURITIES
At December 31, 2002, CIB Marine had $60.0 million outstanding in
guaranteed trust preferred securities, as compared to $40.0 million at December
31, 2001, and $25.0 million at December 31, 2000. Though presented in the
balance sheet as debt, these securities qualify as Tier I equity capital for
regulatory capital purposes. The trust preferred securities are issued through
wholly-owned special purpose trusts and are fully and unconditionally guaranteed
by CIB Marine on a subordinated basis. Distributions are cumulative. The
securities are classified in the liability section of the Consolidated Balance
Sheets, and the distributions on the securities are classified as interest
expense in the Consolidated Statements of Income.
In September 2002, CIB Marine issued $20 million in guaranteed trust
preferred securities at a variable rate of interest based upon the three-month
LIBOR plus 3.40%. The interest rate was 5.19% at December 31, 2002. The
securities are mandatorily redeemable upon their maturity on September 27, 2032
and are callable beginning September 30, 2007 at par value. Issuance costs of
$0.5 million were incurred in connection with these securities. CIB Marine used
the net proceeds of $19.5 million to reduce debt with non-affiliated commercial
banks and for other corporate purposes.
In February 2001, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.20% per annum. The securities are
mandatorily redeemable upon their maturity on February 22, 2031, and are
callable beginning February 22, 2011, at a premium, which declines ratably to
par by February 22, 2021. Issuance costs of $0.5 million were incurred in
connection with these securities. CIB Marine used the net proceeds of $14.5
million to reduce its debt with a non-affiliated commercial bank and for other
corporate purposes.
In September 2000, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.60% per annum. The securities are
mandatorily redeemable upon their maturity on September 7, 2030, and are
callable beginning September 7, 2010, at a premium, which declines ratably to
par by September 7, 2020. Issuance costs of $0.5 million were incurred in
connection with these securities. CIB Marine used the net proceeds of $14.5
million to reduce its debt with a non-affiliated commercial bank and for other
corporate purposes.
In March 2000, CIB Marine issued $10.0 million in guaranteed trust
preferred securities at a fixed rate of 10.88% per annum. The securities are
mandatorily redeemable upon their maturity on March 8, 2030, and are callable
beginning March 8, 2010, at a premium, which declines ratably to par by March 8,
2020. Issuance costs of $0.3 million were incurred in connection with these
securities. CIB Marine used the net proceeds of $9.7 million to reduce its debt
with a non-affiliated commercial bank and for other corporate purposes.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 -- Summary of Significant Accounting Policies contained in
Item 8 of this Form 10-K.
LIQUIDITY
The objective of liquidity risk management is to ensure that CIB Marine has
adequate funding capacity to fund commitments to extend credit, deposit account
withdrawals, maturities of borrowings, and other obligations in a timely manner.
CIB Marine's Asset/Liability Management Committee actively manages CIB Marine's
liquidity position by estimating, measuring, and monitoring its sources and uses
of funds. CIB Marine's sources of funding and liquidity include both asset and
liability components. CIB Marine's funding requirements are primarily met by the
inflow of funds from deposits. CIB Marine also makes use of noncore
51
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
funding cost opportunities. Short-term non-core funding sources utilized by CIB
Marine include federal funds purchased, securities sold under agreements to
repurchase, Eurodollar deposits, short-term borrowings from the Federal Home
Loan Bank, and short-term brokered and negotiable time deposits. CIB Marine also
has established borrowing lines with the Federal Reserve Bank and unaffiliated
banks. Long-term funding sources, other than core deposits, include long-term
brokered and negotiable time deposits and long-term borrowings from the Federal
Home Loan Bank. Additional sources of liquidity include cash and cash
equivalents, federal funds sold, sales of loans held for sale, and the sale of
securities.
The following discussion should be read in conjunction with the statements
of cash flows for 2002, 2001 and 2000 contained in Item 8 of this Form 10-K.
Net cash used in operating activities was $154.3 million in 2002 compared
to net cash provided by operating activities of $21.1 million in 2001, and $9.8
million in 2000. The increase in net cash used in operating activities from 2001
to 2002 was due to net increases in loans held for sale. The increase in net
cash provided by operating activities in 2001 compared to 2000 was in part due
to net changes in other asset accounts.
Net cash used in investing activities was $462.8 million, $466.9 million,
and $508.3 million in 2002, 2001, and 2000, respectively. The decrease in cash
used for investment activities in 2002 compared to 2001 was due to lower loan
growth partially offset by increased net securities funding. The decrease in
cash used for investment activities in 2001 compared to 2000 was due to
increased loan funding offset by net cash provided by securities reductions. The
net increase in loans represented the largest portion of cash used in investing
activities for each period. The net increase in loans was $364.8 million, $554.8
million, and $383.9 million in 2002, 2001, and 2000, respectively.
Net cash provided by financing activities was $656.4 million, $452.1
million, and $519.5 million for 2002, 2001, and 2000, respectively. Deposit
growth was the primary source of net cash provided by financing activities, with
88.1%, 51.3%, and 82.8% of funds in each of the respective years. During 2001,
short-term borrowed funds were used to supplement cash provided by deposit
funds.
The following table summarizes long term minimum cash payment commitments
other than deposit liabilities presented elsewhere in this section under
Liquidity. CIB Marine was able to meet its liquidity needs in 2002 and expects
to meet these needs in 2003.
<Table>
<Caption>
LONG GUARANTEED
TERM TRUST PREFERRED OPERATING
DEBT SECURITIES LEASES TOTAL
------- --------------- --------- --------
(DOLLARS IN THOUSANDS)
MATURITY
1 Year or less..................................... $ -- $ -- $ 1,798 $ 1,798
1 to 2 Years....................................... 8,500 -- 1,648 10,148
2 to 3 Years....................................... -- -- 1,479 1,479
3 to 4 Years....................................... -- -- 1,340 1,340
4 to 5 Years....................................... -- -- 1,221 1,221
Beyond 5 Years..................................... 38,641 60,000 5,180 103,821
------- ------- ------- --------
$47,141 $60,000 $12,666 $119,807
======= ======= ======= ========
</Table>
CAPITAL
CIB Marine and its subsidiary banks are subject to various regulatory
capital guidelines. In general, these guidelines define the various components
of core capital and assign risk weights to various categories of assets. The
risk-based capital guidelines require financial institutions to maintain minimum
levels of capital as a percentage of risk-weighted assets.
52
The risk-based capital information of CIB Marine at December 31, 2002, 2001
and 2000 is contained in the following table. The capital level of CIB Marine
was sufficiently in excess of the required regulatory minimums to be considered
well-capitalized at the dates indicated. CIB Marine intends to maintain its
capital level and the capital levels of its subsidiary banks at or above levels
sufficient to support future growth. The risk-based capital ratios of CIB Marine
and its subsidiary banks for December 31, 2002 and 2001 are included in Note 13
to CIB Marine's financial statements contained in Item 8 of this Form 10-K.
<Table>
<Caption>
DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
RISK WEIGHTED ASSETS..................................... $3,319,762 $2,790,669 $2,221,208
========== ========== ==========
AVERAGE ASSETS(1)........................................ $3,485,504 $2,818,577 $2,402,253
========== ========== ==========
CAPITAL COMPONENTS
Stockholders' equity................................... $ 261,801 $ 237,142 $ 203,367
Guaranteed trust preferred securities and minority
interests........................................... 61,052 40,133 25,000
Less: disallowed intangibles........................... (14,815) (11,420) (12,746)
Add/less: Unrealized loss/(gain) on securities......... (2,896) (3,023) (2,242)
---------- ---------- ----------
TIER 1 CAPITAL........................................... 305,142 262,832 213,379
Allowable allowance for loan losses.................... 41,644 34,078 23,988
---------- ---------- ----------
TOTAL RISK BASED CAPITAL................................. $ 346,786 $ 296,910 $ 237,367
========== ========== ==========
</Table>
<Table>
<Caption>
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
----------------- -----------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
Total Capital to risk weighted assets..................... $346,786 10.45% $265,581 8.00%
Tier 1 Capital to risk weighted assets.................... 305,142 9.19 132,790 4.00
Tier 1 Leverage to average assets......................... 305,142 8.75 139,420 4.00
DECEMBER 31, 2001
Total Capital to risk weighted assets..................... 296,910 10.64 223,254 8.00
Tier 1 Capital to risk weighted assets.................... 262,832 9.42 111,627 4.00
Tier 1 Leverage to average assets......................... 262,832 9.32 112,743 4.00
</Table>
- -------------------------
(1) Average assets as calculated for risk-based capital (deductions include
current period balances for goodwill and other intangibles).
CIB Marine's primary sources of capital have been the retention of net
income, the issuance of additional common stock and the issuance of guaranteed
trust preferred securities. The issuance of common stock, through private
placement offerings and stock option exercises, provided $9.2 million, $6.3
million, and $8.6 million in additional capital in 2002, 2001, and 2000,
respectively. Retained earnings provided $15.6 million, $26.9 million, and $20.7
million of additional capital in 2002, 2001, and 2000, respectively. CIB Marine
issued $20 million, $15.0 million, and $25.0 million in guaranteed trust
preferred securities in 2002, 2001 and 2000, respectively. These securities
qualify as Tier 1 equity capital for regulatory capital purposes. A discussion
of these securities is included in "Guaranteed Trust Preferred Securities".
IMPACT OF INFLATION AND CHANGING PRICES
CIB Marine's Consolidated Financial Statements and Notes contained in Item
8 of this Form 10-K have been prepared in accordance with generally accepted
accounting principles, which require 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
53
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CIB Marine's primary market risk exposure is from interest rate risk. Net
interest income and the estimated market value of CIB Marine's assets and
liabilities are vulnerable to changes in U.S. prime interest rates. Other market
risks exist to a lesser degree, including foreign currency exchange rate risk
and equity price risk. Commodity price risk does not normally arise in the
course of CIB Marine's business.
CIB Marine's Board of Directors has overall responsibility for its interest
rate risk management policies. CIB Marine sets policy limits for interest rate
risk to be assumed in the normal course of business. CIB Marine's market risk
policy has the general objective of maintaining a low level of earnings
volatility due to interest rate risk and to protect CIB Marine from the impact
that changes in interest rates have on net interest income. CIB Marine uses gap
analysis and earnings simulations to measure interest rate risk. CIB Marine's
Asset-Liability Management Committee monitors, at least quarterly, the interest
rate risk measurements for compliance with policy limits.
If the derived interest rate risk measurements are outside of the policy
limits, management may implement a variety of strategies to reduce the risk. CIB
Marine strives to use the most effective instruments for implementing its
interest rate risk management strategies, considering the costs, liquidity
impact and capital requirements of the various alternatives. The implementation
strategies usually involve altering the market risk characteristics of new
funding liabilities, and may also include the use of derivative instruments and
the altering of the market risk characteristics of groups of interest rate
sensitive assets such as the repositioning of marketable securities.
The gap analysis as of December 31, 2002, is shown in the following table
and represents the contractual reprice risk positions of CIB Marine. The gap
analysis does not represent basis, yield curve or option risk. The table shows
interest rate sensitive assets and liabilities and the difference between them
within each time interval. In this analysis the contractual repricing interest
rate sensitivity position is balanced when an equal amount of interest-earning
assets and interest-bearing liabilities reprice during a given time interval.
Excess interest rate sensitive assets or liabilities repricing in a given time
period results in the interest sensitivity gap shown in the table. A positive or
asset-sensitive gap indicates that more interest-earning assets than interest-
54
bearing liabilities will reprice in a given time period, while a negative or
liability-sensitive gap indicates that more interest-bearing liabilities than
interest earning-assets will reprice in a given time period.
<Table>
<Caption>
DECEMBER 31, 2002
--------------------------------------------------------------------------
0-3 4-6 7-12 2-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
---------- --------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning Assets:
Loans.............................. $1,933,265 $ 127,813 $ 151,708 $478,702 $ 16,050 $2,707,538
Securities......................... 93,906 53,949 113,586 221,029 31,533 514,003
Loans held for sale................ 228,114 -- -- -- -- 228,114
Federal funds sold................. 25,625 -- -- -- -- 25,625
---------- --------- --------- -------- -------- ----------
TOTAL INTEREST-EARNING ASSETS........ 2,280,910 181,762 265,294 699,731 47,583 3,475,280
---------- --------- --------- -------- -------- ----------
Interest-bearing Liabilities:
Time deposits...................... 528,796 283,724 483,365 651,094 64,186 2,011,165
Savings and interest-bearing demand
deposits......................... 632,972 -- -- -- -- 632,972
Short-term borrowings.............. 383,812 -- 1,333 1,800 -- 386,945
Long-term borrowings............... -- -- -- 8,500 38,641 47,141
Guaranteed trust preferred
securities....................... 20,000 -- -- -- 40,000 60,000
---------- --------- --------- -------- -------- ----------
TOTAL INTEREST-BEARING LIABILITIES... 1,565,580 283,724 484,698 661,394 142,827 3,138,223
---------- --------- --------- -------- -------- ----------
Interest sensitivity gap (by
period)............................ 715,330 (101,962) (219,404) 38,337 (95,244) 337,057
Interest sensitivity gap
(cumulative)....................... 715,330 613,368 393,964 432,301 337,057 337,057
ADJUSTED FOR DERIVATIVES
Derivatives (notional, by
period).......................... (130,000) 30,000 35,000 -- 65,000 --
Derivatives (notional,
cumulative)...................... (130,000) (100,000) (65,000) (65,000) -- --
---------- --------- --------- -------- -------- ----------
Interest sensitivity gap (by
period)............................ 585,330 (71,962) (184,404) 38,337 (30,244) 337,057
Interest sensitivity gap
(cumulative)....................... 585,330 513,368 328,964 367,301 337,057 337,057
CUMULATIVE GAP AS A % OF TOTAL
ASSETS............................. 15.97% 14.01% 8.97% 10.02% 9.20%
</Table>
The financial instruments are shown to reprice at the earlier of their
principal repayment date due to maturity, amortization, or prepayment in a
stable rate environment or their next contractual reprice. In the gap analysis,
non-maturing interest-earning assets and interest-bearing liabilities are shown
to reprice at the next contractual reprice date and the Collateralized Mortgage
Obligations and the Real Estate Mortgage Investment Conduits that are a part of
the investment securities are shown to reprice in those periods in which they
are expected to repay.
The table indicates that CIB Marine has a positive gap at one year and a
positive gap in time periods exceeding one year. With a positive gap, an
increase in interest rates will generally have a positive effect on the net
interest income, and a decrease in interest rates will generally have a negative
effect on net interest income. With a negative gap, a decrease in interest rates
will generally have a positive effect on the net interest income, and an
increase in interest rates will generally have a negative effect on net interest
income.
While this repricing interest rate sensitivity analysis is a widely used
measure of interest rate risk and may be used as an indication of interest
margin direction, it does not fully reflect the effects given to interest rate
risks other than reprice risk, such as option, basis and yield curve risks. For
these reasons, CIB Marine also performs interest rate sensitivity analyses using
earnings simulation models. These analyses measure the estimated percentage
change in net interest income due to changes in interest rates. CIB Marine
derives results for selected hypothetical changes in interest rates over a
selected period of time, usually one year.
55
The following table illustrates the expected percentage change in net
interest income over a one-year period due to an immediate change in the short
term U.S. prime rate of interest as of December 31, 2002 and 2001.
<Table>
<Caption>
BASIS POINT CHANGES
-----------------------------------------
+200 +100 -100 -200
----- ----- ----- -----
NET INTEREST INCOME CHANGE OVER ONE YEAR
December 31, 2002..................................... 12.01% 7.20% (3.36)% (9.13)%
December 31, 2001..................................... (7.61)% (4.85)% 4.73% 8.35%
</Table>
At December 31, 2002, the analyses indicated that CIB Marine's net interest
income would change by approximately 12.01%, 7.20%, (3.36)% and (9.13)% if
interest rates were to change by +200, +100, -100, or -200 basis points,
respectively. This reveals an asset sensitive interest rate risk position for
the current one year horizon as compared to a liability sensitive position at
December 31, 2001. CIB Marine altered its interest rate risk position during
2002 through increased longer term liabilities, increased non-maturing deposits,
and shorter term asset holding strategies.
CIB Marine monitors the models on an ongoing basis to ensure the
assumptions most accurately reflect the current conditions. The balance sheet
financial instruments included in the gap and simulation models include loans,
investment securities, federal funds sold, time deposits, saving deposits,
interest-bearing demand deposits, federal funds purchased, securities sold under
agreements to repurchase and other borrowings. Some of the options accounted for
in the simulation analysis include call options in U.S. Government Sponsored
Enterprise issued investment securities, embedded call options in U.S.
Government Sponsored Enterprise issued Collateralized Mortgage Obligations, Real
Estate Mortgage Investment Conduits, fixed rate loans, loans with rate floors
and put options in various borrowings.
In addition, the interest rate sensitivity analyses include derivative
financial instruments, such as interest rate swaps and forward sale agreements.
At December 31, 2002, the notional value of receive fixed/pay floating interest
rate swaps was $130.0 million. The majority of CIB Marine's interest rate swaps
are used to hedge the fair market value of various deposits and borrowings. At
December 31, 2002, the notional value of interest rate swaps to hedge
borrowings, fixed rate non-callable Certificates of Deposits, and fixed rate
callable Certificates of Deposit was $25.0 million, $65.0 million, and $40.0
million, respectively. These interest rate swaps effectively convert the fixed
rates on these deposits and borrowings into floating rates. CIB Marine also
engages in interest rate swaps to hedge fixed rate lending activity. At December
31, 2002 the notional amount of pay fixed/receive floating amortizing interest
rate swaps was $4.3 million. Conditional forward sale agreements (otherwise
called 'best efforts' contracts) are utilized to hedge the risk of price changes
in mortgage loans held for sale and rate locks for loans to be originated for
later sale. The notional value of conditional forward sale agreements was
approximately $504 million at December 31, 2002 and $137 million at December 31,
2001.
Some of the features of the financial instruments included in the model
that are not reflected fully in the quantitative market risk disclosure
information include call options in municipal bonds and U.S. Government
Sponsored Enterprise issued structured notes.
The following assumptions were used in the earnings simulation model:
- The balance sheet size was assumed to remain constant;
- All maturing assets and liabilities were invested or deposited into
similar financial or derivative instruments;
- Spreads to the benchmark interest rates for pricing new volume to replace
maturing or paying older volumes were similar to spreads currently
inherent in those financial instruments, except for marketable securities
which reflects current market spreads;
- Short term interest rates were assumed to change by the respective
interest rate shock amount, and longer term interest rates were assumed
to change by amounts based upon historical experience; and
56
- The interest rates of financial instruments with like terms were assumed
to change by the same number of basis points except that the timing,
magnitude, and direction of change of interest rates paid on non-
maturing savings and interest-bearing demand deposits were assumed to
change in a way similar to that experienced in the past, which is less
than perfectly correlated with the other interest rate changes. Current
anticipated pricing strategies for non-maturing deposits were also
utilized.
The simulations of earnings do not incorporate any management actions that
might moderate the negative consequences of certain interest rate changes.
Therefore, they may not reflect actual results.
Equity price risk exists as the result of various holdings of equity
securities whose market value changes with changes in the market. Equity
holdings include those traded on various exchanges and those that are not, the
latter of which have limited liquidity. CIB Marine does not actively hedge its
equity positions with derivatives to mitigate the risk of price movements in
equity securities. Total equity security holdings of CIB Marine includes $5.8
million of private and public non-affiliated firms, $4.2 million in low income
housing tax credit limited partnerships, $0.6 million of Federal Reserve Bank
Stock, and $9.8 million of Federal Home Loan Bank Stock.
Foreign currency exchange rate risk arises through the sale of foreign
currency forward contracts to customers of CIB Marine. CIB Marine hedges all
such activity. At December 31, 2002 there were no contracts outstanding. In
addition, Canron normally engages in business in the United States, Canada and
Mexico, and takes foreign currency exchange rate risk in such activity. See
"Companies Held For Disposal" for more information related to Canron.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CIB Marine Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of CIB Marine
Bancshares, Inc. and its subsidiaries (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These Consolidated Financial Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the financial position of CIB Marine
Bancshares, Inc. and its subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the Consolidated Financial Statements, effective
January 1, 2002 the company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets and Statement of Financial
Accounting Standards No. 147 Acquisitions of Certain Financial Institutions.
Additionally, as discussed in Note 1 to the Consolidated Financial Statements,
effective January 1, 2001 the company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by Statement of Financial Accounting Standards No. 138.
KPMG LLP
Milwaukee, Wisconsin
March 28, 2003
58
CIB MARINE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 72,771 $ 29,686
Federal funds sold........................................ 25,625 29,314
---------- ----------
Total cash and cash equivalents...................... 98,396 59,000
---------- ----------
Loans held for sale......................................... 228,114 34,295
Securities:
Available for sale, at fair value......................... 443,871 321,748
Held to maturity (approximate fair value of $72,873 and
$98,759, respectively)................................. 70,132 96,609
---------- ----------
Total securities..................................... 514,003 418,357
---------- ----------
Loans....................................................... 2,707,538 2,389,482
Less: allowance for loan losses........................... (52,369) (34,078)
---------- ----------
Net loans.............................................. 2,655,169 2,355,404
---------- ----------
Premises and equipment, net................................. 28,087 27,807
Accrued interest receivable................................. 16,669 16,993
Intangible assets, net...................................... 14,822 11,434
Foreclosed properties....................................... 3,678 3,168
Assets of companies held for disposal....................... 73,874 7,311
Other assets................................................ 32,749 15,400
---------- ----------
Total Assets......................................... $3,665,561 $2,949,169
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................ $ 204,267 $ 148,709
Interest-bearing demand................................... 58,889 60,671
Savings................................................... 574,083 300,318
Time...................................................... 2,011,165 1,760,012
---------- ----------
Total deposits....................................... 2,848,404 2,269,710
---------- ----------
Short-term borrowings....................................... 386,945 319,883
Long-term borrowings........................................ 47,141 61,987
Guaranteed trust preferred securities....................... 60,000 40,000
Accrued interest payable.................................... 11,108 11,335
Liabilities of companies held for disposal.................. 37,171 683
Other liabilities........................................... 12,991 8,429
---------- ----------
Total Liabilities.................................... 3,403,760 2,712,027
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 5,000,000 shares authorized,
none issued............................................... -- --
Common stock, $1 par value; 50,000,000 shares authorized,
18,312,242 and 17,876,752 issued and outstanding,
respectively.............................................. 18,312 17,877
Capital surplus............................................. 157,783 148,972
Retained earnings........................................... 82,901 67,270
Accumulated other comprehensive income, net................. 2,805 3,023
---------- ----------
Total Stockholders' Equity........................... 261,801 237,142
---------- ----------
Total Liabilities and Stockholders' Equity........... $3,665,561 $2,949,169
========== ==========
</Table>
See accompanying Notes to Consolidated Financial Statements
59
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
INTEREST AND DIVIDEND INCOME
Loans...................................................... $ 178,569 $ 174,222 $ 161,751
Loans held for sale........................................ 4,137 1,919 454
Securities:
Taxable.................................................. 17,897 22,722 23,850
Tax-exempt............................................... 2,541 2,842 2,821
Dividends................................................ 387 304 349
Federal funds sold......................................... 539 1,121 1,340
----------- ----------- -----------
Total interest and dividend income..................... 204,070 203,130 190,565
----------- ----------- -----------
INTEREST EXPENSE
Deposits................................................... 85,478 100,585 102,466
Short-term borrowings...................................... 5,964 8,481 7,113
Long-term borrowings....................................... 1,370 2,633 1,792
Guaranteed trust preferred securities...................... 4,523 4,024 1,351
----------- ----------- -----------
Total interest expense................................. 97,335 115,723 112,722
----------- ----------- -----------
Net interest income........................................ 106,735 87,407 77,843
Provision for loan losses.................................. 34,725 12,743 9,454
----------- ----------- -----------
Net interest income after provision for loan losses.... 72,010 74,664 68,389
----------- ----------- -----------
NONINTEREST INCOME
Loan fees.................................................. 3,456 3,732 1,770
Mortgage banking revenue................................... 10,602 8,397 2,272
Deposit service charges.................................... 3,209 2,750 2,340
Other service fees......................................... 326 348 376
Trust...................................................... -- -- 548
Gain (loss) on sale of assets.............................. (19) 101 459
Other income............................................... 899 1,439 733
Gain on investment securities, net......................... 3,127 4,028 31
----------- ----------- -----------
Total noninterest income............................... 21,600 20,795 8,529
----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits......................... 41,462 33,150 27,388
Equipment.................................................. 4,840 4,434 3,498
Occupancy and premises..................................... 4,539 3,801 3,359
Professional services...................................... 2,997 1,916 1,945
Advertising/marketing...................................... 1,199 1,035 965
Amortization of intangibles................................ 485 1,325 1,399
Telephone & data communications............................ 1,925 1,508 1,090
Litigation settlements..................................... 1,753 145 --
Merger-related charges..................................... -- 477 --
Other expense.............................................. 11,879 6,762 5,628
----------- ----------- -----------
Total noninterest expense.............................. 71,079 54,553 45,272
----------- ----------- -----------
Income before income taxes................................. 22,531 40,906 31,646
Income tax expense......................................... 6,900 13,989 10,975
----------- ----------- -----------
NET INCOME.......................................... $ 15,631 $ 26,917 $ 20,671
=========== =========== ===========
EARNINGS PER SHARE
Basic...................................................... $ 0.86 $ 1.52 $ 1.19
Diluted.................................................... 0.84 1.49 1.17
Weighted average shares -- basic........................... 18,167,379 17,751,752 17,381,478
Weighted average shares -- diluted......................... 18,547,515 18,083,013 17,622,964
</Table>
See accompanying Notes to Consolidated Financial Statements
60
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
COMMON STOCK ACCUMULATED
-------------------- OTHER
PAR CAPITAL RETAINED COMPREHENSIVE
SHARES VALUE SURPLUS EARNINGS INCOME (LOSS) TOTAL
---------- ------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 31, 1999......... 17,074,991 $17,075 $134,681 $20,057 $(2,110) $169,703
========== ======= ======== ======= ======= ========
Comprehensive income:
Net income......................... -- -- -- 20,671 -- 20,671
Other comprehensive income:
Unrealized securities holding
gains arising during the
period........................ -- -- -- -- 7,133 7,133
Reclassification adjustment for
gains included in net
income........................ -- -- -- -- (31) (31)
Income tax effect................ -- -- -- -- (2,750) (2,750)
--------
Total comprehensive
income................... 25,023
Common stock issuance.............. 428,581 428 7,595 (375) -- 7,648
Non-cash compensation.............. -- -- 67 -- -- 67
Exercise of stock options.......... 74,563 75 851 -- -- 926
---------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2000......... 17,578,135 $17,578 $143,194 $40,353 $ 2,242 $203,367
========== ======= ======== ======= ======= ========
Comprehensive income:
Net income......................... -- -- -- 26,917 -- 26,917
Other comprehensive income:
Unrealized securities holding
gains arising during the
period........................ -- -- -- -- 5,266 5,266
Reclassification adjustment for
gains included in net
income........................ -- -- -- -- (4,028) (4,028)
Income tax effect................ -- -- -- -- (457) (457)
--------
Total comprehensive
income................... 27,698
Common stock issuance.............. 287,038 287 5,704 -- -- 5,991
Payments to dissenters and for
fractional shares................ (10,659) (10) (228) -- -- (238)
Non-cash compensation.............. -- -- 17 -- -- 17
Exercise of stock options.......... 22,238 22 285 -- -- 307
---------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2001......... 17,876,752 $17,877 $148,972 $67,270 $ 3,023 $237,142
========== ======= ======== ======= ======= ========
Comprehensive income:
Net income......................... -- -- -- 15,631 -- 15,631
Other comprehensive income:
Unrealized securities holding
gains arising during the
period........................ -- -- -- -- 2,884 2,884
Reclassification adjustment for
gains included in net
income........................ -- -- -- -- (3,127) (3,127)
Foreign currency translation
adjustment.................... (91) (91)
Income tax effect................ -- -- -- -- 116 116
--------
Total comprehensive
income................... 15,413
Common stock issuance.............. 341,772 342 7,594 -- -- 7,936
Exercise of stock options.......... 93,718 93 1,217 -- -- 1,310
---------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2002......... 18,312,242 $18,312 $157,783 $82,901 $ 2,805 $261,801
========== ======= ======== ======= ======= ========
</Table>
See accompanying Notes to Consolidated Financial Statements
61
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 15,631 $ 26,917 $ 20,671
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred loan fee amortization.......................... (10,212) (9,722) (6,176)
Depreciation and other amortization..................... 7,600 3,821 4,000
Provision for loan losses............................... 34,725 12,743 9,454
Originations of loans held for sale..................... (356,832) (254,414) (80,770)
Purchases of loans held for sale........................ (900,956) (695,137) (155,577)
Proceeds from sale of loans held for sale............... 1,065,877 931,456 224,450
Deferred tax expense (benefit).......................... (6,836) 8,657 (2,714)
(Gain) loss on the sale of other assets................. 27 -- (675)
Gain on sale of securities.............................. (3,127) (4,028) (31)
Decrease (increase) in interest receivable and other
assets................................................ 2,850 1,754 (8,166)
Increase (decrease) in interest payable and other
liabilities........................................... (3,038) (926) 5,321
---------- --------- ---------
Net cash provided by (used in) operating activities... (154,291) 21,121 9,787
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of securities available for sale............. 286,219 956,907 762,374
Maturities of securities held to maturity............... 38,206 61,482 42,498
Purchase of securities available for sale............... (432,482) (842,789) (902,460)
Purchase of securities held to maturity................. (18,769) (35,870) (17,169)
Proceeds from sales of securities available for sale.... 127,522 86,663 29,252
Repayments of mortgage backed securities held to
maturity.............................................. 7,236 6,568 3,658
Repayments of mortgage backed securities available for
sale.................................................. 96,378 33,639 6,431
Purchase of mortgage backed securities available for
sale.................................................. (196,880) (168,618) (45,912)
Purchase of mortgage backed securities held to
maturity.............................................. -- (1,676) (7,715)
Net (increase) decrease in other equities (including
FHLB stock)........................................... (3,121) (2,246) 1,137
Net increase in partnership investments................. (1,767) (1,348) (516)
Net increase in loans................................... (364,789) (554,776) (383,856)
Proceeds from sale of foreclosed properties............. 3,404 2,052 6,366
Proceeds from sale of assets............................ -- -- 1,037
Capital expenditures.................................... (3,913) (6,853) (3,461)
---------- --------- ---------
Net cash used in investing activities................. (462,756) (466,865) (508,336)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits.................................... 578,151 232,058 430,319
Proceeds from long-term borrowings...................... -- 25,949 23,180
Proceeds from issuance of guaranteed trust preferred
securities............................................ 19,550 14,550 24,250
Proceeds from issuance of common stock.................. 7,936 5,991 7,649
Proceeds from stock options exercised................... 1,310 307 926
Cash paid to dissenters and for fractional shares....... -- (238) --
Net increase in short-term borrowings................... 49,496 173,444 33,220
---------- --------- ---------
Net cash provided by financing activities............. 656,443 452,061 519,544
---------- --------- ---------
Net increase in cash and cash equivalents................... 39,396 6,317 20,995
Cash and cash equivalents, beginning of year................ 59,000 52,683 31,688
---------- --------- ---------
Cash and cash equivalents, end of year...................... $ 98,396 $ 59,000 $ 52,683
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................ $ 97,562 $ 117,365 $ 108,249
Income taxes............................................ 16,000 5,172 12,970
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Transfers of loans to foreclosed properties............. 3,949 3,867 13,318
Transfers of loans to companies held for disposal....... 5,895 -- 6,455
</Table>
See accompanying Notes to Consolidated Financial Statements
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
CIB Marine Bancshares, Inc. is a bank holding company. References to "CIB
Marine" include CIB Marine's subsidiaries unless otherwise specified. The
primary sources of revenue are providing loans to customers who are small and
middle-market businesses and the investment in securities. CIB Marine also
offers a competitive range of deposit and other financial products to its
customers. Offices and, generally, customers are located in the central
Illinois, Chicago, Milwaukee, Indianapolis, Omaha, Phoenix, Las Vegas, and
southeast Florida markets. CIB Marine's 84% interest in Canron Corporation, a
steel fabrication and erection company with operations in the United States,
Canada and Mexico, was acquired as a result of collection activities.
The accounting and reporting policies of CIB Marine conformed to accounting
principles generally accepted in the United States of America, prevailing
practices within the banking industry and for Canron, prevailing practices in
the construction contracting industry. CIB Marine and its subsidiaries utilize
the accrual basis of accounting.
CONSOLIDATION
The Consolidated Financial Statements include the accounts of CIB Marine
and its wholly-owned and majority owned subsidiaries including companies which
are held for disposal. All significant intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities 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 financial statements are
based on various factors, including the current interest rate environment and
the general strength of the local economy. Changes in these factors can
significantly affect CIB Marine's net interest income and the value of its
recorded assets and liabilities.
RECLASSIFICATIONS
Reclassifications have been made to certain balances as of and for the
years ended December 31, 2001 and 2000 to be consistent with classifications
adopted for 2002.
CASH FLOWS
For purposes of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the consolidated balance
sheet captions "Cash and Due from Banks" and "Federal Funds Sold", all of which
mature within ninety days.
OTHER INVESTMENTS
Investments in limited partnerships and other equity investments which are
not readily marketable are accounted for using the equity method when CIB
Marine's ownership is at least 3% in a limited partnership and 20% in a
corporate entity but less than a controlling interest. Investments which fall
below the specified interests are accounted for using the cost method.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The equity method of accounting requires CIB Marine to record its
proportionate share of income or loss as an increase or decrease in its
investment and a corresponding gain or loss in noninterest income. Cash
dividends or other distributions received by CIB Marine are recorded as
reductions in the carrying amount of the investment.
SECURITIES HELD TO MATURITY
Bonds, notes and certain debt securities which CIB Marine has the positive
intent and ability to hold to maturity are reported at cost and adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity. Impairments in the value of securities held
to maturity which are other than temporary are accounted for as a realized loss.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of equity securities, bonds, notes
and other debt securities not classified as held to maturity securities or
trading securities. Available for sale securities are carried at fair value with
unrealized net gains and losses reported in other comprehensive income in
stockholders' equity. Gains and losses on the sale of available for sale
securities are determined using the specific identification method. Impairments
in the value of available for sale securities, which are other than temporary,
are accounted for as a realized loss.
LOANS HELD FOR SALE
Mortgage loans originated or purchased and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by a charge to mortgage banking revenue. Gains and losses on the sale
of loans are included in mortgage banking revenue.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold to maturity for
the foreseeable future are carried at the amount of unpaid principal, increased
by costs to originate and reduced by net deferred fees and an allowance for loan
losses. The accrual of interest on loans is generally discontinued when a loan
becomes ninety days delinquent unless the credit is well secured and in process
of collection. Loans are placed on nonaccrual or charged off at an earlier date
if collection of principal or interest is considered by management to be
doubtful. Unpaid interest that has previously been recorded as income is written
off against interest income when a loan is placed on nonaccrual. Interest on
loans is calculated by using the simple interest method on daily balances of the
principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal amount is unlikely.
Recoveries of amounts previously charged off are credited to the allowance.
Management periodically reviews the loan portfolio in order to establish an
allowance for loan losses that are probable at the reporting date. The provision
for loan losses is based on management's evaluation of the loan portfolio,
including such factors as the volume and character of loans outstanding, the
relationship of the allowance for loan losses to outstanding loans, past loan
loss experience, the estimated value of any underlying collateral and general
economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in the loan
portfolio and/or in economic conditions. In addition, various regulatory
agencies, as an integral part
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
of their examination process, periodically review CIB Marine's allowance for
loan losses. Such agencies may require CIB Marine to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
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.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, CIB Marine does not separately identify
individual consumer and residential loans for impairment.
Loan origination fees are deferred and certain direct origination costs are
capitalized. The amounts deferred and capitalized are included in the carrying
amount of the loans and are recognized as an adjustment of the yield of the
related loan. Fees for loans sold and other loan fees are included in loan fee
income as realized.
INTANGIBLE ASSETS
Goodwill, core deposit, and other identifiable intangibles have arisen from
the purchase of companies or assets. Intangible assets that are subject to
amortization are amortized over the estimated remaining benefit periods. Core
deposits are amortized on a straight-line basis over an eight to ten year life
and customer based intangibles are amortized on an accelerated basis over a five
year life. Prior to 2002, goodwill was amortized on a straight line basis over
15 years.
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), was adopted
effective January 1, 2002. SFAS 142 replaces the requirement to amortize
intangible assets with indefinite lives and goodwill with a requirement for an
impairment test. Intangible assets with definite lives will continue to be
amortized. SFAS 142 also requires an evaluation of intangible assets and their
useful lives, and a transitional impairment test for goodwill and certain
intangible assets. CIB Marine has performed its transitional impairment tests,
which indicated no impairment.
In October 2002, the Financial Accounting Standards Board issued SFAS No.
147, Acquisitions of Certain Financial Institutions (SFAS 147). SFAS 147 expands
the scope of SFAS 141 and 142 to include unidentifiable intangible assets
established in the acquisition of bank branches. Under SFAS 147 goodwill
associated with these acquisitions will not be subject to amortization and will
be tested for impairment. CIB Marine adopted SFAS 147 on September 30, 2002 and
in accordance with its provisions, reversed goodwill amortization previously
recorded in 2002. See Note 7 to the Consolidated Financial Statements for
further information on the impact of the adoption of these statements.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation computed primarily using the straight-line method.
Maintenance and repairs are charged to expense as
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
incurred, while renewals and betterments are capitalized. Leasehold improvements
included in premises and equipment are amortized over the shorter of the useful
life of the improvements or the term of the lease.
ASSETS HELD FOR DISPOSAL
Assets held for disposal include foreclosed properties and companies
acquired in partial or full satisfaction of loans, primarily through
foreclosure. These assets are carried at the lower of cost or current fair
value, less estimated selling costs. When these assets are acquired in full or
partial satisfaction of a loan, any excess of the related loan balance over the
fair value, less estimated selling cost, is charged as a loan loss against the
allowance for loan losses. Subsequent net operating income or loss along with
gains or losses on disposition are included in other income or other expenses as
appropriate. The aggregate assets and liabilities of companies held for disposal
are shown as separate categories on the Consolidated Balance Sheet.
STOCK-BASED COMPENSATION
CIB Marine applies Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its stock-based compensation plans. Under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), companies may elect to
recognize stock-based compensation expenses based on the fair value of the
awards or continue to account for stock-based compensation under APB 25. CIB
Marine has elected to continue to apply the provisions of APB 25.
Had compensation expense for these plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
methodology in SFAS 123, CIB Marine's net income and earnings per share would
have been the pro forma amounts indicated below:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Net income.................... As reported $15,631 $26,917 $20,671
Assumed compensation
cost, net of tax (1,291) (1,000) (689)
------- ------- -------
Pro forma $14,340 $25,917 $19,982
======= ======= =======
Basic earnings per share...... As reported $ 0.86 $ 1.52 $ 1.19
Pro forma 0.79 1.46 1.15
Diluted earnings per share.... As reported 0.84 1.49 1.17
Pro forma 0.77 1.44 1.13
</Table>
Fair value has been estimated using the minimum value method as defined in
SFAS 123. Key assumptions used were zero percent volatility, zero percent
dividend yield, expected lives of ten years and risk-free interest rates
averaging 5.04%, 5.22%, and 6.20%, respectively, for 2002, 2001, and 2000. The
per share weighted average fair value of stock options granted during 2002,
2001, and 2000 was $9.56, $9.27, and $8.49, respectively, on the date of grant.
Because the options vest over a five-year period, the pro forma disclosures are
not necessarily representative of the effects on reported net income for future
years.
Under APB 25, stock based compensation expense includes the excess, if any,
of the market price of the stock at grant date or other measurement date, over
the exercise price. This expense is recognized over the vesting period of the
options. Certain stock options have an exercise price less than the market price
at the measurement date; accordingly, compensation expense associated with those
options is included in salaries and employee benefits expense with a
corresponding increase in capital surplus.
CIB Marine follows the practice of recording 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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
in current income taxes payable and, to the extent not previously recognized as
a reduction in income tax expense, result in an additional increase in capital
surplus.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
amounts reported for assets and liabilities for financial statement purposes and
their tax bases. Deferred tax assets are recognized for temporary differences
that will be deductible in future years' tax returns and for operating loss and
tax credit carry-forwards. Deferred tax assets are reduced by a valuation
allowance when in the opinion of management, it is deemed more likely than not
that some or all of the deferred tax assets will not be realized. Deferred tax
liabilities are recognized for temporary differences that will be taxable in
future years' tax returns.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
BUSINESS SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense. A
segment is further defined as a component whose operating results are reviewed
by the chief operating decision maker in the determination of resource
allocation and performance, and for which discrete financial information is
available.
CIB Marine, through the bank branch network of its subsidiaries, provides a
broad range of financial services to companies and individuals in Illinois,
Wisconsin, Indiana, Florida, Arizona, Nevada, and Nebraska. These services
include commercial and retail lending and deposits. While CIB Marine's chief
operating decision maker monitors the revenue streams of the various products
and services, operations in all areas, are managed and financial performance is
evaluated on a corporate-wide basis. The mortgage banking operations are also
evaluated separately, but are not presented as a separate segment as its assets
and results of operations do not meet the required disclosure criteria.
Accordingly, all of CIB Marine's operations are reported in its financial
statements in one reportable operating segment.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares outstanding during the periods. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of common shares adjusted for the dilutive effect of outstanding
stock options. The dilutive effect of outstanding stock options is computed
using the treasury stock method.
FOREIGN CURRENCY TRANSLATION
CIB Marine's foreign subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date. Net exchange gains or losses resulting from
the translation of financial statements of foreign operations are recorded as a
separate component of stockholders' equity. The effect of foreign currency
re-measurement and changes in exchange rates are recorded in the cost of
contract revenue as it is expensed against the contract as incurred.
DERIVATIVE AND HEDGING ACTIVITIES
CIB Marine uses certain derivative financial instruments to help manage its
risk or exposure to changes in interest rates and in conjunction with its
mortgage banking operations. Effective January 1, 2001, CIB Marine
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
adopted SFAS 133, as amended by SFAS 138, which established new rules for the
recognition and measurement of derivatives and hedging activities.
Under SFAS 133, all derivatives are recognized on the balance sheet at
their fair value. On the date a derivative contract is entered into, CIB Marine
designates the derivative as either (1) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("Fair-Value
Hedge"), (2) a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability
("Cash-Flow Hedge"), (3) a foreign-currency fair-value or cash-flow hedge
("Foreign-Currency Hedge"), (4) a hedge of a net investment in a foreign
operation, or (5) held for trading ("Trading Instruments"). Changes in the fair
value of a derivative that is highly effective as, and that is designated and
qualifies as, a Fair-Value Hedge, along with the loss or gain on the
corresponding hedged asset or liability (including losses or gains on firm
commitments), are recorded in current-period earnings. Changes in the fair value
of a derivative that is highly effective as, and that is designated and
qualifies as, a Cash-Flow Hedge are recorded in other comprehensive income until
earnings are affected by the variability of cash flows (e.g., when periodic
settlements on a variable-rate asset or liability are recorded in earnings).
Changes in the fair value of derivatives that are highly effective as, and that
are designated and qualify as, Foreign-Currency Hedges are recorded in either
current-period earnings or other comprehensive income, depending on whether the
hedge transaction meets the criteria for a Fair-Value Hedge or a Cash-Flow
Hedge. If, however, a derivative is used as a hedge of a net investment in a
foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustment account within
equity. Changes in the fair value of derivative trading instruments are reported
in current-period earnings.
CIB Marine formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as Fair-Value Hedges, Cash-Flow Hedges, or
Foreign-Currency Hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. CIB Marine formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in fair values or cash flows of hedged items and whether they
are expected to continue to be highly effective in the future. When it is
determined that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, CIB Marine discontinues hedge accounting
prospectively.
CIB Marine discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is designated as a hedge instrument because it is
unlikely that a forecasted transaction will occur; (4) because a hedged firm
commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective Fair-Value Hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current-period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings.
CIB Marine uses interest rate swaps to hedge changes in the fair value of
fixed rate borrowings and deposits attributable to changes in market interest
rates. CIB Marine primarily engages in floating-pay, fixed-receive swaps,
whereby CIB Marine pays a floating interest rate based upon an index (e.g.,
3-month LIBOR) and receives a fixed rate of interest. This type of transaction
effectively changes the net interest cash flows from a fixed rate to floating
rate. This particular transaction is engaged in to provide a funding liability
that more closely offsets the market risk of certain floating rate assets whose
rate is highly correlated with the index rate off which the floating rate is
paid in the interest rate swap. CIB Marine generally enters into swap agreements
with nationally recognized securities firms and monitors the credit status of
counter parties and the level of collateral for such swaps.
CIB Marine's mortgage banking activities include the issuance of
commitments to extend residential mortgage loans. When the loan is originated or
purchased it is recorded as a residential mortgage loan held for sale. The
residential mortgage loans held for sale are hedged with conditional forward
contracts and a Fair Value Hedge is designated under SFAS 133. CIB Marine is in
a short position with conditional forward contracts, whereby CIB Marine agrees
to sell residential mortgage loans held for sale at a pre-established price at
some future date, and in a long position with the residential mortgage loans
held for sale. The hedging relationship is highly effective and hedges changes
in the fair value of the residential mortgage loans held for sale due to
interest rate changes. The notional amount of conditional forward contracts
outstanding varies and is a function of the current balance of residential
mortgage loans held for sale and commitments to extend mortgage loans to be held
for sale.
In addition, CIB Marine has various agreements arising out of certain
credit relationships under which it may earn other forms of contingent
compensation in addition to interest. The contingent compensation is typically
based upon, or determined by, the financial performance of the borrower. At
December 31, 2002, CIB Marine determined these agreements did not have any fair
value. The adoption of SFAS 133 on January 1, 2001, resulted in the following
after tax adjustment, as of or for the year ended, December 31, 2001: an
increase in consolidated assets of $2.6 million; an increase in consolidated
liabilities of $2.5 million; and an increase in net income of $0.03 million.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS 144 requires companies to
separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. CIB Marine adopted SFAS 144 on January 1, 2002. Adoption of SFAS
144 did not have a material effect on the results of operations or financial
position of CIB Marine however, the accounting for assets of companies held for
disposal will be subject to SFAS 144 and will require periodic re-evaluation of
the carrying amounts of these assets.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
RESCISSION OF PREVIOUSLY ISSUED STATEMENTS
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," ("SFAS 145"). SFAS 145 rescinds
Statement No. 4 ("SFAS 4"), which required all gains and losses from
extinguishments of debt to be classified as an extraordinary item, net of the
related income tax effect, if material in the aggregate. Due to the rescission
of SFAS 4, the criteria in Opinion 30 will now be used to classify those gains
and losses. Statement No. 64 amended SFAS 4, and is no longer necessary because
of the rescission of SFAS 4. Statement No. 44, which established accounting
requirements for the effects of transition provisions of the Motor Carrier Act
of 1980, is no longer necessary because the transition has been completed. SFAS
145 also amends Statement No. 13 ("SFAS 13") to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. In addition,
SFAS 145 also makes technical corrections to existing pronouncements which are
generally not substantive in nature. The provisions of SFAS 145 related to the
rescission of SFAS 4 are effective for fiscal years beginning after May 15,
2002. Any gain or loss on extinguishments of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria
for classification as an extraordinary item will be reclassified. The provisions
of SFAS 145 related to SFAS 13 are effective for transactions occurring after
May 15, 2002. All other provisions of SFAS 145 shall be effective for financial
statements issued on or after May 15, 2002. The adoption had no effect on CIB
Marine's financial position or results of operations.
ACCOUNTING FOR COSTS OF EXIT OR DISPOSAL ACTIVITIES
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).
Under the previous accounting guidance, a company recognized a liability for an
exit cost when it committed to an exit plan. Under SFAS 146, expenses related to
exit, disposal or restructuring activities initiated after December 31, 2002,
will be recorded when such costs are incurred and can be measured at fair value.
Any recorded liability would be adjusted for future changes in estimated cash
flows. The future impact to CIB Marine will be determined by any future
activities in these areas. CIB Marine does not currently have plans in any of
these areas, but has occasionally conducted these types of activities in the
past.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of Statement of Financial
Accounting Standards No. 123. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 requires prominent
disclosures in interim as well as annual financial statements about the method
of accounting for stock-based employee compensation and the effect of the method
used on reported net income. SFAS 148 is effective for fiscal years ended after
December 15, 2002. CIB Marine plans to continue to account for stock-based
employee compensation under the intrinsic value based method and to provide
disclosure of the impact of the fair value based method on reported income. The
more prominent disclosures required by this statement have been provided herein.
GUARANTEES
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45) Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, to clarify accounting and disclosure requirements relating to a
guarantor's issuance of
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
certain types of guarantees. FIN 45 requires entities to disclose additional
information about certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. CIB
Marine does not expect the recognition and measurement provision to have a
material impact on its financial statements and has provided additional
disclosures required by FIN 45 in the financial statements. Refer to Note 16 of
the Notes to Consolidated Financial Statements for further information on
guarantees.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to improve financial reporting of special purpose and other
entities. In accordance with the interpretation, business enterprises that
represent the primary beneficiary of another entity by retaining a controlling
financial interest in that entity's assets, liabilities, and results of
operating activities must consolidate the entity in their financial statements.
Prior to the issuance of FIN 46, consolidation generally occurred when an
enterprise controlled another entity through voting interests. Adoption of the
accounting provisions of FIN 46 in 2003 is not expected to have a material
affect on the consolidated results of operations or financial position.
NOTE 2 -- BUSINESS COMBINATIONS
Canron Acquisition
In 1999, one of CIB Marine's borrowers (the "Borrower") experienced a
substantial decline in net worth as a result of a similar decline in the market
value of a publicly traded common stock which comprised a large part of the
Borrower's net worth. The decline in the value of this security caused liquidity
problems for the Borrower with respect to its obligations to CIB Marine and
other lenders. A substantial amount of collateral held by CIB Marine related to
this borrowing relationship included certain assets of, and the Borrower's
approximately 84% interest in, Canron Corporation ("Canron"), a closely held
steel fabrication and erection company with operations in the United States,
Canada, and Mexico. Canron has been in the business of fabricating steel since
1912. Canron has been involved in a wide variety of fabrication and erection
projects which include high-rise buildings, bridges, airports, stadiums and
other unique projects. Canron also offers construction services, including the
supervision and restoration of projects of the types noted above. Certain
directors and/or officers of CIB Marine own, in the aggregate, approximately
1.5% of Canron.
On April 24, 2002, the Borrower filed a lawsuit against CIB Marine and
certain of its officers seeking damages and to rescind the Borrower's pledge of
the Canron stock as collateral. On April 25, 2002, the Borrower filed for
bankruptcy reorganization and CIB Marine filed an action to lift the bankruptcy
stay to take possession and control of the Borrower's interest in Canron. On
August 21, 2002, CIB Marine and the Borrower agreed upon a settlement of all
claims and demands between the parties. The settlement order entered in the
Bankruptcy Court established CIB Marine's claim at $15.3 million and provided
that in the event the Borrower fails to pay CIB Marine $13.3 million on or
before October 30, 2002, CIB Marine would become the owner of the Borrower's 84%
interest in Canron, subject to an option of the Borrower to acquire the 84%
interest in Canron from CIB Marine on or before December 31, 2002 for $14.5
million, plus any funds contributed by CIB Marine to Canron after October 30,
2002. In addition, the settlement resulted in the transfer of the Borrower's
interest in a condominium development in exchange for a $0.8 million reduction
in
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2 -- BUSINESS COMBINATIONS -- CONTINUED
the amount of CIB Marine's claim, and a release and dismissal by CIB Marine and
the Borrower of any claims that each might have against the other.
The Borrower failed to pay CIB Marine the $13.3 million on or before
October 30, 2002, and CIB Marine became the owner of the Borrower's 84% interest
in Canron through a newly formed and wholly owned subsidiary, CIB Construction,
LLC. On October 31, 2002, CIB Marine recognized a $1.8 million charge-off
related to the $13.3 million of loans that were secured by the stock in Canron,
and transferred $11.5 million to Companies Held For Disposal, which represented
the book value of CIB Marine's ownership in Canron. The Borrower also failed to
exercise its option to repurchase.
Subsequent to acquisition, CIB Marine engaged an independent third party to
determine the estimated fair value of Canron as a going concern. Based upon the
fair value estimated by the independent third party and adjustments arising from
an independent audit of Canron, CIB Marine concluded that the estimated fair
value of its ownership interest in Canron was $5.9 million at October 31, 2002.
As a result of this estimate, CIB Marine recognized an additional $5.6 million
charge-off during the fourth quarter of 2002 relative to the loans secured by
the Canron stock. CIB Marine's investment in Canron is classified as an asset
held for disposal and recorded at the lower of cost or fair market value.
The acquisition was accounted for under the purchase method of accounting,
thus the results of operations prior to the consummation date (October 30, 2002)
were not included in the accompanying Consolidated Financial Statements. Since
the fair value of the net assets acquired was less than the book value, $6.7
million of negative goodwill was allocated pro rata to property and equipment.
Minority interest of $1.1 million was included in liabilities and a $2.6 million
deferred tax asset was recorded related to the book/tax difference.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
<Table>
<Caption>
OCTOBER 31,
2002
-----------
Assets:
Cash on deposit at CIB Marine............................. $ 609
Accounts receivable....................................... 36,627
Inventories and contracts in progress..................... 13,354
Other assets.............................................. 5,319
-------
Current assets......................................... 55,909
Deferred tax asset........................................ 4,355
Property and equipment, net............................... 18,231
-------
Total assets acquired.................................. 78,495
Liabilities:
Current portion of loans payable to CIB Marine............ 3,757
Other liabilities......................................... 39,168
-------
Current liabilities.................................... 42,925
Loans payable to CIB Marine............................... 27,861
Loans payable to unaffiliated banks....................... 1,814
-------
Total liabilities assumed.............................. 72,600
-------
Net assets acquired......................................... $ 5,895
=======
</Table>
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2 -- BUSINESS COMBINATIONS -- CONTINUED
The following represents supplemental pro forma disclosure required by SFAS
No. 141, Business Combinations, of net income and earnings per share as though
the business combination has been completed at the beginning of the earliest
comparable period.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001
-------- --------
Net income.................................................. $13,442 $28,060
Basic earnings per share.................................... 0.74 1.58
Diluted earnings per share.................................. 0.72 1.55
</Table>
Since the revenues and expenses of Canron are shown net in Other Income,
disclosure of pro forma revenues is not meaningful.
Other Acquisitions
In August 2002, CIB Marine acquired certain of the assets of a business
engaged in the factoring of receivables. These assets were acquired from a
borrower who was in default of its obligations. The aggregate cost of the
business was the forgiveness of indebtedness of $3.8 million. The business was
recorded at its fair value as determined by an independent valuation.
Additionally, $2.1 million of loans to the borrower were charged-off.
Approximately $3.8 million was assigned to goodwill and other intangible assets.
In December 2002, CIB Marine acquired the business and certain assets of
Comcor Mortgage Corporation for a maximum purchase price of $1.8 million, the
operations of which are conducted as a division of CIB Marine's mortgage
subsidiary. Approximately $0.6 million of the purchase price was paid in cash
and $1.2 million of the purchase price is contingent upon achievement of certain
earnings goals of the acquired entity. Such payments will result in additions to
identifiable intangible assets and goodwill. Payments of $24 thousand were
accrued in 2002 against the contingent price.
In September 2001, CIB Marine acquired Citrus Financial Services, Inc., a
one-bank holding company, through a merger transaction. Citrus Financial had
total assets of $84.2 million and three full-service banking facilities at the
time of the merger. Pursuant to the terms of the merger agreement, each share of
Citrus Financial was exchanged for .4634 common shares of CIB Marine. CIB Marine
issued 699,253 shares of its voting common stock to shareholders of Citrus
Financial and paid cash of $0.2 million to dissenters and for fractional shares.
The merger was accounted for as a pooling-of-interests. All Consolidated
Financial Statements of CIB Marine included herein have been restated to include
the financial information of Citrus Financial as if CIB Marine and Citrus
Financial had always been combined.
NOTE 3 -- CASH AND DUE FROM BANKS
Reserves in the form of deposits with the Federal Reserve Bank and vault
cash totaling $11.0 million and $8.4 million were maintained to satisfy federal
regulation requirements as of December 31, 2002 and 2001, respectively. These
amounts are included in cash and due from banks in the Consolidated Balance
Sheet.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4 -- SECURITIES
The amortized cost, gross unrealized gains and losses and approximate fair
values of securities at December 31, 2002 and 2001 are as follows:
Securities Available for Sale:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
2002
U.S. Treasuries and agencies........................ $150,710 $1,457 $ -- $152,167
Obligations of states and political subdivisions.... 6,478 55 7 6,526
Other notes and bonds............................... 600 -- -- 600
Commercial paper.................................... 8,300 4 -- 8,304
Mortgage backed securities.......................... 262,674 3,320 114 265,880
Federal Home Loan Bank stock........................ 10,394 -- -- 10,394
-------- ------ ---- --------
$439,156 $4,836 $121 $443,871
======== ====== ==== ========
2001
U.S. Treasuries and agencies........................ $104,601 $3,128 $ -- $107,729
Obligations of states and political subdivisions.... 2,629 209 -- 2,838
Other notes and bonds............................... 600 -- -- 600
Commercial paper.................................... 6,999 8 -- 7,007
Mortgage backed securities.......................... 195,386 2,227 614 196,999
Federal Home Loan Bank stock........................ 6,575 -- -- 6,575
-------- ------ ---- --------
$316,790 $5,572 $614 $321,748
======== ====== ==== ========
</Table>
Securities Held to Maturity:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
2002
U. S. Treasuries and agencies......................... $ 4,499 $ 24 $ -- $ 4,523
Obligations of states and political subdivisions...... 56,107 2,310 18 58,399
Other notes and bonds................................. 450 -- -- 450
Mortgage backed securities............................ 9,076 425 -- 9,501
------- ------ ---- -------
$70,132 $2,759 $ 18 $72,873
======= ====== ==== =======
2001
U. S. Treasuries and agencies......................... $21,484 $ 666 $ -- $22,150
Obligations of states and political subdivisions...... 59,527 1,234 191 60,570
Other notes and bonds................................. 450 -- -- 450
Mortgage backed securities............................ 15,148 472 31 15,589
------- ------ ---- -------
$96,609 $2,372 $222 $98,759
======= ====== ==== =======
</Table>
Assets, primarily securities, carried at approximately $200.1 million and
$268.1 million at December 31, 2002 and 2001, respectively, were pledged to
secure public deposits, Federal Home Loan Bank advances and for other purposes
as required or permitted by law. The approximate fair value of these assets was
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4 -- SECURITIES -- CONTINUED
$203.3 million and $273.1 million at December 31, 2002 and 2001, respectively.
In March 2003, CIB Marine agreed to pledge an additional $7.5 million of
securities with respect to a letter of credit.
The amortized cost and fair value of securities as of December 31, 2002, 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
maturity schedules.
<Table>
<Caption>
SECURITIES HELD TO
MATURITY SECURITIES AVAILABLE FOR SALE
----------------------- ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- ----------- ------------
Due in one year or less..................... $24,754 $24,865 $ 64,982 $ 65,552
Due after one year through five years....... 16,200 17,068 100,413 101,308
Due after five years through ten years...... 14,289 15,289 693 737
Due after ten years......................... 5,813 6,150 -- --
------- ------- -------- --------
61,056 63,372 166,088 167,597
Federal Home Loan Bank Stock................ -- -- 10,394 10,394
Mortgage backed securities.................. 9,076 9,501 262,674 265,880
------- ------- -------- --------
$70,132 $72,873 $439,156 $443,871
======= ======= ======== ========
</Table>
Proceeds from the sale of securities available for sale during 2002, 2001
and 2000, were $127.5 million, $86.7 million and $29.3 million, respectively.
Net realized gains on the sale of these securities available for sale were $3.1
million, $4.0 million, and $0.03 million in 2002, 2001, and 2000, respectively.
There were no sales of held to maturity securities in any of these periods.
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans
The components of loans were as follows:
<Table>
<Caption>
DECEMBER 31,
------------------------
2002 2001
---------- ----------
Commercial.................................................. $ 803,929 $ 829,828
Factored receivables........................................ 6,779 --
Commercial real estate...................................... 1,332,455 1,107,229
Commercial real estate construction......................... 513,804 394,081
Residential real estate..................................... 37,628 37,727
Home equity loans........................................... 14,526 20,175
Consumer loans.............................................. 5,895 8,126
---------- ----------
Gross loans............................................... 2,715,016 2,397,166
Deferred loan fees.......................................... (7,478) (7,684)
Allowance for loan losses................................... (52,369) (34,078)
---------- ----------
Loans, net................................................ $2,655,169 $2,355,404
========== ==========
</Table>
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES -- CONTINUED
The following table lists information on nonperforming and certain past due
loans:
<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
Nonaccrual loans......................................... $36,618 $34,364 $15,752
Restructured loans....................................... 3,210 309 1,505
Loans 90 days or more past due and still accruing........ 6,396 1,535 1,095
</Table>
Information on impaired loans is as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------
2002 2001 2000
------- ------- ------
Impaired loans without a specific allowance............... $ 7,789 $ 5,723 $ --
Impaired loans with a specific allowance.................. 31,071 18,237 7,757
------- ------- ------
Total impaired loans................................. 38,860 $23,960 $7,757
======= ======= ======
Specific allowance related to impaired loans.............. $ 9,225 $ 4,671 $1,552
Average balance of impaired loans......................... 38,178 16,615 4,646
Interest income recognized on impaired loans.............. 56 149 116
</Table>
The allowance for loan loss, including specific allowances, related to
these impaired loans was $10.2 million and $5.4 million at December 31, 2002 and
2001, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $9.1 million and $15.0 million as of December 31, 2002
and 2001, respectively. Included in intangible assets are mortgage servicing
rights for loans serviced for others. These amounted to $7 thousand and $16
thousand at December 31, 2002 and 2001, respectively. There was no valuation
allowance for this asset in either 2002 or 2001.
Credit Concentrations
Pursuant to CIB Marine's loan policy, a concentration of credit is deemed
to exist when the total credit relationship to one borrower, a related group of
borrowers, or borrowers within or dependent upon a related industry, exceeds 25%
of the stockholders' equity of CIB Marine. At December 31, 2002 CIB Marine had
four secured borrowing relationships that exceeded 25% of stockholders' equity.
These relationships include:
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $115.1 million, or 44.0%, of CIB
Marine's stockholders' equity and 4.3% of total loans. The aggregate
principal amount actually drawn and outstanding was $112.4 million at
December 31, 2002. The majority of these loans are in the
nursing/convalescent home industry. These loans are primarily secured by
first mortgages on commercial real estate and security interests in other
business assets including stock in a community bank. At December 31,
2002, all of the loans to this borrower and its related interests were
current.
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $109.7 million, or 41.9%, of CIB
Marine's stockholders' equity and 4.0% of total loans. The aggregate
principal amount actually drawn and outstanding was $82.3 million at
December 31, 2002. The majority of these loans are commercial real estate
and construction loans. These loans are primarily secured by first
mortgages on commercial real estate. At December 31, 2002, all of the
loans to this borrower and its related interests were current.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES -- CONTINUED
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $75.3 million, or 28.7%, of CIB
Marine's stockholders' equity and 2.8% of total loans. The aggregate
principal amount actually drawn and outstanding was $66.8 million at
December 31, 2002. The majority of these loans are in the commercial real
estate development and the nursing/convalescent home industries. These
loans are primarily secured by first mortgages on commercial real estate
and security interests in other business assets. At December 31, 2002,
all of the loans to this borrower and its related interests were current.
- Loans to a borrower, and its related interests, whose total outstanding
lending commitment, including lines of credit which have not been fully
drawn, as of December 31, 2002, was $73.5 million, or 28.1%, of CIB
Marine's stockholders' equity and 2.7% of total loans. The aggregate
principal amount actually drawn and outstanding was $52.6 million at
December 31, 2002. The majority of these loans are commercial real estate
and construction loans. These loans are primarily secured by first
mortgages on commercial real estate. In January 2002, a commercial real
estate loan to a related interest of this borrower with an outstanding
balance of $3.2 million was classified as restructured. CIB Marine does
not believe that there will be any loss with respect to this restructured
loan. At December 31, 2002, all of the loans to this borrower and its
related interests were current.
Approximately $27.5 million of the above described outstanding loan
balances are counted in more than one of the described relationships.
At December 31, 2002, CIB Marine also had credit relationships within five
industries or industry groups that exceeded 25% of its stockholders' equity. The
total outstanding balance to commercial real estate developers, investors and
contractors was approximately $595.7 million, or 22.0%, of total loans and
227.5% of stockholders' equity. The total outstanding balance to residential
real estate developers, investors and contractors was approximately $665.8
million, or 24.6%, of total loans and 254.3% of stockholders' equity. The total
outstanding balance of loans made in the motel and hotel industry was
approximately $214.6 million, or 7.9%, of total loans and 82.0% of stockholders'
equity. The total outstanding balance of loans made in the nursing/convalescent
home industry was approximately $146.3 million, or 5.4%, of total loans and
55.9% of stockholders' equity. The total outstanding balance of loans made in
the health care facility industry was approximately $116.0 million, or 4.3%, of
total loans and 44.3% of stockholders' equity.
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- -------- --------
Balance at beginning of year............................ $ 34,078 $23,988 $16,214
Charge-offs............................................. (17,499) (2,999) (1,924)
Recoveries.............................................. 943 346 244
-------- ------- -------
Net loan charge-offs.................................. (16,556) (2,653) (1,680)
Allowance acquired...................................... 122 -- --
Provision for loan losses............................... 34,725 12,743 9,454
-------- ------- -------
Balance at end of year.................................. $ 52,369 $34,078 $23,988
======== ======= =======
Allowance for loan losses as a percentage of loans...... 1.93% 1.43% 1.31%
======== ======= =======
</Table>
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES -- CONTINUED
Director and Officer Loans
Certain directors and principal officers of CIB Marine and its subsidiaries
and companies with which they are affiliated, are customers of, and have banking
transactions with, the subsidiary banks in the ordinary course of business. This
indebtedness has been incurred on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons. The activity in these loans during 2002 and
2001 is as follows:
<Table>
<Caption>
2002 2001
-------- --------
Balance at beginning of year................................ $ 61,860 $ 51,772
New loans................................................... 60,814 21,705
Repayments.................................................. (71,496) (11,617)
-------- --------
Balance at end of year...................................... $ 51,178 $ 61,860
======== ========
</Table>
NOTE 6 -- PREMISES AND EQUIPMENT, NET
The major classes of premises and equipment and accumulated depreciation
are summarized as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2001
-------- --------
Land........................................................ $ 4,562 $ 4,588
Buildings and improvements.................................. 18,387 17,931
Furniture and equipment..................................... 15,940 15,480
Computer equipment and software............................. 7,527 4,842
Construction in progress.................................... 287 77
-------- --------
46,703 42,918
Less: Accumulated depreciation.............................. (18,616) (15,111)
-------- --------
$ 28,087 $ 27,807
======== ========
</Table>
Depreciation expense totaled $3.6 million, $3.4 million and $2.9 million
for 2002, 2001 and 2000, respectively. Total rental expense was $1.8 million,
$1.6 million and $1.3 million for 2002, 2001 and 2000, respectively.
CIB Marine leases certain premises and equipment under noncancellable
operating leases, which expire at various dates. Such noncancellable operating
leases also include options to renew. The following is a schedule by years of
annual future minimum rental commitments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year as of
December 31, 2002.
<Table>
<Caption>
AMOUNT
-------
2003........................................................ $ 1,798
2004........................................................ 1,648
2005........................................................ 1,479
2006........................................................ 1,340
2007........................................................ 1,221
Thereafter.................................................. 5,180
-------
$12,666
=======
</Table>
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7 -- INTANGIBLE ASSETS
CIB Marine's intangible asset values are as follows:
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------------- --------------------------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION INTANGIBLE AMOUNT AMORTIZATION INTANGIBLE
-------- ------------ ---------- -------- ------------ ----------
Amortizing intangible assets:
Core deposits.................. $3,959 $2,605 $ 1,354 $ 3,959 $2,180 $ 1,779
Goodwill....................... -- -- -- 12,645 3,006 9,639
Customer base of factoring
business.................... 390 51 339 -- -- --
Mortgage servicing rights........ 19 12 7 19 3 16
------ ------ ------- ------- ------ -------
Total amortizing intangible
assets......................... $4,368 $2,668 1,700 $16,623 $5,189 11,434
====== ====== ======= ======
Nonamortizing goodwill......... 13,122 --
------- -------
Total intangible assets, net... $14,822 $11,434
======= =======
</Table>
CIB Marine's aggregate amortization expense was $0.5 million, $1.3 million,
and $1.4 million for the years ended December 31, 2002, 2001, and 2000,
respectively. The estimated amortization expense is $0.5 million for 2003, $0.3
million for 2004, and $0.2 million for each of the years 2005, 2006, and 2007.
In accordance with SFAS 142 and 147, CIB Marine discontinued the
amortization of goodwill and continues to amortize core deposit intangibles and
other identifiable intangibles with definite lives. A reconciliation of
previously reported net income adjusted for the discontinuance of the
amortization of goodwill is as follows:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Net income:
Net income as reported...................................... $15,631 $26,917 $20,671
Add back: discontinued goodwill amortization................ N/A 621 596
------- ------- -------
Adjusted net income....................................... $15,631 $27,538 $21,267
======= ======= =======
Basic earnings per share:
Reported basic earnings per share........................... $ .86 $ 1.52 $ 1.19
Add back: discontinued goodwill amortization per share...... -- 0.03 0.03
------- ------- -------
Adjusted basic earnings per share......................... $ .86 $ 1.55 $ 1.22
======= ======= =======
Diluted earnings per share:
Reported diluted earnings per share......................... $ .84 $ 1.49 $ 1.17
Add back: discontinued goodwill amortization per share...... -- 0.03 0.03
------- ------- -------
Adjusted diluted earnings per share....................... $ .84 $ 1.52 $ 1.20
======= ======= =======
</Table>
NOTE 8 -- COMPANIES HELD FOR DISPOSAL
CIB Marine has acquired two companies through loan collection activities
that are classified as held for disposal. The gross assets and liabilities of
these companies are separately reported on the Consolidated Balance Sheet.
Intercompany loan and cash balances and interest income and expense between the
two companies and CIB Marine have been eliminated from the totals shown on the
Consolidated Financial Statements. Fixed asset depreciation continues to be
recorded by these two companies. The financial
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8 -- COMPANIES HELD FOR DISPOSAL -- CONTINUED
statements of the companies shown below include all adjustments necessary to
reflect the fair values at date of acquisition.
Canron
As described in Note 2, CIB Marine acquired Canron in October 2002. CIB
Marine is exploring various exit strategies relative to Canron, all of which CIB
Marine management has authority to do, including the immediate sale of the
company in its current condition, the stabilization of operations and subsequent
sale, and an orderly liquidation. Over the past two years, Canron has been
operating without, and unable to obtain a surety bond line. In order to obtain
bonding, CIB Marine may be required to make various commitments, including
letters of credit, guarantees and the providing of collateral. CIB Marine may be
required to fund the cash flow needs of Canron until it obtains bonding and
begins generating sufficient cash flows.
At December 31, 2002, CIB Marine also had $26.2 million in loans receivable
from Canron, which are eliminated in the Consolidated Balance Sheet of CIB
Marine. These loans are collateralized by essentially all of the business assets
of Canron, including accounts receivable, certain inventories, equipment, and
real estate. The loans receivable are eliminated in the Consolidated Financial
Statements against Canron's loans payable to CIB Marine.
The following table summarizes the composition of Canron's balance sheet
adjusted for amounts necessary to reflect the fair values:
<Table>
<Caption>
DECEMBER 31,
2002
------------
Assets:
Cash on deposit at CIB Marine............................. $ 327
Accounts receivable....................................... 33,610
Inventories and contracts in progress..................... 7,629
Other assets.............................................. 4,195
-------
Current assets......................................... 45,761
Deferred tax asset........................................ 3,869
Property and equipment, net............................... 18,026
-------
Total assets......................................... $67,656
=======
Liabilities and stockholder's equity:
Current portion of loans payable to CIB Marine............ $ 3,921
Other liabilities......................................... 33,880
-------
Current liabilities.................................... 37,801
Loans payable to CIB Marine............................... 22,272
Loans payable to unaffiliated banks....................... 1,814
-------
Total liabilities.................................... 61,887
Stockholder's equity...................................... 5,769
-------
Total liabilities and stockholder's equity........... $67,656
=======
</Table>
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8 -- COMPANIES HELD FOR DISPOSAL -- CONTINUED
Canron's results of operations from October 30, 2002 are included in CIB
Marine's Other Income in 2002. Canron's results of operations for the years
ended December 31, 2002 and 2001 are as follows:
<Table>
<Caption>
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
2002 2002 2001
------------ ----------- ------------
Contract revenue earned.................................. $19,876 $144,134 $209,939
Cost of contract revenue................................. 18,157 124,184 182,492
------- -------- --------
Gross profit........................................... 1,719 19,950 27,447
Selling, general and administrative expenses............. 2,370 15,950 20,328
Interest on CIB Marine debt.............................. 352 2,103 1,321
Other interest expense................................... 50 239 3,163
------- -------- --------
Income (loss) before income taxes........................ (1,053) 1,658 2,635
Income tax expense....................................... 82 4,262 1,276
------- -------- --------
Net income (loss)...................................... $(1,135) $ (2,604) $ 1,359
======= ======== ========
</Table>
The following is a summary of significant accounting policies with respect
to Canron:
Canron follows the percentage of completion method of accounting, which
recognizes as revenues the total estimated revenue multiplied by the percentage
of costs incurred to date to total estimated costs. Contract costs are
recognized as incurred and include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for losses
anticipated on contracts are made when such losses are determined. Amounts equal
to contract costs attributable to recoverable construction claims are included
in earned revenue when realization is probable and can be reasonably estimated.
Management reviews and estimates the amounts of costs to complete a given
contract based on information available at each balance sheet date. Estimates of
costs to complete certain contracts could change significantly in the near term,
and other contracts are subject to cost reviews by the customer. The ultimate
outcome of these estimates and contracts subject to customer review are not
known. Due to these uncertainties, it is possible that completion costs will be
significantly different than the estimates.
Inventories, consisting primarily of raw steel, are stated at the lower of
cost or market using the first-in first-out basis method.
MICR, Inc.
In 2000, CIB Marine acquired and/or assumed, through MICR, Inc., a wholly
owned subsidiary of CIB-Chicago, the business and certain assets and liabilities
of a manufacturer of payment processing systems. The business was acquired from
a borrower, who was in default of its obligations, in lieu of foreclosure or
other legal action. The principal business of this manufacturer, which operates
under the name Maverick International, is the design, development, assembly,
distribution and servicing of magnetic ink character recognition check encoders
and related embedded software for small and medium-sized financial institutions,
as well as to large retailers and independent remittance processors. This
business is classified as a held for sale asset. As of the acquisition date,
MICR, Inc. was recorded at $6.5 million, which represented the approximate fair
value, as determined by an independent appraiser, of the business, less
estimated costs to sell. Pre-tax net income was $1.2 million for both 2002 and
2001. Dividends totaling $1.5 million and $0.8 million were paid by MICR, Inc to
CIB Marine during 2002 and 2001, respectively. Income before income taxes
related to this
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8 -- COMPANIES HELD FOR DISPOSAL -- CONTINUED
business is classified as Other Income in the Consolidated Statements of Income.
The borrower has an option to repurchase the business under certain conditions.
This option expires upon the earlier of the divestiture of the business or
October 13, 2003. The option, if exercised, is not expected to result in any
gain or loss to CIB Marine. CIB Marine management, which has authority to do so,
has developed and implemented a plan to sell this business.
The following table summarizes the composition of MICR, Inc.'s balance
sheet:
<Table>
<Caption>
DECEMBER 31,
-------------------
2002 2001
------ ------
Assets:
Accounts receivable....................................... $ 430 $ 657
Inventory................................................. 1,024 981
Other current assets...................................... 502 979
Property and equipment, net............................... 433 482
Goodwill, net............................................. 4,156 4,212
------ ------
Total assets........................................... $6,545 $7,311
====== ======
Liabilities and stockholder's equity:
Current liabilities....................................... $ 470 $ 643
Deferred tax liability.................................... 88 40
Shareholders' equity...................................... 5,987 6,628
------ ------
Total liabilities and stockholder's equity............. $6,545 $7,311
====== ======
</Table>
NOTE 9 -- OTHER ASSETS
The following table summarizes the composition of CIB Marine's other
assets:
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2001
------- -------
Prepaid expenses............................................ $ 1,293 $ 1,179
Accounts receivable......................................... 551 1,247
Fair value of derivatives................................... 8,022 4,870
Trust preferred securities underwriting fee, net of
amortization.............................................. 1,555 1,150
Other investments........................................... 9,999 6,376
Income tax receivable....................................... 2,877 --
Deferred tax assets......................................... 6,688 --
Other....................................................... 1,764 578
------- -------
$32,749 $15,400
======= =======
</Table>
Other investments include interests in three limited partnerships. The
carrying value of these investments was $3.0 million at December 31, 2002 and
$2.6 million at December 31, 2001. Equity income recorded on the limited
partnerships was $0.3 million in 2002, and $0.1 million in 2001. There is
currently no public market for the limited partnership interests in these
private investment funds, and it is unlikely that such a market will develop. In
December 2001, CIB Marine purchased 230,770 shares of the common stock of a
closely held information services company, which represents less than a 5%
interest in the company, at a public sale from one of its subsidiary banks as a
result of a defaulted loan. The amount of this investment is carried at the
lower of cost or estimated fair market value which was estimated to be $1.6
million at December 31, 2002, and which is also equal to the original purchase
price.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 9 -- OTHER ASSETS -- CONTINUED
Other investments include investments in various affordable housing
partnerships. The carrying value of these investments was $4.2 million at
December 31, 2002 and $1.1 million at December 31, 2001. CIB Marine has engaged
in these transactions to provide additional qualified investments under the CRA
and to receive related income tax credits. The partnerships provide affordable
housing to low income residents within CIB Marine's markets and other locations.
NOTE 10 -- DEPOSITS
The aggregate amount of time deposits of $100,000 or more at December 31,
2002 and 2001, were $724.2 million and $629.4 million, respectively. Brokered
time deposits were $222.8 million, or 7.8%, of total deposits at December 31,
2002, and $166.5 million, or 7.3%, of total deposits at December 31, 2001.
The scheduled maturities of time deposits at December 31, 2002 are as
follows:
<Table>
2003........................................................ $1,705,577
2004........................................................ 130,064
2005........................................................ 36,711
2006........................................................ 29,215
2007........................................................ 63,487
Thereafter.................................................. 46,111
----------
$2,011,165
==========
</Table>
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11 -- SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified as
short-term. Federal funds purchased generally represent one-day borrowings.
Securities sold under repurchase agreements represent borrowings maturing within
one year that are collateralized by US Treasury and Government Agency
Securities. The fair value of securities sold under repurchase agreements was
approximately $42.7 million, $35.6 million, and $22.3 million at December 31,
2002, 2001, and 2000, respectively. CIB Marine had $47.0 million of revolving
lines of credit at December 31, 2002 with unaffiliated commercial banks
collateralized by the common stock of three of its banking subsidiaries. CIB
Marine's factoring subsidiary has a $12.0 million revolving line of credit to
support its operating needs. The following is a summary of short-term borrowings
for each of the three years ended December 31:
<Table>
<Caption>
AT YEAR-END FOR THE YEAR
--------------------------------- ------------------------
HIGHEST
WEIGHTED- DAILY WEIGHTED- BALANCES AT
AVERAGE AVERAGE AVERAGE MONTH
BALANCE RATE BALANCES RATE END
-------- --------- -------- --------- -----------
2002
Federal funds purchased and securities
sold under repurchase agreements........ $243,187 1.27% $208,373 1.77% $243,187
Federal Home Loan Bank notes.............. 100,500 2.20 36,181 3.49 100,500
Revolving lines of credit................. 36,685 3.09 26,490 3.56 36,685
Commercial paper.......................... 4,436 2.04 1,912 2.20 6,000
Treasury tax and loan note................ 2,137 0.99 1,534 1.43 2,170
-------- ---- -------- ----
Total short-term borrowings........ $386,945 1.69% $274,490 2.17%
2001
Federal funds purchased and securities
sold under repurchase agreements........ $261,768 1.54% $199,802 3.76% $273,129
Federal Home Loan Bank notes.............. 27,325 2.04 11,102 2.80 60,725
Revolving lines of credit................. 24,985 3.62 1,793 8.14 24,985
Commercial paper.......................... 4,677 2.26 9,744 4.80 13,653
Treasury tax and loan note................ 1,128 1.51 928 4.96 1,613
-------- ---- -------- ----
Total short-term borrowings........ $319,883 1.75% $223,369 3.80%
2000
Federal funds purchased and securities
sold under repurchase agreements........ $127,873 6.17% $ 71,176 6.48% $127,873
Federal Home Loan Bank notes.............. -- -- 9,823 6.33 30,800
Revolving lines of credit................. 11,590 8.28 21,054 8.32 30,000
Commercial paper.......................... 6,453 6.81 1,368 6.87 6,453
Treasury tax and loan note................ 523 6.29 432 6.94 523
-------- ---- -------- ----
Total short-term borrowings........ $146,439 6.37% $103,853 6.85%
</Table>
At December 31, 2002, CIB Marine was not in compliance with certain
provisions of its revolving lines of credit. CIB Marine has obtained waivers
with respect to these matters. On March 27, 2003, CIB Marine cancelled its $7.0
million revolving line of credit, which at that date had a zero balance.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12 -- LONG-TERM BORROWINGS
The following table presents information regarding amounts payable to the
Federal Home Loan Bank of Chicago. All of the FHLB borrowings shown in the
following table are fixed rate borrowings.
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001 CALLABLE
----------------- ----------------- SCHEDULED QUARTERLY @
BALANCE RATE BALANCE RATE MATURITY PAR AFTER
------- ---- ------- ---- --------- -----------
$ -- --% $ 7,500 5.45% 1/16/03 N/A
-- -- 2,500 5.45 1/16/03 N/A
-- -- 7,500 5.51 2/08/03 N/A
-- -- 67 5.76 4/26/03 N/A
3,500 5.12 3,500 5.12 5/01/04 N/A
5,000 5.12 5,000 5.12 5/01/04 N/A
3,250 4.95 3,250 4.95 1/16/08 1/16/01
2,500 4.95 2,500 4.95 1/16/08 1/16/01
2,000 4.95 2,000 4.95 1/16/08 1/16/01
2,000 5.09 2,000 5.09 2/20/08 2/20/01
23,810 7.07 23,635 7.07 6/30/08 N/A
------- ---- ------- ----
$42,060 6.19% $59,452 5.98%
==== ====
Interest Rate Swap.................. 5,081 2,535
------- -------
Total.......................... $47,141 $61,987
======= =======
</Table>
CIB Marine is required to maintain qualifying collateral as security for
both the short-term and long-term FHLB notes. The debt to collateral ratio
cannot exceed 60%. CIB Marine had eligible collateral of $316.2 million and
$93.4 million at December 31, 2002 and 2001, respectively. As of December 31,
2002 and 2001, this collateral consisted of securities with a fair market value
of $82.9 million and $90.7 million, respectively, and 1-4 family residential
mortgages not more than 90 days delinquent of $233.3 million and $2.7 million,
respectively.
On February 25, 2000, CIB Marine assumed a $25.0 million Federal Home Loan
Bank of Chicago advance due June 30, 2008, with a net cost, including premium,
of 7.07%. The premium amount of $1.7 million is being amortized to interest
expense over the life of the borrowing. The unamortized balance related to this
premium was $1.2 million and $1.4 million as of December 31, 2002 and 2001,
respectively. Simultaneously with this advance, CIB Marine entered into an
interest rate swap with the Federal Home Loan Bank of Chicago with a $25.0
million notional value and maturing on June 30, 2008, whereby CIB Marine pays a
variable rate of interest at the 1 month LIBOR rate and earns a fixed rate of
interest at 7.08%. As of December 31, 2002 and 2001, the fair market value of
the swap was approximately $5.1 million and $2.5 million, respectively. The net
cash received from the hedging relationship for the years ended December 31,
2002 and 2001, was approximately $1.3 million and $0.8 million, respectively.
CIB Marine's management believes the swap transaction will reduce interest rate
risk by converting the fixed rate on the advance to a variable rate similar to
the loans funded with the proceeds of these borrowings.
GUARANTEED TRUST PREFERRED SECURITIES
At December 31, 2002, CIB Marine had $60.0 million outstanding in
guaranteed trust preferred securities, as compared to $40.0 million at December
31, 2001, and $25.0 million at December 31, 2000. Though presented in the
balance sheet as debt, these securities qualify as Tier I equity capital for
regulatory capital purposes. The trust preferred securities are issued through a
wholly-owned special purpose trusts and are fully and unconditionally guaranteed
by CIB Marine on a subordinated basis. Distributions are cumulative.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12 -- LONG-TERM BORROWINGS -- CONTINUED
The securities are classified in the liability section of the Consolidated
Balance Sheets, and the distributions on the securities are classified as
interest expense in the Consolidated Statements of Income.
In September 2002, CIB Marine issued $20 million in guaranteed trust
preferred securities at a variable rate of interest based upon the three-month
LIBOR plus 3.40%. The interest rate was 5.19% at December 31, 2002. The
securities are mandatorily redeemable upon their maturity on September 27, 2032
and are callable beginning September 30, 2007 at par value. Issuance costs of
$0.5 million were incurred in connection with these securities. CIB Marine used
the net proceeds of $19.6 million to reduce debt with non-affiliated commercial
banks and for other corporate purposes.
In February 2001, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.20% per annum. The securities are
mandatorily redeemable upon their maturity on February 22, 2031, and are
callable beginning February 22, 2011, at a premium, which declines ratably to
par by February 22, 2021. Issuance costs of $0.5 million were incurred in
connection with these securities. CIB Marine used the net proceeds of $14.5
million to reduce its debt with the non-affiliated commercial bank and for other
corporate purposes.
In September 2000, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.60% per annum. The securities are
mandatorily redeemable upon their maturity on September 7, 2030, and are
callable beginning September 7, 2010, at a premium, which declines ratably to
par by September 7, 2020. Issuance costs of $0.5 million were incurred in
connection with these securities. CIB Marine used the net proceeds of $14.5
million to reduce its debt with the non-affiliated commercial bank and for other
corporate purposes.
In March 2000, CIB Marine issued $10.0 million in guaranteed trust
preferred securities at a fixed rate of 10.88% per annum. The securities are
mandatorily redeemable upon their maturity on March 8, 2030, and are callable
beginning March 8, 2010, at a premium, which declines ratably to par by March 8,
2020. Issuance costs of $0.3 million were incurred in connection with these
securities. CIB Marine used the net proceeds of $9.7 million to reduce its debt
with the non-affiliated commercial bank and for other corporate purposes.
NOTE 13 -- STOCKHOLDERS' EQUITY
CIB Marine and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Pursuant to
federal holding company and bank regulations, CIB Marine and each bank
subsidiary is assigned to a capital category. The assigned capital category is
largely determined by the three ratios that are calculated in accordance with
specific instructions included in the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the bank subsidiaries
must meet specific capital guidelines that involve quantitative measures of the
bank's assets and certain off-balance sheet items as calculated under regulatory
accounting practices. The banks' capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. To be categorized as well-capitalized, the bank
subsidiaries must maintain total risk adjusted capital, Tier 1 capital, and Tier
1 leverage ratios of 10.0%, 6.0% and 5.0%, respectively.
There are five capital categories defined in the regulations:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Classification of a subsidiary
bank in any of the undercapitalized categories can result in certain mandatory
and possible additional discretionary actions by regulators that could have a
direct material effect on the Consolidated Financial Statements.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 13 -- STOCKHOLDERS' EQUITY -- CONTINUED
At December 31, 2002, which is the most recent notification from the banks'
primary regulators, all of the bank subsidiaries were categorized as well
capitalized under the regulatory framework for prompt corrective action.
On January 30, 2003, CIB-Chicago entered into a Memorandum of Understanding
(the "Memorandum") with the Illinois Office of Banks and Real Estate (OBRE) and
the FDIC (together the "Regulators"). The Memorandum was entered into as a
result of a deterioration in the credit quality of the loan portfolio, the level
of concentrations of credit, and weaknesses in the credit administration process
identified during the OBRE's regular examination of CIB-Chicago, which commenced
on September 23, 2002.
Pursuant to the Memorandum, CIB-Chicago has agreed to take certain actions
to correct the deficiencies noted within the examination report. In addition,
during the period in which the Memorandum is in effect, CIB-Chicago has agreed
to maintain a Tier 1 capital level equal to or exceeding 8% of the bank's total
assets. In the event such ratio is less than 8% as of June 30 or December 31 of
each calendar year the Memorandum is in effect, the bank is required within 30
days thereof to submit to the Regulators a plan for the augmentation of the
bank's capital accounts. Also, unless prior written consent is received from the
Regulators, CIB -- Chicago has agreed to restrict its loan growth to no more
than 2% during any consecutive three month period and suspend the declaration or
payment of dividends.
The Memorandum is not a formal supervisory action. Failure to comply with
the Memorandum can lead to a formal enforcement action which could have a
material adverse affect on CIB Marine and its operations. CIB Marine is in the
process of developing action plans to correct the deficiencies noted in the
examination report.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 13 -- STOCKHOLDERS' EQUITY -- CONTINUED
The actual and required capital amounts and ratios for CIB Marine and its
bank subsidiaries are presented in the tables below.
<Table>
<Caption>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
DECEMBER 31, 2002
TOTAL CAPITAL TO RISK WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC................. $346,786 10.45% $265,581 8.00% $ N/A N/A%
Central Illinois Bank...................... 101,929 10.58 77,083 8.00 96,354 10.00
CIB-Chicago................................ 164,550 10.17 129,413 8.00 161,767 10.00
Marine Bank-Wisconsin...................... 38,851 10.46 29,724 8.00 37,155 10.00
CIB-Indiana................................ 18,302 11.24 13,030 8.00 16,287 10.00
Marine Bank-FSB............................ 10,827 12.64 6,856 8.00 8,570 10.00
Citrus Bank................................ 21,579 17.04 10,131 8.00 12,663 10.00
TIER 1 CAPITAL TO RISK WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC................. $305,142 9.19% $132,790 4.00% $ N/A N/A%
Central Illinois Bank...................... 90,491 9.39 38,542 4.00 57,813 6.00
CIB-Chicago................................ 144,229 8.92 64,707 4.00 97,060 6.00
Marine Bank-Wisconsin...................... 34,175 9.20 14,862 4.00 22,293 6.00
CIB-Indiana................................ 16,266 9.99 6,515 4.00 9,772 6.00
Marine Bank-FSB............................ 9,847 11.49 3,428 4.00 5,142 6.00
Citrus Bank................................ 19,992 15.79 5,065 4.00 7,598 6.00
TIER 1 LEVERAGE TO AVERAGE ASSETS
CIB MARINE BANCSHARES, INC................. $305,142 8.75% $139,420 4.00% $ N/A N/A%
Central Illinois Bank...................... 90,491 8.43 42,928 4.00 53,660 5.00
CIB-Chicago................................ 144,229 8.89 64,860 4.00 81,075 5.00
Marine Bank-Wisconsin...................... 34,175 8.37 16,329 4.00 20,412 5.00
CIB-Indiana................................ 16,266 10.05 6,471 4.00 8,089 5.00
Marine Bank-FSB............................ 9,847 10.07 3,912 4.00 4,890 5.00
Citrus Bank................................ 19,992 11.17 7,157 4.00 8,946 5.00
</Table>
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 13 -- STOCKHOLDERS' EQUITY -- CONTINUED
<Table>
<Caption>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
DECEMBER 31, 2001
TOTAL CAPITAL TO RISK WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC................. $296,910 10.64% $223,254 8.00% $ N/A N/A%
Central Illinois Bank...................... 82,353 10.17 64,811 8.00 81,013 10.00
CIB-Chicago................................ 143,870 10.15 113,372 8.00 141,714 10.00
Marine Bank-Wisconsin...................... 34,937 11.20 24,950 8.00 31,188 10.00
CIB-Indiana................................ 16,611 13.15 10,109 8.00 12,636 10.00
Marine Bank-FSB............................ 10,188 30.89 2,638 8.00 3,298 10.00
Citrus Bank................................ 10,473 14.32 5,845 8.00 7,307 10.00
TIER 1 CAPITAL TO RISK WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC................. $262,832 9.42% $111,627 4.00% $ N/A N/A%
Central Illinois Bank...................... 72,831 8.99 32,405 4.00 48,608 6.00
CIB-Chicago................................ 126,717 8.94 56,686 4.00 85,029 6.00
Marine Bank-Wisconsin...................... 31,275 10.03 12,475 4.00 18,713 6.00
CIB-Indiana................................ 15,031 11.90 5,054 4.00 7,582 6.00
Marine Bank-FSB............................ 9,774 29.64 1,319 4.00 1,979 6.00
Citrus Bank................................ 9,642 13.18 2,923 4.00 4,384 6.00
TIER 1 LEVERAGE TO AVERAGE ASSETS
CIB MARINE BANCSHARES, INC................. $262,832 9.32% $112,743 4.00% $ N/A N/A%
Central Illinois Bank...................... 72,831 8.57 34,011 4.00 42,514 5.00
CIB-Chicago................................ 126,717 9.18 55,228 4.00 69,035 5.00
Marine Bank-Wisconsin...................... 31,275 8.99 13,910 4.00 17,387 5.00
CIB-Indiana................................ 15,031 11.56 5,202 4.00 6,503 5.00
Marine Bank-FSB............................ 9,774 25.80 1,515 4.00 1,894 5.00
Citrus Bank................................ 9,642 10.60 3,634 4.00 4,543 5.00
</Table>
The payment of dividends by banking subsidiaries is subject to regulatory
restrictions by various federal and/or state regulatory authorities. At December
31, 2002, approximately $51.3 million of the retained earnings of the banking
subsidiaries was available for the payment of dividends to CIB Marine without
prior regulatory agency approval, of which $27.0 million was attributable to
CIB-Chicago. However, pursuant to the Memorandum, and throughout such time as
the Memorandum remains in effect, CIB-Chicago may not pay a dividend to CIB
Marine without first obtaining the consent of the Regulators. 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.
NOTE 14 -- STOCK SPLIT
On June 19, 2000, CIB Marine announced that its Board of Directors approved
a 150-for-1 split of the Company's outstanding shares of common stock. The stock
split was effected in the form of a stock dividend and each shareholder of
record at the close of business on July 1, 2000, received 149 additional shares
of common stock for every share of common stock held. The stock dividends
resulting from the stock split were distributed by CIB Marine's transfer agent
on or about July 25, 2000. All share and per share data contained in this
document have been restated to reflect the effect of this stock split.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 15 -- EARNINGS PER SHARE
The following provides a reconciliation of basic and diluted earnings per
share:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---------- ---------- -----------
Net income...................................... $ 15,631 $ 26,917 $ 20,671
========== ========== ===========
Weighted average shares outstanding:
Basic......................................... 18,167,379 17,751,752 17,381,478
Effect of dilutive stock options
outstanding.............................. 380,136 331,261 241,486
---------- ---------- -----------
Diluted....................................... 18,547,515 18,083,013 17,622,964
========== ========== ===========
Earnings per share -- Basic..................... $ 0.86 $ 1.52 $ 1.19
Effect of dilutive stock options
outstanding................................ (0.02) (0.03) (0.02)
---------- ---------- -----------
Earnings per share -- Diluted................... $ 0.84 $ 1.49 $ 1.17
========== ========== ===========
</Table>
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CIB Marine is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. CIB
Marine has entered into commitments to extend credit, which involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheets.
Standby letters of credit are conditional commitments that CIB Marine
issues to guarantee the performance of a customer to a third-party. The
guarantees frequently support public and private borrowing arrangements,
including commercial paper issuances, bond financings, and other similar
transactions. CIB Marine issues commercial letters of credit on behalf of
customers to ensure payments or collection in connection with trade
transactions. In the event of a customer's nonperformance, CIB Marine's credit
loss exposure is the same as in any extension of credit, up to the letter's
contractual amount. Management assesses the borrower's financial condition to
determine the necessary collateral, which may include marketable securities,
real estate, accounts receivable and inventory. Since the conditions requiring
CIB Marine to fund letters of credit may not occur, CIB Marine expects its cash
future requirements to be less than the total outstanding commitments. The
maximum potential future payments guaranteed by CIB Marine under standby letter
of credit arrangements at December 31, 2002, is approximately $120.2 million
with a weighted average term of approximately 15 months. CIB Marine has provided
a $1.0 million reserve against potential losses related to a $7.5 million
standby letter of credit as a result of financial difficulties of the customer.
The $7.5 million standby letter of credit as well as two additional letters of
credit totalling $15.3 million were participated to other banks. CIB Marine was
not in compliance with certain provisions of these participated letters of
credit, but has received waivers or taken other actions to resolve these
matters.
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 counter party.
Collateral held varies, but may include marketable securities, accounts
receivable, inventories, property and equipment, and real estate.
CIB Marine has no derivative financial instruments held or issued for
trading purposes. The derivative financial instruments with which CIB Marine is
involved are utilized for purposes of asset/liability management to modify the
existing market risk characteristics of certain hedged assets and liabilities
and are
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -- CONTINUED
predominately comprised of interest rate swaps. An interest rate swap agreement
involves the exchange of fixed and floating rate interest payment obligations
based on the underlying notional principal amounts. The amounts subject to
market and credit risks are the streams of interest payments under the
agreements and not the notional principal amounts, which are used only to
express the volume of the transactions. CIB Marine's credit risk on a swap
agreement is limited to nonperformance of the counter party's obligations under
the terms of the swap agreement. CIB Marine deals exclusively with counter
parties that have high credit ratings, and based on management's assessments,
all counter parties were expected to meet any outstanding obligations as of
December 31, 2002.
CIB Marine had $130.0 million notional value of receive fixed/pay floating
interest rate swaps outstanding as of December 31, 2002. Most of these interest
rate swaps are used to hedge the fair market value of various deposits and
borrowings, including $25 million notional to hedge borrowings, $65 million
notional to hedge fixed rate bullet certificates of deposit, and $40 million
notional to hedge fixed rate callable certificates of deposit. The interest rate
swaps are floating pay-fixed receive instruments and, as such, effectively
convert the fixed rate payments on the financial instruments to a floating rate
and hedge their fair value from changes in interest rates. CIB Marine also
engages in interest rate swaps to hedge fixed rate lending activity. At December
31, 2002 this amounted to $4.3 million notional in pay fixed/receive floating
amortizing interest rate swaps. Each hedge is matched with the financial
instrument as to final maturity, interest payment dates and call features. These
swaps are accounted for as Fair Value Hedges under SFAS 133. Market value
changes during the period of the interest rate swaps and the hedge liabilities
are reflected in other noninterest income in the income statement period.
At December 31, 2002, CIB Marine had $503.5 million in forward sale
agreements outstanding with a fair market value of approximately $(4.2) million,
and $275.7 million outstanding in commitments to extend mortgage loans with
interest rate locks, with a fair market value of approximately $2.3 million.
Market value changes during the period are reflected in other noninterest income
in the income statement.
The following table summarizes the notional amount of off-balance sheet
financial instruments with credit risk.
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2001
---- ----
Commitments to extend credit................................ $628,920 $573,603
Commitments to extend mortgage loans to be held for sale.... 275,656 102,746
Standby letters of credit................................... 120,221 98,805
Interest rate swaps......................................... 134,250 55,000
Forward loan sale agreements................................ 503,521 137,041
</Table>
For additional information related to interest rate swaps, see Note
12 -- Long-term Borrowings.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, CIB Marine has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying Consolidated Financial Statements. CIB Marine is not currently
involved in any material pending legal proceedings other than litigation of a
routine nature which is being defended and handled in the ordinary course of
business.
CIB Marine has a lending relationship with a borrower who has recently been
charged with various criminal offenses, a conviction of which may result in
forfeiture to the United States of any and all property of the borrower involved
in the alleged criminal offenses and funds in the amount of $54.9 million. In
August of 2002, CIB Marine purchased various assets from certain of the
borrower's related interests, as a result of
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 17 -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
financial difficulties of this borrower. Although CIB Marine does not currently
believe it will incur any losses with respect to any such forfeiture
proceedings, this matter is being disclosed as a contingent liability pursuant
to Statement of Financial Accounting Standard No. 5, Accounting for
Contingencies. CIB Marine engaged in the lending activities with the borrower
and its related interests, and the acquisition of assets from the borrower's
related interests, without knowledge of the alleged criminal activities and
believes that it is a bona fide purchaser for value of the assets.
In addition, CIB Marine has lending relationships with other individuals
and entities who purchased certain assets of other operating subsidiaries of the
borrower. These loans are secured by certain assets previously owned by the
borrower's related interests. CIB Marine has no reason to believe at this time
that such assets will be subject to forfeiture and does not expect any loss to
occur as a result of any such proceedings.
NOTE 18 -- STOCK OPTION PLANS
CIB Marine has a nonqualified stock option and incentive plan for its
employees and directors. At December 31, 2002, options to purchase 134,525
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 fair market value on the option grant date. Options vest over five
years.
The following table shows activity relating to stock options.
<Table>
<Caption>
RANGE OF
NUMBER OPTION WEIGHTED AVERAGE
OF SHARES PRICES PER SHARE EXERCISE PRICE
--------- ---------------- ----------------
Shares under option at December 31, 1999............. 1,160,235 $ 4.95-22.40 $13.01
Granted............................................ 346,137 18.40-19.11 18.43
Lapsed or surrendered.............................. (57,618) 10.87-22.40 18.10
Exercised.......................................... (29,411) 8.50-22.40 11.15
--------- ------------ ------
Shares under option at December 31, 2000............. 1,419,343 $ 4.95-19.11 $14.16
Granted............................................ 321,138 20.13-22.89 22.82
Lapsed or surrendered.............................. (60,600) 13.07-18.40 15.18
Exercised.......................................... (22,238) 13.07-16.23 13.71
--------- ------------ ------
Shares under option at December 31, 2001............. 1,657,643 $ 4.95-22.89 $15.81
Granted............................................ 21,099 23.22-25.08 24.30
Lapsed or surrendered.............................. (51,773) 10.87-22.89 18.93
Exercised.......................................... (93,718) 4.95-18.40 8.50
--------- ------------ ------
Shares under option at December 31, 2002............. 1,533,251 $ 4.95-25.08 $16.27
========= ============ ======
</Table>
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 18 -- STOCK OPTION PLANS -- CONTINUED
The following table summarizes information about stock options outstanding
at December 31, 2002.
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
OPTION PRICES AT 12/31/02 LIFE (YEARS) PRICE 12/31/02 PRICE
------------- ----------- ------------ -------- ----------- --------
$ 4.95 - 7.52 29,250 0.5 $ 4.95 29,250 $ 4.95
7.52 - 10.03 82,500 2.0 8.50 82,500 8.50
10.03 - 12.54 107,850 3.3 10.87 107,850 10.87
12.54 - 15.05 398,820 5.1 13.11 324,900 13.12
15.05 - 17.56 280,200 6.6 16.22 169,560 16.21
17.56 - 20.06 310,131 7.6 18.42 124,027 18.42
20.06 - 22.57 11,126 8.4 21.12 2,223 21.12
22.57 - 25.08 313,374 9.0 22.99 58,438 22.89
- --------------- --------- --- ------ ------- ------
$ 4.95 - 25.08 1,533,251 6.3 $16.27 898,748 $14.13
=============== ========= === ====== ======= ======
</Table>
NOTE 19 -- OTHER BENEFIT PLANS
CIB Marine provides a defined contribution 401(k) deferred compensation
plan to all employees of CIB Marine and its subsidiaries who have attained age
20 and work at least a minimum number of hours. Employees enter the plan on the
first entrance date after their start date. Entrance dates are January 1 and
July 1 of each year. The Plan permits participants to make voluntary tax
deferred contributions of up to 15% of annual compensation subject to various
limitations. Through December 31, 2002, CIB Marine has not matched employee
contributions. The administrative costs to maintain the plan are paid by the
plan.
CIB Marine has an employee stock ownership plan for the benefit of
employees who attain a certain number of hours worked and length of service. At
December 31, 2002, the plan held 212,888 shares of common stock, all of which
have been allocated to participants. CIB Marine made contributions in 2002,
2001, and 2000 of $0.6 million, $0.5 million, and $0.4 million, respectively.
Contributions are discretionary and are determined annually by the Board of
Directors. The administrative costs to maintain the plan are paid by the plan.
NOTE 20 -- INCOME TAXES
CIB Marine and its subsidiaries file consolidated Federal income tax
returns. The provision for income taxes in the consolidated statements of income
consisted of the following components:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Current tax provision:
Federal................................................ $13,396 $ 5,213 $13,044
State.................................................. 383 119 645
Foreign................................................ (43) -- --
Deferred (benefit)....................................... (6,969) 8,657 (2,714)
Foreign deferred......................................... 133 -- --
------- ------- -------
$ 6,900 $13,989 $10,975
======= ======= =======
</Table>
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 20 -- INCOME TAXES -- CONTINUED
A reconciliation of the income tax provision and income taxes, which would
have been provided by applying the federal statutory rate of 35%, is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
Income at statutory tax rate................... $ 7,886 35.0% $14,318 35.0% $11,076 35.0%
Increase (reduction) in tax rate resulting
from:
State income taxes, net of Federal Income tax
benefit................................... (462) (2.0) 175 .4 159 .5
Nondeductible amortization................... 54 .2 116 .3 112 .4
Tax exempt interest.......................... (1,059) (4.7) (903) (2.2) (838) (2.6)
Foreign taxes................................ 107 .5
Other, net................................... 374 1.6 283 .7 466 1.4
------- ---- ------- ---- ------- ----
$ 6,900 30.6% $13,989 34.2% $10,975 34.7%
======= ==== ======= ==== ======= ====
</Table>
The tax effects of temporary differences that give rise to net deferred tax
(liability)/asset in the accompanying Consolidated Balance Sheets are as
follows:
<Table>
<Caption>
DECEMBER 31,
------------------
2002 2001
------- -------
Deferred tax assets:
Net operating losses...................................... $ 7,548 $ 621
Allowance for loan losses................................. 20,117 13,142
Non-cash compensation..................................... 322 493
Deferred loan fees and other.............................. 431 758
Purchase accounting-basis adjustment...................... 2,639 --
Other..................................................... 2,093 153
------- -------
Deferred tax assets before valuation allowance.............. 33,150 15,167
Valuation allowance....................................... (5,157) (666)
------- -------
Net deferred tax assets..................................... 27,993 14,501
------- -------
Deferred tax liabilities:
Net unrealized gain in securities available for sale...... 1,819 1,935
Depreciation.............................................. 2,880 525
REIT Income............................................... 11,333 11,993
Other securities.......................................... 153 257
Other..................................................... 1,339 515
------- -------
Total deferred tax liabilities.............................. 17,524 15,225
------- -------
Net deferred tax (liability)/asset.......................... $10,469 $ (724)
======= =======
</Table>
<Table>
<Caption>
DECEMBER 31,
------------------
2002 2001
------- -----
Net deferred tax assets/(liabilities) are classified as:
Other assets/(liabilities)................................ $ 6,688 $(724)
Assets of companies held for disposal..................... 3,781 --
------- -----
Net deferred tax asset/(liability).......................... $10,469 $(724)
======= =====
</Table>
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 20 -- INCOME TAXES -- CONTINUED
The change in the net deferred tax asset is as follows:
<Table>
<Caption>
DECEMBER 31,
------------------
2002 2001
------- -------
Deferred tax benefits (expenses) included in provision.... $ 6,836 $(8,657)
Deferred tax included in other comprehensive income....... 116 (457)
Deferred tax balances of acquired subsidiary.............. 1,676 --
Reclassifications from current............................ -- (10)
Minority interest......................................... (79) --
Exchange translation adjustment........................... 5 --
Purchase accounting-basis adjustment...................... 2,639 --
------- -------
Total change in net deferred tax asset............... $11,193 $(9,124)
======= =======
</Table>
There were US Federal net operating loss carryforwards of approximately
$14.0 million and $0.3 million in 2002 and 2001, respectively and state net
operating loss carryforwards of approximately $25.5 million and $10.7 million in
2002 and 2001, respectively. In addition, there were Mexican net operating loss
carryforwards attributable to a foreign subsidiary of approximately $1.5 million
in 2002. The net operating loss carryforwards will expire in varying amounts
between 2007 and 2022. $13.7 million and $1.5 million of the U.S. Federal and
Mexican net operating loss carryforwards were acquired in connection with the
Canron acquisition.
Realization of the net deferred tax asset over time is dependent upon the
existence of taxable income in carryback periods or CIB Marine generating
sufficient taxable earnings in future periods. In determining that realization
of the net deferred tax asset was more likely than not, CIB Marine gave
consideration to a number of factors including its recent earnings history, its
expectations for earnings in the future, and where applicable, the expiration
dates associated with tax carryforwards.
Valuation allowances have been established against state deferred tax
assets for those entities which have state net operating loss carryforwards in
which management believes that is more likely than not that the state deferred
tax assets will not be realized. In addition, a valuation allowance has been set
up against the deferred tax asset related to $7.7 million of US Federal net
operating loss carryforwards in which management believes that it is more likely
than not the losses will expire unused due to annual limitations under IRC
Section 382.
Tax benefits of $513 thousand, $2 thousand and $37 thousand have been
credited directly to capital surplus, with a corresponding decrease in the
liability for current income taxes payable, for stock related incentives during
the years ended December 31, 2002, 2001 and 2000, respectively.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 21 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS 107).
<Table>
<Caption>
DECEMBER 31, 2002
------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
Financial Assets:
Cash and cash equivalents................................. $ 98,396 $ 98,396
Loans held for sale....................................... 228,114 228,114
Securities available for sale............................. 443,871 443,871
Securities held to maturity............................... 70,132 72,873
Loans, net................................................ 2,655,169 2,688,810
Accrued interest receivable............................... 16,669 16,669
Financial Liabilities:
Deposit liabilities....................................... 2,848,404 2,897,046
Short term borrowings..................................... 386,945 386,795
Long term borrowings...................................... 47,141 48,976
Guaranteed trust preferred securities..................... 60,000 66,320
Accrued interest payable.................................. 11,108 11,108
</Table>
<Table>
<Caption>
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- -------- ----------
Off-Balance Sheet Items:
Commitments to extend mortgage loans to be held for
sale............................................. $275,656 $ 2,273 $ 2,273
Standby letters of credit........................... 120,221 (592) (592)
Commitments to extend credit........................ 632,030 -- --
Interest rate swap agreements....................... 134,250 5,749 5,749
Forward sale agreements............................. 503,521 (4,188) (4,188)
</Table>
<Table>
<Caption>
DECEMBER 31, 2001
------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
Financial Assets:
Cash and cash equivalents................................. $ 59,000 $ 59,000
Loans held for sale....................................... 34,295 34,295
Securities available for sale............................. 321,748 321,748
Securities held to maturity............................... 96,609 98,759
Loans receivable, net..................................... 2,355,404 2,383,241
Accrued interest receivable............................... 16,993 16,993
Financial Liabilities:
Deposit liabilities....................................... 2,269,710 2,287,168
Short Term Borrowings..................................... 319,883 319,905
Long Term Borrowings...................................... 61,987 62,718
Guaranteed Trust Preferred Securities..................... 40,000 40,918
Accrued interest payable.................................. 11,335 11,335
</Table>
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 21 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
<Table>
<Caption>
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- -------- ----------
Off-Balance Sheet Items:
Commitments to extend mortgage loans to be held for
sale............................................. $102,746 $(1,585) $(1,585)
Standby letters of credit........................... 98,805 848 848
Commitments to extend credit........................ 573,603 -- --
Interest rate swap agreements....................... 55,000 1,920 1,920
Forward sale agreements............................. 137,041 2,950 2,950
</Table>
Fair value amounts represent estimates of value at a point in time.
Significant estimates regarding economic conditions, loss experience, risk
characteristics associated with particular financial instruments and other
factors were used for the purposes of this disclosure. These estimates are
subjective in nature and involve matters of judgment. Therefore, they cannot be
determined with precision. Changes in the assumptions could have a material
impact on the amounts estimated.
While these estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be exchanged in a
current transaction between willing parties, it is CIB Marine's intent to hold
most of its financial instruments to maturity. Therefore, it is not probable
that the fair values shown will be realized in a current transaction.
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) are
not reflected. The value of this item is significant.
Because of the wide range of valuation techniques and the numerous
estimates that must be made, it may be difficult to make reasonable comparisons
of CIB Marine's fair value to that of other financial institutions. It is
important that the many uncertainties discussed above be considered when using
the estimated fair value disclosures and to realize that because of these
uncertainties the aggregate fair value should in no way be construed as
representative of the underlying value of CIB Marine.
The following describes the methodology and assumptions used to estimate
fair value of financial instruments required by SFAS 107.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair value. For purposes of this disclosure only,
cash equivalents include cash and due from banks, Federal Funds sold and
repurchase agreements.
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
The estimated fair values of securities by type are provided in Note 4 to
the Consolidated Financial Statements. These are based on quoted market prices,
when available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities or carrying values.
LOANS HELD FOR SALE
The fair value of loans held for sale, primarily conventional residential
mortgage loans, are estimated using quoted market prices of similar loans. If a
quoted market price is unavailable, the fair value is estimated using reasonable
and supportable assumptions and projections.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 21 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
LOANS RECEIVABLE
For loans that reprice frequently, the carrying value approximates their
value. The fair values of all other loan receivables were estimated by
discounting the expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings and
maturities. The carrying value and the fair value of Loans Receivable is net of
the Allowance for Loan Losses.
ACCRUED INTEREST RECEIVABLE
The carrying amounts of accrued interest approximate their fair values.
DEPOSIT LIABILITIES
The carrying value of deposits with no stated maturity approximates their
fair value as they are payable on demand. The estimated fair value of fixed time
deposits is based on discounted cash flow analyses. The discount rates used in
these analyses are based on market rates of alternative funding sources
currently available for similar remaining maturities.
SHORT TERM BORROWINGS
The carrying value of short term borrowings payable within 3 months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than 3 months is based on quoted market prices, when available.
Debt for which quoted prices were not available was valued using cash flows
discounted at a current market rate for similar types of debt. For purposes of
this disclosure, short term borrowings are those borrowings with stated final
maturities of less than or equal to one year, including securities sold under
agreements to repurchase, US Treasury Tax and loan notes, lines of credit,
commercial paper and other similar borrowings.
LONG TERM BORROWINGS
The carrying value of long term borrowings payable within 3 months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than 3 months is based on quoted market prices, when available.
Debt for which quoted prices were not available was valued using cash flows
discounted at a current market rate for similar types of debt. For purposes of
this disclosure, long term borrowings are those borrowings with stated final
maturity of more than one year, including Federal Home Loan Bank advances with
stated final maturity of more than one year. Notwithstanding their stated final
maturity of more than one year, guaranteed trust preferred securities are
excluded from long term borrowings.
GUARANTEED TRUST PREFERRED SECURITIES
The carrying value of guaranteed trust preferred securities payable within
3 months or less approximates their fair value. The estimated fair value of
guaranteed trust preferred securities with a maturity greater than 3 months is
based on quoted market prices, when available. Debt for which quoted prices were
not available was valued using cash flows discounted at a current market rate
for similar types of debt.
ACCRUED INTEREST PAYABLE
The carrying amounts of accrued interest approximate their fair values.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 21 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
OFF-BALANCE SHEET INSTRUMENTS
The fair value of commitments to extend mortgage loans to be held for sale
represents the fair value of commitments to make or purchase loans, primarily
conventional mortgage loans, at an agreed upon interest rate. The fair value is
based upon current market quotes, when available. If a quoted market price is
not available, fair value is estimated using reasonable and supportable
assumptions and projections.
The fair value of interest rate swaps is based upon quoted market prices,
when available. If a quoted market price is not available, fair value is
estimated based on the net of the discounted cash flows of the fixed leg and the
floating leg of the swap using as a discount rate currently existing rates
available for swaps of comparable remaining term, notional value, index and
counter party credit risk.
The fair value of letters of credit and unused and open ended lines of
credit have been estimated based on the equivalent fees, net of expenses, that
would be charged for comparable transactions.
The fair value of forward sale agreements represents the fair value of
conditional forward contracts entered into to sell mortgage loans, and is
related to CIB Marine's mortgage banking activities. The fair value is based
upon quoted market prices, when available. If quoted market price is not
available, fair value is based upon an estimate of the fair value of the forward
rate agreement given current interest rates for contracts with similar notional
value, and underlying assets.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 22 -- PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only, are
presented as follows:
CONDENSED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2001
-------- --------
ASSETS
Cash and due from banks..................................... $ 513 $ 751
Investments in subsidiaries................................. 342,873 285,206
Other investments........................................... 5,734 5,211
Loans....................................................... -- 2,738
Loans to subsidiaries....................................... 5,553 13,590
Premises and equipment, net................................. 1,171 780
Current tax receivable...................................... 382 --
Deferred income taxes....................................... 546 469
Foreclosed properties....................................... 1,938 --
Other assets................................................ 2,185 1,653
-------- --------
Total Assets........................................... $360,895 $310,398
======== ========
LIABILITIES
Short-term borrowings....................................... $ 36,811 $ 29,662
Accrued interest payable.................................... 1,417 1,392
Accrued income taxes........................................ -- 1,198
Other liabilities........................................... 866 1,004
Guaranteed trust preferred securities....................... 60,000 40,000
-------- --------
Total Liabilities...................................... 99,094 73,256
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 5,000,000 shares authorized,
none issued............................................... -- --
Common stock, $1 par value; 50,000,000 shares authorized,
18,312,242 and 17,876,752 issued and outstanding,
respectively.............................................. 18,312 17,877
Capital surplus............................................. 157,783 148,972
Retained earnings........................................... 82,901 67,270
Accumulated other comprehensive income...................... 2,805 3,023
-------- --------
Total Stockholders' Equity............................. 261,801 237,142
-------- --------
Total Liabilities and Stockholders' Equity............. $360,895 $310,398
======== ========
</Table>
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 22 -- PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED
CONDENSED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
INTEREST AND DIVIDEND INCOME
Dividends from subsidiaries................................. $ 1,300 $ 2,133 $ 750
Loan interest from subsidiaries............................. 258 60 30
Other....................................................... -- 180 12
------- ------- -------
Total interest and dividend income........................ 1,558 2,373 792
INTEREST EXPENSE
Short-term borrowings....................................... 922 615 1,833
Guaranteed trust preferred securities....................... 4,523 4,024 1,351
------- ------- -------
Net interest expense........................................ (3,887) (2,266) (2,392)
Provision for loan losses................................... 800 -- --
------- ------- -------
Net interest expense after provision for loan losses...... (4,687) (2,266) (2,392)
NONINTEREST INCOME
Equity in undistributed earnings of subsidiaries............ 21,928 30,234 24,221
Fees from subsidiaries...................................... 8,914 7,062 5,419
Other Income................................................ 317 99 40
------- ------- -------
Total noninterest income.................................. 31,159 37,395 29,680
------- ------- -------
NONINTEREST EXPENSE
Compensation and employee benefits.......................... 10,436 8,034 6,609
Equipment................................................... 443 328 121
Occupancy and premises...................................... 1,043 701 577
Professional services....................................... 454 1,106 780
Other....................................................... 1,767 676 589
------- ------- -------
Total Noninterest Expense................................. 14,143 10,845 8,676
------- ------- -------
Income before income taxes.................................. 12,329 24,284 18,612
Income tax benefit.......................................... (3,302) (2,633) (2,059)
------- ------- -------
NET INCOME................................................ $15,631 $26,917 $20,671
======= ======= =======
</Table>
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 22 -- PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED
CONDENSED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 15,631 $ 26,917 $ 20,671
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed earnings of subsidiaries....... (21,928) (30,234) (24,221)
Depreciation and amortization.......................... 260 194 55
Provision for loan losses.............................. 800 -- --
Deferred tax benefits.................................. (77) 642 578
Loss on sale of other assets........................... -- 229 --
Decrease (increase) in interest receivable and other
assets............................................... (308) 20 467
Increase (decrease) in interest payable and other
liabilities.......................................... (1,693) 436 781
-------- -------- --------
Net cash used in operating activities................ (7,315) (1,796) (1,669)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in limited partnerships and other
investments.......................................... (301) (2,269) (766)
Net (increase) decrease in loans....................... 8,037 (13,589) 443
Net increase in investment in subsidiaries............. (37,258) (16,510) (18,921)
Dividends received from subsidiaries................... 1,300 2,133 750
Proceeds from sale of fixed assets..................... -- 59 47
Capital expenditures................................... (646) (413) (500)
-------- -------- --------
Net cash used in investing activities................ (28,868) (30,589) (18,947)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................. 7,936 5,991 7,649
Proceeds from stock options exercised.................. 1,310 307 926
Proceeds paid for merger dissenters shares............. -- (238) --
Proceeds from issuance of guaranteed trust preferred
securities........................................... 19,550 14,550 24,250
Net increase (decrease) in short-term borrowings....... 7,149 11,619 (11,667)
-------- -------- --------
Net cash provided by financing activities............ 35,945 32,229 21,158
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (238) (156) 542
Cash and cash equivalents, beginning of year................ 751 907 365
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 513 $ 751 $ 907
======== ======== ========
</Table>
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 23 -- QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
QUARTER ENDED 2002
------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
2002
Total interest income................................... $52,650 $51,916 $51,090 $48,414
Total interest expense.................................. 24,693 24,748 24,275 23,619
------- ------- ------- -------
Net interest income..................................... 27,957 27,168 26,815 24,795
Provision for loan losses............................... 11,249 11,713 7,782 3,981
------- ------- ------- -------
Net interest income after provision for loan losses..... 16,708 15,455 19,033 20,814
Gain on investment securities, net...................... -- 1,031 992 1,104
Other noninterest income................................ 4,987 4,539 4,821 4,126
Noninterest expense..................................... 19,772 18,815 17,209 15,283
------- ------- ------- -------
Income before income taxes.............................. 1,923 2,210 7,637 10,761
Income tax expense (benefit)............................ 679 (15) 2,429 3,807
------- ------- ------- -------
Net income............................................ $ 1,244 $ 2,225 $ 5,208 $ 6,954
======= ======= ======= =======
Earnings per share:
Basic................................................. $ 0.07 $ 0.12 $ 0.29 $ 0.39
Diluted............................................... 0.07 0.12 0.28 0.38
</Table>
<Table>
<Caption>
QUARTER ENDED 2001
------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
2001
Total interest income................................... $48,591 $49,635 $52,076 $52,828
Total interest expense.................................. 24,816 27,707 30,448 32,752
------- ------- ------- -------
Net interest income..................................... 23,775 21,928 21,628 20,076
Provision for loan losses............................... 3,739 3,061 3,155 2,788
------- ------- ------- -------
Net interest income after provision for loan losses..... 20,036 18,867 18,473 17,288
Gain on investment securities, net...................... 884 1,591 452 1,101
Other noninterest income................................ 5,728 4,699 3,641 2,699
Noninterest expense..................................... 15,070 14,457 12,617 12,409
------- ------- ------- -------
Income before income taxes.............................. 11,578 10,700 9,949 8,679
Income tax expense...................................... 3,723 3,880 3,431 2,955
------- ------- ------- -------
Net income............................................ $ 7,855 $ 6,820 $ 6,518 $ 5,724
======= ======= ======= =======
Earnings per share:
Basic................................................. $ 0.44 $ 0.38 $ 0.37 $ 0.33
Diluted............................................... 0.43 0.37 0.36 0.32
</Table>
103
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements or reportable events of the nature required to
be disclosed pursuant to Item 304 (b) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to directors and director
nominees is incorporated by reference to CIB Marine's Proxy Statement for the
annual meeting to be held on May 22, 2003 under the caption "Proposal
1 -- Election of Directors -- Information Regarding Nominees and Directors."
The information required by Item 10 with respect to executive officers is
incorporated by reference to Part I hereof under the caption "Supplemental Item.
Executive Officers of CIB Marine."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to CIB
Marine's Proxy Statement for the annual meeting to be held on May 22, 2003 under
the captions "Proposal 1 -- Election of Directors" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002, with
respect to CIB Marine's compensation plans under which equity securities are
authorized for issuance:
<Table>
<Caption>
NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
PLAN CATEGORY ----------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders(1)............ 1,533,251 $16.2675 134,525
Equity compensation plans not
approved by security holders...... -- -- --
--------- -------- -------
Total............................... 1,533,251 $16.2675 134,525
========= ======== =======
</Table>
- -------------------------
(1) All securities remaining available for future issuance will be issued under
the 1999 Stock Option and Incentive Plan.
Additional information required by Item 12 is incorporated by reference to
CIB Marine's Proxy Statement for the annual meeting to be held on May 22, 2003
under the captions "Security Ownership of Certain Beneficial Owners" and
"Proposal 1 -- Election of Directors -- Stock Ownership of Management."
104
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by Item 13 is incorporated by reference to CIB
Marine's Proxy Statement for the annual meeting to be held on May 22, 2003 under
the caption "Proposal 1 -- Election of Directors -- Certain Relationships and
Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures
CIB Marine's Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of CIB Marine's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on March 27, 2003,
have concluded that, as of such date, CIB Marine's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to CIB Marine and its consolidated subsidiaries would be made known to
them by others within those entities. As a result of the ineffectiveness of
certain internal controls as noted in b. below, management took appropriate
actions to ensure that material information relating to CIB Marine and its
consolidated subsidiaries would be made known to them by others within those
entities.
b. Changes in Internal Controls
There were no significant changes in CIB Marine's internal controls or in
other factors that could significantly affect CIB Marine's disclosure controls
and procedures subsequent to the date of their evaluation. Except for the
ineffectiveness of certain internal controls over the loan risk management
process, there were no significant deficiencies or material weaknesses in CIB
Marine's internal controls. CIB Marine is taking actions to improve these
controls, including amendments to its loan policy and the hiring of additional
staff.
105
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of CIB Marine are filed as a part of
this document under Item 8, Financial Statements and Supplementary Data.
- Independent Auditors' Report of KPMG LLP.
- Consolidated Balance Sheets as of December 31, 2002 and 2001.
- Consolidated Statements of Income for the Years Ended December 31, 2002,
2001, and 2000.
- Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001, and 2000.
- Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000.
- Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements
contained in Item 8.
(a)(3) EXHIBITS
<Table>
<Caption>
EXHIBIT
NO. EXHIBIT
------- -------
3.1 Amended and Restated Articles of Incorporation of CIB Marine
Bancshares, Inc. (incorporated by reference to Appendix B to
the Proxy Statement of Central Illinois Bancorp, Inc. filed
with the Securities and Exchange Commission on May 28,
1999).
3.2 Bylaws of CIB Marine Bancshares, Inc. (incorporated by
reference to Appendix C to the Proxy Statement of Central
Illinois Bancorp, Inc. filed with the Securities and
Exchange Commission on May 28, 1999).
*10.1 CIB Marine Bancshares, Inc. 1999 Stock Option and Incentive
Plan, as amended.
*10.2 Form of Deferred Compensation Agreement of CIB Marine
(incorporated by reference to Exhibit 10.3 to CIB Marine's
Form 10 filed on April 30, 1999).
21 Subsidiaries of CIB Marine
23.1 Consent of KPMG LLP
99.1 Certificate of J. Michael Straka, Chief Executive Officer,
and Steven T. Klitzing, Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
</Table>
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CIB Marine is not
filing certain documents. CIB Marine agrees to furnish a copy of each such
document upon the request of the Commission.
- -------------------------
* Executive compensation plans
(B) During the three months ended December 31, 2002 and through the date of this
report, CIB Marine filed a Form 8-K on March 6, 2003, reporting under Item 9 the
delay in release of 2002 financial information. No financial statements were
filed.
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<Table>
CIB MARINE BANCSHARES, INC.
(registrant)
By: /s/ J. MICHAEL STRAKA
----------------------------------------------
J. Michael Straka
Date: March 31, 2003 President and Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. MICHAEL STRAKA President and Chief Executive March 31, 2003
- ----------------------------------------------------- Officer (Principal Executive
J. Michael Straka Officer) and Director
/s/ STEVEN T. KLITZING Chief Financial Officer March 31, 2003
- ----------------------------------------------------- (Principal Financial and
Steven T. Klitzing Accounting Officer)
/s/ C. TODD ATKINS Director March 31, 2003
- -----------------------------------------------------
C. Todd Atkins
/s/ JOSE ARAUJO Director March 31, 2003
- -----------------------------------------------------
Jose Araujo
/s/ NORMAN E. BAKER Director March 31, 2003
- -----------------------------------------------------
Norman E. Baker
/s/ JOHN T. BEAN Director March 31, 2003
- -----------------------------------------------------
John T. Bean
/s/ W. SCOTT BLAKE Director March 31, 2003
- -----------------------------------------------------
W. Scott Blake
/s/ DEAN M. KATSAROS Director March 31, 2003
- -----------------------------------------------------
Dean M. Katsaros
/s/ JERRY D. MAAHS Director March 31, 2003
- -----------------------------------------------------
Jerry D. Maahs
/s/ DONALD M. TRILLING Chairman of the Board of March 31, 2003
- ----------------------------------------------------- Directors and Director
Donald M. Trilling
/s/ HOWARD E. ZIMMERMAN Director March 31, 2003
- -----------------------------------------------------
Howard E. Zimmerman
</Table>
107
CERTIFICATIONS
I, J. Michael Straka, Chief Executive Officer of CIB Marine Bancshares, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of CIB Marine
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor's any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ J. MICHAEL STRAKA
--------------------------------------
J. Michael Straka
Chief Executive Officer
March 28, 2003
108
CERTIFICATIONS
I, Steven T. Klitzing, Chief Financial Officer, of CIB Marine Bancshares, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of CIB Marine
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor's any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ STEVEN T. KLITZING
--------------------------------------
Steven T. Klitzing
Chief Financial Officer
March 28, 2003
109