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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, 2003
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 [ ] No [X]
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of June 30, 2003 cannot be determined as there is no public market
for the common stock.
As of September 30, 2005, there were issued and outstanding 18,346,442
shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this report: None
- --------------------------------------------------------------------------------
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EXPLANATORY NOTE
The company is filing this annual report on Form 10-K to report its
financial results for the year ended December 31, 2003, as well as to restate
the consolidated financial statements of operations for the years ended December
31, 2002 and 2001, and the consolidated balance sheets as of December 31, 2002
and 2001. This document is intended to speak as of December 31, 2003, except
where noted otherwise.
FORM 10-K TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I
Item 1 -- Business.................................................... 3
Item 2 -- Properties.................................................. 27
Item 3 -- Legal Proceedings........................................... 29
Item 4 -- Submission of Matters to a Vote of Security Holders......... 31
PART II
Item 5 -- Market for the Registrant's Common Equity and Related 31
Stockholder Matters.........................................
Item 6 -- Selected Financial Data..................................... 32
Item 7 -- Management's Discussion and Analysis of Financial Condition 35
and Results of Operations...................................
Item 7A -- Quantitative and Qualitative Disclosures About Market 79
Risk........................................................
Item 8 -- Financial Statements and Supplementary Data................. 82
Item 9 -- Changes in and Disagreements with Accountants on Accounting 155
and Financial Disclosure....................................
Item 9A -- Controls and Procedures..................................... 155
PART III
Item 10 -- Directors and Executive Officers of the Registrant.......... 156
Item 11 -- Executive Compensation...................................... 160
Item 12 -- Security Ownership of Certain Beneficial Owners and 164
Management..................................................
Item 13 -- Certain Relationships and Related Transactions.............. 166
Item 14 -- Principal Accountant Fees and Services...................... 166
PART IV
Item 15 -- Exhibits, Financial Statement Schedules and Reports on Form 167
8-K.........................................................
Signatures.................................................................. 169
</Table>
2
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 owned and operated five separately chartered commercial
banking organizations and one federal savings bank at December 31, 2003:
- 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, 2003, CIB Marine had a total of 57 full-service banking
facilities in Illinois, Wisconsin, Indiana, Nebraska, Florida, Arizona and
Nevada. CIB Marine sold CIB -- Chicago to an unrelated banking organization on
November 30, 2004. See Note 27 to the consolidated financial
statements -- Subsequent Events.
CIB Marine offers a full array of traditional banking services through its
bank and nonbank 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, and commercial and standby letters of credit;
accepting demand, savings and time 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 and Canada, and 100% of MICR, Inc. ("MICR"), 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. Canron is in the process of a voluntary liquidation and winding down
of its affairs and CIB Marine has initiated a plan to sell MICR.
SUMMARY OF EVENTS
During 2003, CIB Marine shifted its strategic focus from business
development and asset growth to improving the company's credit administration
function, asset quality, and liquidity and capital positions. The change in
emphasis occurred in response to a significant deterioration in the credit
quality of its loan portfolio and other credit related matters, including credit
concentration risk and weaknesses in the credit administration process,
identified by the bank regulators during their regular examinations in 2002 and
2003. Moreover, these credit issues had an adverse financial impact on CIB
Marine's financial condition and results of operations, resulting in a net loss
of $137.6 million for 2003.
JANUARY 2003 CIB -- CHICAGO MOU AND CREDIT CONCERNS
In January 2003, CIB -- Chicago entered into a Memorandum of Understanding
with the Office of Banks and Real Estate, now known as the Illinois Department
of Financial and Professional Regulation, Division of Banks and Real Estate (the
"DBRE") and the FDIC. The bank regulators issued the Memorandum based on the
results of their August 2002 examination of CIB -- Chicago, which identified a
severe deterioration in the credit quality of the bank's loan portfolio,
heightened credit concentration risk, and weaknesses in the credit
administration process. Pursuant to the Memorandum, CIB -- Chicago agreed to
3
take certain actions to correct noted deficiencies, maintain a Tier 1 capital
level equal to or exceeding 8% of the bank's total assets, restrict its loan
growth to no more than 2% during any consecutive three-month period and suspend
the declaration or payment of dividends without regulatory approval.
FALL 2003 REGULATORY EXAMINATIONS
CIB -- Chicago experienced further deterioration in the credit quality of
its loan portfolio throughout the remainder of 2003, including a significant
increase in nonperforming assets. A bank examination of CIB -- Chicago in the
fall of 2003 and examinations of some of CIB Marine's other subsidiary banks
during this same period revealed serious asset quality and credit administration
concerns that caused the bank regulators to pursue formal enforcement actions
against CIB -- Chicago and several of its affiliated banks as well as CIB
Marine, all of which became effective in May 2004 and thereafter. These
developments led CIB Marine to begin a comprehensive review of the adequacy of
its allowance for loan losses in the fourth quarter of 2003 and to initiate an
independent legal investigation of the situation.
INDEPENDENT REVIEW AND INVESTIGATION
In October 2003, a Special Review Committee of the Board of Directors of
CIB Marine was established to evaluate these credit issues and other issues
which had come to the attention of the Board of Directors. The committee engaged
the assistance of outside advisors, including independent legal counsel and an
external loan review firm, to conduct an independent investigation of these
developments. The investigation continued into 2004 and included an evaluation
of possible illegal activities. This investigation was completed in the fourth
quarter of 2004 and the results were reported to the Board of Directors, the
banking regulators and CIB Marine's outside auditing firm, KPMG LLP. Management
has taken appropriate actions to address issues raised by the investigations. As
a result of the investigations and its own analysis, management has adopted new
policies and procedures and has strengthened internal reporting and controls. In
January 2004, an Executive Committee of the Board was also formed to ensure that
these issues received the full and prompt attention of the entire organization.
ANNOUNCEMENT OF 2003 CONSOLIDATED FINANCIAL RESULTS AND RESTATEMENT OF
PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
In April 2004, CIB Marine announced that, based on the preliminary results
of the credit review, the estimated net loss for 2003 was expected to range from
$135 million to $155 million and that nonperforming assets as of December 31,
2003 were expected to total $205 million. The loss was primarily due to
increased provisions to the allowance for loan losses resulting from the
deterioration in the credit quality of the loan portfolio and related tax
effects and the impairment of goodwill. A troubled real estate development loan
on the balance sheet of CIB -- Chicago resulted in approximately $40 million of
this loss. This property was acquired by CIB -- Chicago in 2003 and was included
in foreclosed properties at December 31, 2003. As a result of the significance
of the estimated loss and the corresponding reduction in stockholders' equity,
it was estimated that CIB Marine would be categorized as "undercapitalized" and
CIB -- Chicago would be categorized as "significantly undercapitalized" pursuant
to regulatory guidelines for capital adequacy. CIB Marine also announced that
the financial results of its prior periods may require restatement and that
certain financial reports previously filed with the Securities and Exchange
Commission ("SEC") should no longer be relied upon.
Upon considering the results of the comprehensive review of the adequacy of
the allowance for loan losses which was concluded in August 2005 and the results
of the independent investigation, CIB Marine also determined that it would be
necessary to restate its previously issued consolidated financial statements for
the years ended December 31, 1999 through 2002 and the quarters ended March 31
and June 30, 2003. See Item 6, Selected Financial Data and Note 2 to
consolidated financial statements -- Restatement of 2002 and 2001. Certain
previously reported quarterly financial information is also being restated. See
Note 26 to the
4
consolidated financial statements -- Quarterly Consolidated Financial
Information. The consolidated financial statements have been restated for the
following items:
Receivables from Sale of Stock
It was noted during the 2003 regulatory examination that certain of CIB
Marine's subsidiary banks had originated loans, the proceeds of which were used
by borrowers to purchase the common stock of CIB Marine. These loans should have
been accounted for as a reduction in consolidated stockholders' equity, unless
the loan had been repaid prior to the issuance of the financial statements or
the loan was adequately collateralized exclusive of the value of CIB Marine
stock pledged as collateral, if any. The amount of such loans outstanding was
$5.2 million, $7.9 million, $7.4 million, $5.1 million and $4.7 million as of
December 31, 2003, 2002, 2001, 2000 and 1999, respectively. The amount of such
loans outstanding was $7.9 million at June 30 and March 31, 2003. The
consolidated balance sheets at those dates have been restated to reduce loans
and reduce stockholders' equity by recording a new contra-equity account in
stockholders' equity captioned "Receivables from sale of stock." See Note 15 to
the consolidated financial statements -- stockholders' equity.
Provision for Credit Losses
The restatements also include an increase in the provision for credit
losses for the years ended December 31, 2002 and 2001 and the quarters ended
March 31 and June 30, 2003 to account for loan losses not reflected in the
previous financial statements for these periods and the reduction of interest
recognized on certain nonperforming loans to correct related balances that were
previously reported. These adjustments also resulted in the corresponding
increase in the allowance for loan losses at December 31, 2002 and 2001.
Reclassification of Securities
During the fourth quarter of 2004, CIB Marine determined that it no longer
had the intent to hold to maturity its tax exempt securities classified as held
to maturity. In the first nine months of 2005, CIB Marine sold $9.3 million of
these securities at a gain of $0.4 million. As a result of these actions, CIB
Marine determined the consolidated financial statements should be restated for
all years presented to reclassify all held to maturity securities to available
for sale. The effect of this restatement is to increase total securities for the
unrealized gain, increase equity for the unrealized gain, net of taxes and
increase deferred taxes.
5
The impact of the restatements for the loans made to acquire CIB Marine
stock, the increases in the provision for credit losses and the transfer of
securities held to maturity to available for sale as of and for the years ended
December 31, 2002, 2001, 2000 and 1999 are as follows:
<Table>
<Caption>
2002 2001
------------------------------------ ------------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED ADJUSTMENT RESTATED REPORTED ADJUSTMENT RESTATED
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SELECTED INCOME STATEMENT
ACCOUNTS:
Interest income -- loans..... $ 178,691 $ (191) $ 178,500 $ 174,222 $ (125) $ 174,097
Provision for credit
losses..................... (35,725) (10,785) (46,510) (12,743) (1,652) (14,395)
Net interest income after
provision for credit
losses..................... 71,132 (10,976) 60,156 74,664 (1,777) 72,887
Income tax expense........... (6,748) 4,152 (2,596) (13,989) 589 (13,400)
Income from continuing
operations................. 16,433 (6,824) 9,609 26,917 (1,188) 25,729
---------- -------- ---------- ---------- ------- ----------
EPS -- Diluted from
continuing operations...... $ 0.89 $ (0.37) $ 0.52 $ 1.49 $ (0.07) $ 1.42
========== ======== ========== ========== ======= ==========
SELECTED BALANCE SHEET
ACCOUNTS:
Total securities............. $ 514,003 $ 2,741 $ 516,744 $ 418,357 $ 2,150 $ 420,507
Loans, net of deferred loan
fees....................... 2,711,943 (7,937) 2,704,006 2,389,482 (7,437) 2,382,045
Allowance for loan losses.... (52,369) (12,753) (65,122) (34,078) (1,777) (35,855)
Net loans.................... 2,659,574 (20,690) 2,638,884 2,355,404 (9,214) 2,346,190
Retained earnings............ 82,901 (8,012) 74,889 67,270 (1,188) 66,082
Total stockholders' equity... $ 261,801 $(14,238) $ 247,563 $ 237,142 $(7,317) $ 229,825
</Table>
<Table>
<Caption>
2000 1999
------------------------------------ ------------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED ADJUSTMENT RESTATED REPORTED ADJUSTMENT RESTATED
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
SELECTED BALANCE SHEET
ACCOUNTS:
Total securities............. $ 505,871 $ 729 $ 506,600 $ 369,988 $(1,854) $ 368,134
Loans, net of deferred loan
fees....................... 1,831,231 (5,096) 1,826,135 1,455,581 (4,710) 1,450,871
Net loans.................... 1,807,243 (5,096) 1,802,147 1,439,367 (4,710) 1,434,657
Total stockholders' equity... $ 203,367 $(4,653) $ 198,714 $ 169,703 $(5,832) $ 163,871
</Table>
DELAYS IN FILING PERIODIC SEC REPORTS
The results of the regulatory examinations and enforcement actions and the
preliminary results of the Board's independent investigation that continued
until the fourth quarter of 2004 caused CIB Marine to defer filing its quarterly
report on Form 10-Q for the third quarter of 2003 as well as a prolonged delay
in the completion of the audit for the year ended December 31, 2003 and the
filing of the 2003 Form 10-K.
EARLY ACTION TO IMPROVE CIB MARINE'S FINANCIAL CONDITION
During this filing delay, and as the credit quality issues developed, were
identified and quantified during late 2003 and into 2004, CIB Marine undertook a
number of steps to improve its credit culture and strengthen the financial
condition of the company. These actions included changes in company management
and the
6
Board of Directors, improvements in the credit underwriting procedures, and
various measures to reduce and control expenses.
CIB Marine made the following changes in senior management and the Board of
Directors:
- In December 2003, Michael J. Miller was hired and named Chief Lending
Officer of CIB Marine.
- In February 2004, Board Member W. Scott Blake was appointed Chairman of
the Board of CIB Marine, succeeding Donald Trilling who remained on the
Board of Directors.
- In February 2004, CIB Marine named Margaret A. Incandela as its Chief
Credit Officer replacing Stephen C. Bonnell, who resigned from CIB Marine
in March 2004. Ms. Incandela was hired as CIB Marine's Loan Review
Manager in October 2003.
- In March 2004, CIB -- Chicago's President and CEO, and the Senior Loan
Officer of that bank resigned from their positions.
- In April 2004, Stanley J. Calderon was hired and appointed President and
CEO of CIB Marine. He joined the Board of CIB Marine in November 2004.
Mr. Calderon replaced J. Michael Straka, who retired as CIB Marine's
President and CEO in February 2004 and retired from all positions and the
Board of CIB Marine in April 2004.
- In September 2004, Steven C. Hillard was appointed to serve as a Director
of the Board of CIB Marine.
- In October 2004, Gary L. Longman was appointed to serve on the Board of
CIB Marine and as Chairman of CIB Marine's Audit Committee. The Board has
determined that Mr. Longman is an Audit Committee Financial Expert.
CIB Marine made the following changes in its credit functions, policies and
procedures:
- Replaced the senior executives in charge of the company's credit
function;
- Formed an Executive Loan Committee of the holding company to review and
approve certain new and renewal loans;
- Restructured the Loan Committees of its subsidiary banks;
- Prohibited any new or additional loans secured by or for the purpose of
purchasing CIB Marine stock;
- Enhanced underwriting procedures;
- Directed the loan review function to report directly to CIB Marine's
Board of Directors;
- Established an Early Identification/Warning Process to enhance the prompt
identification, evaluation and monitoring of weak credits;
- Implemented a loan grade certification program; and
- Reinforced procedures with regard to controls over loan collateral in its
possession.
REGULATORY ORDERS AND AGREEMENTS
In May 2004, CIB -- Chicago, Central Illinois Bank, Marine -- Wisconsin,
and CIB -- Indiana entered into Cease and Desist Orders with their respective
banking regulators. The orders required the banks to cease and desist from
certain banking practices and the violation of certain banking laws and
regulations, such violations being primarily transactions with affiliates
involving loans secured by or for the purpose of purchasing CIB Marine stock.
The Memorandum entered into by CIB -- Chicago in January 2003 was released as a
result of entering into the Cease and Desist Order. In May 2004, CIB Marine
entered into a Written Agreement with the Federal Reserve Bank of Chicago and in
August 2004, Citrus Bank entered into a Written Agreement with the Office of the
Comptroller of the Currency (collectively the "Orders and Agreements"). The
Orders and Agreements impose certain restrictions and reporting requirements on
7
CIB Marine and the bank subsidiaries, and require various actions to be taken.
These items include, among others:
- Maintenance of minimum capital levels;
- Restrictions on dividend payments and redemption of shares without prior
regulatory approval;
- Limitations on asset and loan growth;
- Adoption of a comprehensive plan to improve earnings;
- Development of a plan to reduce concentrations of credit and loan
relationships classified as substandard or doubtful;
- Development of a system to correct loan administration deficiencies; and
- Development of a plan to correct and prevent violations of banking laws
and regulations related to affiliate transactions.
Management believes that CIB Marine and its bank subsidiaries have complied with
the majority of the provisions of the Orders and Agreements and continues to
work with the regulators to comply with the remaining requirements of such
orders and agreements.
2004 AND 2005 ACTIONS TO IMPROVE CIB MARINE'S FINANCIAL CONDITION
As a result of the significant deterioration in the financial condition of
the company and the requirements of the regulatory orders, CIB Marine undertook
the following additional actions during 2004 and 2005 in order to improve the
financial strength of the company:
- Liquidity Enhancements. CIB Marine improved its liquidity position by
deferring interest payments on $60 million in junior subordinated
debentures and increasing investment securities and other liquid assets
at the subsidiary banks. Accrued and unpaid interest on the junior
subordinated debentures was $5.5 million and $11.2 million at December
31, 2004 and September 30, 2005, respectively.
- Further Reductions in Nonperforming Assets. Beginning in 2004 and
continuing into 2005, CIB Marine significantly reduced the level of
nonperforming assets as a result of the sale of CIB -- Chicago,
aggressive workout strategies and charge-offs. Nonperforming assets were
$57.2 million at December 31, 2004 compared to $195.7 million at December
31, 2003. At September 30, 2005, nonperforming assets were $29.9 million.
The allowance for loan losses was $109.9 million at December 31, 2003,
$30.9 million at December 31, 2004 and $22.7 million at September 30,
2005.
- Further Reductions in Credit Concentrations. Beginning in 2004 and
continuing into 2005, CIB Marine worked with its largest borrowers to
significantly reduce the level of credit concentrations. At December 31,
2003, CIB Marine had fifteen secured borrowing relationships (loans to
one borrower or a related group of borrowers) that exceeded 25% of
stockholders' equity as compared to one relationship at December 31, 2004
and September 30, 2005.
- Sale of CIB -- Chicago. The Board of Directors evaluated a wide range of
alternatives to improve the capital and liquidity position of the
company, including the sale of additional common stock, sale of the
company, sale of one or more of the bank subsidiaries and other asset
reduction strategies. An investment banker was hired to assist in
evaluating the financial condition of the company and various strategic
alternatives. Upon evaluation, the Board determined that under the
circumstances the sale of CIB -- Chicago, its Chicago banking subsidiary,
was the most prudent course of action for the company and its
shareholders. On August 12, 2004, CIB Marine signed an agreement to sell
CIB -- Chicago. The sale of CIB -- Chicago closed on November 30, 2004.
The final sale price was $67.4 million in cash. CIB Marine used $23.6
million of the proceeds to repay all indebtedness under its revolving
line of credit, injected $15.0 million of new capital into Central
Illinois Bank and repaid a $5.4 million short-term loan from the
purchaser. The balance of the proceeds are being utilized to help
8
fund ongoing operations and to meet the liquidity needs of the parent
company. The sale resulted in a pre-tax gain for financial statement
purposes of approximately $15.2 million. At the time of sale,
CIB -- Chicago had approximately $1.2 billion in assets and $1.1 billion
in deposits. The total consolidated assets of CIB Marine immediately
after the sale were approximately $1.4 billion. The sale of
CIB -- Chicago significantly improved the financial condition of the
company. As a result of the sale of CIB -- Chicago, CIB Marine and all of
its subsidiary banks currently meet the capital requirements of the
regulatory orders and agreements and are expected to meet their
respective liquidity needs through 2005.
- Sale and Wind Down of Nonbank Subsidiaries. During 2004 and 2005, CIB
Marine divested itself of certain nonbank subsidiaries and commenced the
wind down of certain other nonbank subsidiaries in order to more narrowly
focus its resources on its core commercial and retail banking strategies.
- CIB Marine Commercial Finance, LLC. In June 2004, CIB -- Chicago sold
substantially all of the assets and operations of its factoring
subsidiary, CIB Marine Commercial Finance, LLC. This company was
subsequently dissolved in November 2004.
- Mortgage Services, Inc. During the third quarter of 2004, CIB Marine
sold substantially all of the assets and operations of Mortgage
Services, Inc, its mortgage banking subsidiary. CIB Marine is in the
process of winding down the remaining affairs, and has incurred certain
liabilities with respect to the operations of this company. These
liabilities, totaling $1.8 million and $1.7 million as of December 31,
2004 and September 30, 2005, respectively, include repurchase
obligations relative to certain mortgage loans as a result of external
fraud and/or documentation issues, and certain reporting penalties.
- CIB Marine Capital, LLC. During 2004, CIB Marine continued to wind down
CIB Marine Capital, LLC, its mezzanine lending company. There were $3.4
million and $0.9 million in loans outstanding at December 31, 2004 and
September 30, 2005, respectively.
- CIB Construction/Canron. In 2003, Canron, a steel fabrication company
that CIB -- Chicago acquired 84% of in foreclosure, commenced a
voluntary liquidation and wind down of its affairs. During 2004, Canron
continued this plan and sold several of its properties and operations.
At December 31, 2004 and June 30, 2005, Canron had assets of
approximately $14.6 million and $11.1 million, respectively. In August
2005, Canron authorized and began liquidation distributions to its
shareholders. CIB Marine received a cash distribution of $0.8 million
and recorded the amount as a reduction of its investment in Canron.
- MICR, Inc. CIB Marine is continuing its efforts to sell MICR, a
manufacturer of payment processing systems that was acquired from a
borrower in lieu of foreclosure in 2000. In January 2005, CIB Marine
retained the services of an investment banker to assist in the marketing
and sale of MICR. At December 31, 2004, MICR had assets of approximately
$4.6 million and liabilities of approximately $0.9 million. In January
2005, MICR met the accounting criteria as an asset held for sale. Based
upon new valuation information received in the third quarter of 2005,
CIB Marine posted a $1.3 million impairment loss and reduced its
investment carrying value of MICR by that amount.
- Cost Controls and Reduction in Force Program. In June 2004, CIB Marine
began an overall cost cutting program which included restrictions on
salaries and hiring, tight expense controls, and some executive
management salary reductions. During 2004 and the first nine months of
2005, CIB Marine reduced its work force by a total of 102 full-time
equivalent employees with a total annual base pay of $4.9 million and
incurred severance expense totaling $0.7 million.
- Branches Planned for Sale. CIB Marine currently has twelve branches
planned to be offered for sale in the second half of 2005 and the first
half of 2006 with total June 30, 2005 deposits of $131.8 million.
Although these are all currently planned activities, it is possible some
of these transactions may not be consummated as anticipated in the
proposed time frames, or at all, if pricing is not acceptable or market
conditions change.
9
- Charter Consolidation. During the third and fourth quarters of 2005, CIB
Marine filed applications with the appropriate state and federal
regulators to merge Marine FSB into Marine -- Wisconsin. Prior to the
merger, CIB Marine plans to sell the Omaha and Sun City branch facilities
of Marine FSB to an unrelated third party. CIB Marine may also consider
the consolidation of additional charters in the future as part of its
strategy to become more efficient.
ADDITIONAL PLANS AND DEVELOPMENTS
These actions have stabilized the company and resulted in a significant
improvement in its financial condition. The company also believes that while it
was not profitable in 2004, and does not expect to be profitable in 2005, that
these actions have laid the groundwork for the company to eventually return to
profitability. Returning to profitability will depend upon whether CIB Marine is
successful in growing its loan portfolio, improving its net interest margin,
improving asset quality, further enhancing its credit processes and procedures
and reducing overhead expenses, including ongoing collection and legal fees, and
mitigating its legal risks.
With respect to CIB Marine's legal risks, the company and/or certain of its
officers and directors (past and present) have been named as defendants in a
lawsuit purported to be brought on behalf of CIB Marine shareholders that relate
to their purchase of CIB Marine stock. CIB Marine believes this lawsuit is
without merit and is aggressively defending the company's interests against this
and any other lawsuits that it considers to be baseless.
All of the steps CIB Marine has taken to date to improve the company's
financial position, liquidity and operations will enhance its ability to serve
the banking needs of the communities of its five remaining banks. Specifically,
during 2005, four new Chief Executive Officers were appointed to lead CIB
Marine's subsidiary banks:
- Michael J. Miller as President and CEO of Marine Bank, Wisconsin. Mr.
Miller previously served as Chief Lending Officer of CIB Marine;
- Rick Nisbeth as Chairman and CEO of Citrus Bank, N.A;
- Jerry Schwallier as President and CEO of Marine Bank, FSB; and
- Joseph Henderson as President and CEO of Central Illinois Bank.
In April 2005, the Cease and Desist Orders at Marine -- Wisconsin and
CIB -- Indiana were released and replaced with less restrictive Memoranda of
Understanding, which were entered into in March 2005, as a result of
improvements at such banks. In April 2005, Central Illinois Bank,
Marine -- Wisconsin and CIB -- Indiana each entered into a Memorandum of
Understanding with the FDIC and its applicable state banking regulators as a
result of deficiencies in internal controls over information technology.
ADDITIONAL INFORMATION
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8, "Financial Statements and Supplementary Data"
for more details regarding certain of the above described items.
10
MARKETS SERVED
At December 31, 2003, CIB Marine served eight geographic markets or regions
through its banking subsidiaries. Information on these banks as of December 31,
2003 and the markets they served is set forth in the following table:
<Table>
<Caption>
OPERATED BANKING
BANK GEOGRAPHIC MARKET/REGION SINCE FACILITIES ASSETS DEPOSITS
- ---- ------------------------------ -------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
CIB -- Chicago(1)........... Chicago metropolitan area 1994 16 $1,501.2 $1,314.8
Central Illinois Bank....... Central Illinois 1987 18 887.8 796.0
Marine -- Wisconsin......... Milwaukee metropolitan area 1997 7 358.4 320.0
Citrus Bank................. Florida's southeastern coast 2001 8 211.6 182.3
CIB -- Indiana.............. Indianapolis metropolitan area 1998 5 156.8 141.0
Marine FSB.................. Omaha, Phoenix and Las Vegas 1999 3 96.2 86.9
metropolitan areas
</Table>
- ---------------
(1) CIB -- Chicago was sold on November 30, 2004.
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 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.
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 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 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, 2003, the bank had total assets
of $887.8 million, 173 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.
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.
11
CIB Marine expanded the operations of CIB -- Chicago by establishing and
acquiring banking facilities throughout the Chicago metropolitan area. At
December 31, 2003, the bank had total assets of approximately $1.5 billion, 182
full-time equivalent employees and 16 banking facilities: one each in Arlington
Heights, Bolingbrook, downtown Chicago, Deerfield, Elk Grove Village, Elmhurst,
Frankfort, Gurnee, Harwood Heights, 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 which accepted
Eurodollar deposits. On November 30, 2004, CIB Marine sold CIB -- Chicago to
another banking organization. In conjunction with the sale of CIB -- Chicago,
the Cayman Islands office was closed.
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 expanded the operations of Marine -- Wisconsin by establishing
banking facilities throughout the Milwaukee metropolitan area. At December 31,
2003, the bank had total assets of $358.4 million, 55 full-time equivalent
employees and seven banking facilities: one each in Brookfield, Cedarburg,
Franklin, Grafton, downtown Milwaukee, Wauwatosa, and Pewaukee, which also
serves as CIB Marine's executive offices.
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, 2003, CIB -- Indiana had total assets of $156.8 million,
29 full-time equivalent employees and five banking facilities.
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. In
January 2003, the main office was moved from the Omaha facility to the
Scottsdale, Arizona facility. At December 31, 2003, Marine FSB had total assets
of $96.2 million, 18 full-time equivalent employees and three banking
facilities, one each in Omaha, Nebraska; Scottsdale, Arizona; and Henderson,
Nevada, a suburb of Las Vegas. In February 2004, Marine FSB opened a new banking
facility in Sun City, Arizona.
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. During April 2003, CIB Marine established banking
facilities in Boca Raton, Miami and Coral Gables. At December 31, 2003, Citrus
Bank had total assets of $211.6 million, 53 full-time equivalent employees and
eight banking facilities,
12
one each in Vero Beach, Sebastian, North Miami Beach, Barefoot Bay, Sebring,
Boca Raton, Miami and Coral Gables.
PHOENIX METROPOLITAN AREA
In October 2001, CIB Marine entered the Phoenix metropolitan area by
establishing a banking facility of Marine FSB in Scottsdale, Arizona. In January
2003, this facility became the main office of Marine FSB. In February 2004, a
second banking facility in the Phoenix metropolitan area was opened in Sun City.
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 NONBANK SUBSIDIARIES
At December 31, 2003, CIB Marine also had five wholly-owned nonbanking
subsidiaries or affiliates: Mortgage Services, Inc., CIB Marine Capital, LLC,
CIB Marine Commercial Finance, LLC, CIB Marine Information Services, Inc., and
MICR, Inc.
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 ("Mortgage
Services"). This subsidiary is an Illinois corporation and conducted retail and
wholesale mortgage operations in a number of states. CIB Marine sold
substantially all of these mortgage loans in the secondary market with servicing
rights released. As of December 31, 2003, Mortgage Services had 112 full-time
equivalent employees. Mortgage Services does not separately own any facilities,
and its principal office was located in the Bloomington facility of Central
Illinois Bank. Mortgage Services employees also provided mortgage origination
and mortgage brokerage services at many of the other branch facilities of CIB
Marine's subsidiary banks. CIB Marine sold the operations of Mortgage Services
in the third quarter of 2004. CIB Marine is in the process of winding down the
remaining affairs of Mortgage Services. CIB Marine offers residential mortgage
loans through its subsidiary banks.
CIB MARINE CAPITAL, LLC
On April 3, 2001, CIB Marine established CIB Marine Capital, LLC ("CIB
Marine Capital"), a Wisconsin limited liability company. CIB Marine Capital
provided leveraged financing, including mezzanine loans. Typically, the
collateral coverage on these loans is insufficient to secure a senior debt
position. These loans are, by their nature, inherently riskier than senior debt
position loans. At December 31, 2003, CIB Marine Capital had total loans
outstanding of $19.0 million. CIB Marine Capital does not separately own any
facilities and its principal office was located in the Hillside, Illinois
facility of CIB -- Chicago. During 2003, CIB Marine ceased to offer new loans
through CIB Marine Capital and began winding down its affairs, including the
sale and collection of outstanding loans.
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 ("Commercial
Finance"), 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 Commercial
Finance, LLC provided the factoring of receivables and other asset-based lending
products to borrowers. At December 31, 2003, CIB Marine Commercial Finance, LLC
had total assets of $12.0 million and 13 full-time equivalent employees. CIB
Marine Commercial Finance, LLC did not own any facilities and its principal
office was located in the Hillside, Illinois facility of CIB -- Chicago. CIB
Marine sold the operations of this company in
13
June 2004 and dissolved the company in November 2004. For more information on
this company, see Note 3 -- Business Combinations in Item 8 of this Form 10-K.
CIB MARINE INFORMATION SERVICES, INC.
CIB Marine Information Services, Inc. ("CIB Marine Information"), an
Illinois corporation, was incorporated as a wholly-owned subsidiary of CIB
Marine in August 1990 as CIB Data Processing Services, Inc. In 2002, CIB Marine
changed its name to CIB Marine Information Services, Inc. This subsidiary was
organized to provide in-house data processing services, coordinate computer
equipment leases and purchases, license banking software and coordinate
operation of CIB Marine software. CIB Marine Information facilitates internal
operational needs and does not provide services to third parties. As of December
31, 2003, CIB Marine Information had 71 full-time equivalent employees. CIB
Marine Information does not separately own any facilities, and its principal
office is located in Mt. Prospect, Illinois.
MICR, INC.
In 2000, CIB Marine acquired and/or assumed, through MICR, Inc. ("MICR"), 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 was classified as a held for
disposal asset at December 31, 2003, 2002 and 2001. As of the acquisition date,
MICR 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 $0.8 million, $1.5 million and $0.8 million were
paid by MICR to CIB Marine during 2003, 2002 and 2001, respectively. The
business has generated profits in each of the prior four 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 $1.1 million, $1.2 million and $1.2 million for 2003,
2002 and 2001, respectively. During 2003, goodwill of $2.0 million attributable
to MICR was determined to be impaired and was written off. As of December 31,
2003, MICR had total assets of $4.6 million and $0.6 million in liabilities.
MICR does not separately own any facilities. CIB Marine continues its efforts to
sell MICR. For more information on this company see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Companies Held for Disposal" and "Subsequent Events -- MICR,
Inc.," and Note 9 -- Companies Held for Disposal in Item 8 of this Form 10-K.
CIB CONSTRUCTION, LLC
In 2002, CIB Marine acquired through its wholly-owned subsidiary, CIB
Construction, LLC, a wholly-owned subsidiary of CIB -- Chicago, 84% of Canron
Corporation, a steel fabrication and erection company that had operations in the
United States, Canada and Mexico. Canron was acquired from a borrower who was in
default of its obligations to CIB Marine and it is classified as an asset held
for disposal. In September 2003, Canron commenced a voluntary liquidation and
winding down of its affairs. In the fourth quarter of 2003, Canron sold its
Western Canadian, Western United States and Mexico operations. At December 31,
2003, CIB Construction had $29.0 million in assets and $28.5 million in
liabilities. These amounts reflect estimated liquidation values net of selling
costs. For more information on this company see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Companies Held
For Disposal" and "Subsequent Events -- Canron," Note 3 -- Business Combinations
and Note 9 -- Companies Held for Disposal in Item 8 of this Form 10-K.
14
MANAGEMENT SUPPORT SERVICES
In addition to the support services provided by its nonbank subsidiaries,
CIB Marine, as a holding company, performs a significant portion of its
subsidiaries' back office services, including credit administration, treasury
and asset/liability management support services, loan review, accounting,
finance, 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, 2003, CIB Marine had 192
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, 2003, CIB Marine and all of its bank and nonbank
subsidiaries had a combined total of 898 full-time equivalent employees.
Including Canron Corporation and MICR, which are held for disposal. CIB Marine
had a total of 947 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 nonbanking 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
Bank holding companies and financial institutions are extensively regulated
under both federal and state law. Any significant change in the banking laws and
regulations applicable to CIB Marine or its banking subsidiaries could
materially impact CIB Marine's operations or change the manner in which it
conducts business. Federal and state regulation of financial institutions is
intended primarily for the protection of the federal deposit insurance funds and
depositors.
CIB Marine is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is regulated by the Federal
Reserve Board. 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 the 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: The Division of Banks and Real Estate of the Illinois Department of
Financial and Professional Regulation (the "DBRE"), the Wisconsin Department of
Financial Institutions, or the Indiana Department of Financial Institutions. CIB
Marine's mortgage banking subsidiary is regulated by the DBRE, and regulators in
certain other states in which Mortgage Services conducts operations.
15
CIB Marine and its nonbank 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 nonbank
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. CIB Marine and each of its subsidiary banks, except Marine
FSB, are subject to a Written Agreement, Cease and Desist Order or Memorandum of
Understanding. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Regulatory Matters."
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 bank holding company, or
acquiring directly or indirectly any ownership or control of more than 5% of the
voting shares of any bank. The BHCA also prohibits a bank holding company, with
particular exceptions, from acquiring direct or indirect ownership of more than
5% of the voting shares of any company which is not a bank or bank holding
company and from engaging in any business other than that of banking, managing
and controlling banks, or furnishing services to banks and their subsidiaries.
Bank holding companies may, however, engage in some businesses and activities
determined by the 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,
including having adequate capitalization and management:
- 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. Federal Savings Banks such
as Marine FSB are permitted to establish de novo branches outside their
home state with OTS approval.
16
FINANCIAL MODERNIZATION LEGISLATION
The Gramm-Leach-Bliley Act of 1999 and its implementing regulations (the
"GLBA") significantly changed financial services regulations by expanding
permissible nonbanking activities 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 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 to qualify as a Financial Holding Company, a bank holding company
is required to file a declaration with the Federal Reserve Board certifying 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. CIB
Marine has not elected to become a Financial Holding Company and would not
presently be able to do so.
The GLBA also allows passive investments by Financial Holding Companies in
any type of financial or nonfinancial company through merchant bank and
insurance company investments, provides an enhanced framework for protecting the
privacy of consumer information, 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 state chartered 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 regulatory 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.
The GLBA also limits the ability of depository and other financial
institutions to disclose nonpublic information about consumers to nonaffiliated
third parties. Pursuant to these rules, such institutions must adopt privacy
policies and provide initial notices to customers about them describing the
conditions under which they may disclose nonpublic personal information to
nonaffiliated third parties and affiliates; annual notices to current customers
about their privacy policies; and a reasonable method for customers to "opt-out"
of disclosures to nonaffiliated third parties. These privacy provisions affect
how consumer information is transmitted through diversified financial companies
and conveyed to outside vendors.
CAPITAL STANDARDS
The federal banking agencies impose risk-based capital requirements and
guidelines on bank holding companies and banks to provide for a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets and those recorded as off-balance sheet items. A bank holding company or
bank's capital, in turn, is divided into two tiers:
- core capital (commonly referred to as Tier 1 capital), which generally
includes common equity, qualifying noncumulative perpetual preferred
stock, and for bank holding companies, a limited amount of qualifying
cumulative perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries (including trust preferred
securities, provided that not more than 25% of the
17
qualifying Tier 1 capital may consist of trust preferred securities), less
goodwill and certain other intangible assets; and
- supplementary capital (commonly referred to as Tier 2 capital), which
includes, among other items, perpetual preferred stock not meeting the
Tier 1 definition, mandatory convertible securities, and limited amounts
of subordinated debt and reserves for credit losses.
Bank holding companies and banks are currently required to maintain Tier 1
capital equal to at least 4% and "total capital" (the sum of Tier 1 and Tier 2
capital) equal to at least 8% of its total risk-weighted assets, including
certain off-balance-sheet items, such as unused lending commitments and standby
letters of credit.
The Federal Reserve Board, the FDIC and the OCC have also adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, 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.
Federal regulators have imposed similar requirements on banks.
The regulators may set capital requirements higher than the minimums noted
above for banks and bank holding companies whose circumstances warrant it. For
example, bank holding companies experiencing or anticipating significant growth
may be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the 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, 2003, CIB Marine was not in compliance with these minimum
capital requirements. At December 31, 2003, CIB Marine's banking subsidiaries
were in compliance with those requirements except CIB -- Chicago. For more
information about the regulatory capital levels of CIB Marine and its bank
subsidiaries, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital" and Note 15 -- Stockholders'
Equity in Item 8 of this Form 10-K.
On January 30, 2003, CIB -- Chicago entered into a Memorandum of
Understanding (the "Memorandum") with the DBRE and the FDIC. 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. Pursuant to the Memorandum, CIB -- Chicago agreed to
take certain actions to correct noted deficiencies and to maintain a Tier 1
capital level equal to or exceeding 8% of the bank's total assets as calculated
in accordance with Part 325 of the FDIC rules and regulations ("Part 325"), 12
C.F.R. Part 325 during the period in which the Memorandum was in effect. 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 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 without regulatory approval. For additional information relative to
the Memorandum, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Regulatory Matters" and Note
15 -- Stockholders' Equity in Item 8 of this Form 10-K.
The Memorandum was superceded by a joint Cease and Desist Order entered
into by CIB -- Chicago with the FDIC and DBRE with an effective date of May 29,
2004. Pursuant to the Cease and Desist Order, CIB -- Chicago is required to
maintain a Tier 1 capital level equal to or exceeding 8% of the bank's total
assets as calculated in accordance with Part 325 of the FDIC rules and
regulations ("Part 325"), 12 C.F.R. Part 325. The Order further required
CIB -- Chicago to submit a plan within 60 days of the date of the required
determination to increase its capital ratio to 8%. If it is below such
threshold, CIB -- Chicago would
18
be required to prepare and submit to the regulators a plan to raise
CIB -- Chicago's capital ratio to 8%. Central Illinois Bank, Marine -- Wisconsin
and CIB -- Indiana entered into similar orders with the FDIC and their
applicable state banking regulators and CIB Marine entered into a Written
Agreement providing for similar terms with the Federal Reserve Bank, each
effective May 29, 2004. On August 19, 2004, Citrus Bank entered into a similar
written agreement with the OCC. In April 2005, the Cease and Desist Orders at
CIB -- Indiana and Marine -- Wisconsin were released and replaced with Memoranda
of Understanding, which were entered into in March 2005, and Central Illinois
Bank, Marine -- Wisconsin and CIB -- Indiana entered into Memorandum of
Understandings with the FDIC and their state banking regulators as a result of
deficiencies related to information technology. For additional information
relative to the Cease and Desist Orders and Written Agreement, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Matters" and Note 15 -- Stockholders' Equity in Item 8
of this Form 10-K.
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 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 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 and could be liable to the FDIC if it were to suffer a
loss in connection with any one of them. This liability would be subordinated in
right of payment to deposit liabilities, secured obligations, any other general
debt or senior liability and any obligation subordinated to depositors or other
general creditors, other than obligations owed to all affiliates of the
depository institutions, subject to certain exceptions.
Also, 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, 2003, CIB Marine did not have any capital loans to any of its
subsidiary banks.
SAFETY AND SOUNDNESS GUIDELINES
The federal banking agencies have adopted guidelines to assist in
identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines establish operational and managerial
standards relating to internal controls, information systems, and internal audit
systems; loan documentation; credit underwriting; interest rate exposure; asset
growth and asset quality; and compensation, fees, and benefits. In addition, the
federal banking agencies have adopted safety and soundness guidelines for asset
quality and for evaluating and monitoring earnings to ensure that earnings are
sufficient for the maintenance of adequate capital and reserves.
19
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the federal banking regulators to take prompt corrective
action in respect to FDIC insured depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier depends upon how its capital levels compare to various relevant
capital measures and certain other factors established by regulation. Under
applicable regulations, an FDIC insured bank is defined as well capitalized if
it maintains a leverage ratio 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: a
leverage ratio of 4% or greater (or 3% or greater if it receives the highest
composite examination rating by its examiners, subject to appropriate federal
banking agency guidelines); a total capital ratio of 8% or greater; and a Tier 1
Capital Ratio of 4% or greater. A bank will be considered undercapitalized if it
fails to meet any minimum required measure, significantly undercapitalized if it
is significantly below such measure and critically undercapitalized if it
maintains a level of tangible equity capital equal to or less than 2% of total
assets. A bank may be reclassified to be in a capitalization category that is
next below that indicated by its actual capital position if it receives a less
than satisfactory examination rating by its examiners with respect to its
assets, management, 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. The federal banking agencies, however, may not treat
a significantly undercapitalized institution as critically undercapitalized
unless its capital ratio actually warrants such treatment.
FDICIA generally prohibits a depository institution from making any capital
distribution, including payment of dividends or paying any management fee to its
holding company, if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan to become
adequately capitalized. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally depending upon where the deposits are solicited; in addition,
"pass-through" insurance coverage may not be available for certain employee
benefit accounts.
A number of additional requirements and restrictions may apply to
significantly undercapitalized depository institutions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions may be restricted from
making payments of principal and interest on subordinated debt and are subject
to appointment of a receiver or conservator.
At December 31, 2003, pursuant to FDIC guidelines in 12 C.F.R. Part 325,
CIB -- Indiana, Marine FSB and Citrus Bank were categorized as well capitalized.
Central Illinois Bank and Marine -- Wisconsin were categorized as adequately
capitalized, and CIB -- Chicago was categorized as significantly
undercapitalized, under the regulatory framework for prompt corrective action.
In the second quarter of 2004, CIB -- Chicago submitted to the FDIC a capital
restoration plan which was accepted by the FDIC on August 9, 2004, and
subsequently amended by CIB -- Chicago to provide for the sale of the bank to
restore its capital.
In addition to measures taken under the prompt corrective action
provisions, banking organizations may be subject to potential enforcement
actions by the federal banking agencies for unsafe or unsound practices in
conducting their business for violations of any law, rule, regulation, or any
condition imposed in writing by the agency or any written agreement with the
agency. These enforcement actions may include the appointment of a conservator
or receiver for a bank, the issuance of a cease and desist order that can be
judicially enforced, the
20
termination of a bank's deposit insurance, the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against officers, directors and other institution-affiliated parties, and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if equitable relief was
not granted. Finally, pursuant to an interagency agreement, the FDIC may examine
without the express permission of the institution's primary regulator any
institution that has a substandard regulatory examination score or is considered
undercapitalized.
DIVIDEND RESTRICTIONS
The 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 it dividends.
Federal law prohibits the payment of any dividends that would cause a bank to
become undercapitalized. The ability of state chartered commercial banks to pay
dividends is also subject to restrictions primarily under the banking laws of
the state under which the bank is organized. In the case of CIB Marine's state
chartered banks, the laws of Illinois, 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. In addition, the Federal
Reserve Board and the bank's regulators have the authority to prohibit CIB
Marine and its subsidiary banks from paying dividends, depending upon CIB
Marine's and the banks' financial condition, if such payment is deemed to
constitute an unsafe or unsound practice.
Under Illinois law, a bank may generally pay dividends without the approval
of the DBRE 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 DBRE.
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 is 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
21
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.
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. The OTS defines capital
categories, including "well capitalized" and "adequately capitalized" generally
the same way as the other federal banking regulators.
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.
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 2003 a total of $22.3 million in dividends were paid to CIB Marine by
its bank and nonbank subsidiaries. As of December 31, 2003, there was no
stockholders' equity at the subsidiary banks that was available for payment of
dividends to CIB Marine without approval by the applicable regulatory
authorities. For additional information regarding the Memorandum, Cease and
Desist Orders and Written Agreement, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Regulatory Matters"
and Note 15 -- Stockholders' Equity in Item 8 of this Form 10-K.
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 domestic deposits, depending on the capital category and
supervisory category to which it is assigned. The FDIC may increase or decrease
the assessment rate schedule on a semi-annual basis. The FDIC is also authorized
to terminate an institution's deposit insurance upon a finding by the FDIC that
the institution's financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices or has violated any
applicable rule, regulation, order or condition enacted or imposed by the
institution's regulatory agency. The termination of deposit insurance for CIB
Marine's banks would have a material adverse effect on CIB Marine. In addition
to its insurance assessment, each insured institution is subject to quarterly
debt service assessments in connection with bonds issued by the government
corporation that financed the federal savings and loan bailout. As of December
31, 2003, the banks' assessment rate was 0%, and the quarterly debt service
assessment rate was 0.0152%. During the first quarter of 2004, the assessment
rates for Central Illinois Bank, Marine -- Wisconsin
22
and CIB -- Indiana were increased to 0.10% and CIB -- Chicago was increased to
0.27%. Additionally, the quarterly debt service assessment rate for all banks
was increased to 0.0154%. For further information on these assessments, see
Subsequent Events -- FDIC Premiums in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form 10-K.
RESTRICTIONS ON AFFILIATE TRANSACTIONS
Transactions between CIB Marine, its subsidiary banks and its nonbank
subsidiaries are subject to a number of restrictions. Federal law imposes
restrictions and limitations on CIB Marine's subsidiary banks from making
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, CIB Marine or other affiliates, the purchase of, or investment in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of CIB Marine or other affiliates. Such
restrictions and limitations prevent CIB Marine or other affiliates from
borrowing from the subsidiary banks unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the subsidiary banks to or in CIB Marine or to or in any other affiliate are
limited, individually, to 10% of the respective subsidiary bank's capital,
allowance for loan losses and surplus, and such secured loans are limited in the
aggregate to 20% of the respective subsidiary bank's capital, allowance for loan
losses and surplus. All such transactions must be on terms that are no less
favorable to the bank subsidiary than those that would be available from
nonaffiliated third parties. Moreover, some state banking laws, like those in
Illinois, impose restrictions on affiliate transactions similar to those imposed
by federal law. Certain of CIB Marine's subsidiary banks have engaged in
transactions with affiliates, including the making of loans to purchase CIB
Marine stock. In connection with the cease and desist orders issued against CIB
Marine's bank subsidiaries (see "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Regulatory Matters"), CIB
Marine's two Illinois bank subsidiaries were cited by the bank regulators for
failure to comply with federal restrictions (and CIB -- Chicago also was cited
for failure to comply with the Illinois restrictions) on transactions with
affiliates relating to lending transactions involving the stock of CIB Marine.
See Note 2 -- Restatement of 2002 and 2001 -- Receivables from Sale of Stock in
Item 8 of this Form 10-K. 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 $9.4 million of loans outstanding to
Canron Corporation at December 31, 2003. 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, which period may be
extended up to an additional three years.
At December 31, 2003, CIB Marine's subsidiary banks had $22.7 million in
outstanding principal balances on loans secured or partially secured by CIB
Marine stock. Specific reserves on these loans were $0.1 million.
The restrictions on loans to directors, executive officers, principal
stockholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
federally insured institutions. These restrictions include limits on loans to
one borrower and conditions that must be met before such a loan can be made.
There is also an aggregate limitation on all loans to insiders and their related
interests. These loans cannot exceed the institution's total unimpaired capital
and surplus, and the FDIC may determine that a lesser amount is appropriate.
Insiders are subject to enforcement actions for knowingly accepting loans in
violation of applicable restrictions. Regulation O institutions are not subject
to the prohibitions of the Sarbanes-Oxley Act of 2002 on certain loans to
insiders.
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% 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
23
exceeding 20% 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 and publicly
disclose such ratings. State and federal agencies also examine financial
institutions compliance with fair lending laws. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. Federal banking agencies are also authorized to take compliance
with such laws and a bank's CRA rating into consideration when regulating and
supervising other activities of a bank holding company and its banks, including
expansionary activities. As of the date of its most recent examination, each of
CIB Marine's subsidiary banks had a CRA rating of at least satisfactory.
COMPLIANCE WITH CONSUMER PROTECTION LAWS
CIB Marine's subsidiary banks are subject to many federal consumer
protection statutes and regulations including the CRA, Truth in Lending Act,
Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act, Real
Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other
things, these acts:
- require banks to meet the credit needs of their communities;
- require banks to disclose credit terms in meaningful and consistent
ways;
- prohibit discrimination against an applicant in any consumer or business
credit transaction;
- prohibit discrimination in housing-related lending activities;
- require banks to collect and report applicant and borrower data
regarding loans for home purchases or improvement projects;
- require lenders to provide borrowers with information regarding the
nature and cost of real estate settlements;
- prohibit certain lending practices and limit escrow account amounts with
respect to real estate transactions; and
- prescribe possible penalties for violations of the requirements of
consumer protection statutes and regulations.
24
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Securities Exchange Act of 1934
(the "Exchange Act"), such as CIB Marine, would, under the circumstances set
forth in the presumption, constitute acquisition of control of CIB Marine.
In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of the
acquirer that is a bank holding company) or more of the outstanding common stock
of CIB Marine, or otherwise obtaining control or a "controlling influence" over
CIB Marine or its banking subsidiaries.
USA PATRIOT ACT OF 2001
The USA Patriot Act of 2001 and its implementing regulations ("Patriot
Act") were enacted and implemented for the purpose of strengthening the ability
of the U.S. Government to intercept and obstruct terrorism by, among others,
increasing the power of the U.S. government to obtain access to information and
to investigate a broad range of criminal activities. The Patriot Act expanded
the definition of money laundering to include terrorism, terrorism support and
foreign corruption, and increases the civil and criminal penalties for money
laundering offenses. The Patriot Act further applies certain anti-money
laundering measures to United States bank accounts of foreign persons; prohibits
financial institutions from establishing, maintaining, administering or managing
a correspondent account with a foreign shell bank; provides for certain
forfeitures of funds deposited in United States interbank accounts by foreign
banks; provides the 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. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. Regulatory authorities have increased compliance
monitoring activities and have levied significant fines and sanctions on many
firms in the financial industry. No fines or sanctions have been levied on CIB
Marine.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 ("Sarbanes") addresses corporate governance
and accounting oversight matters. Sarbanes 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 audit clients, such as
certain consulting services; requires accounting firms to rotate partners
working with public clients every five years; expands disclosure of corporate
operations and internal controls; requires certification of financial statements
by the 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.
1934 EXCHANGE ACT
CIB Marine's stock is registered with the Securities and Exchange
Commission ("SEC"). Under the Exchange Act, CIB Marine is subject to the
information, reporting, proxy solicitation, insider trading, corporate
governance and other requirements and restrictions of the Exchange Act.
FUTURE LEGISLATION
Various legislation is from time to time introduced in Congress and state
legislatures with respect to the regulation of financial institutions. Such
legislation may change the banking statutes and the operating
25
environment of CIB Marine and its banking subsidiaries in substantial and
unpredictable ways. CIB Marine cannot determine the ultimate effect that
potential legislation, or implementing regulations, if enacted, would have upon
the financial condition or results of operations of CIB Marine or its banking
subsidiaries.
AVAILABLE INFORMATION
CIB Marine files various reports with the 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 reasonably practical after filed.
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 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;
- CIB Marine's ability to maintain adequate capital;
- CIB Marine's ability to operate profitably;
- CIB Marine's ability to comply with regulatory orders and agreements;
- The costs and effects of outstanding and/or potential litigation and of
unexpected or adverse outcomes in such litigations;
- CIB Marine's ability to bring current its delinquent filings of periodic
reports with the Securities and Exchange Commission and other regulators;
- CIB Marine's ability to submit a timely filing of its federal and state
income tax returns;
- CIB Marine's ability to attract and retain key personnel;
- CIB Marine's ability to attract and retain core deposits;
- 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;
26
- 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 nonfinancial institutions;
- 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;
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.
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,
2003. CIB Marine's subsidiary banks lease or sublease office space to CIB Marine
and to its nonbank subsidiaries.
<Table>
<Caption>
OWNED OR DATE OPENED
LOCATION LEASED OR ACQUIRED
- -------- --------- -----------
SUBSIDIARY BANKS(1):
CENTRAL ILLINOIS BANK FACILITIES
Sidney, Illinois............................................ Owned 09/87
Champaign, Illinois......................................... Owned 09/88
Urbana, Illinois............................................ Owned 03/90
Arrowsmith, Illinois........................................ Owned 10/91
Champaign, Illinois (Midtown)............................... Owned 04/94
Rantoul, Illinois........................................... Leased 11/94
Monticello, Illinois........................................ Leased 05/95
Danville, Illinois.......................................... Owned 08/95
Decatur, Illinois........................................... Leased 10/95
Arthur, Illinois............................................ Owned 10/96
Morton, Illinois............................................ Leased 10/96
Peoria, Illinois............................................ Leased 09/97
East Peoria, Illinois....................................... Owned 10/97
Springfield, Illinois....................................... Leased 04/99
Lincoln, Illinois........................................... Owned 04/00
Bloomington, Illinois....................................... Owned 10/00
Peoria, Illinois (Knoxville)................................ Leased 12/01
Peoria, Illinois (Grand Prairie)............................ Leased 04/03
</Table>
27
<Table>
<Caption>
OWNED OR DATE OPENED
LOCATION LEASED OR ACQUIRED
- -------- --------- -----------
CIB-CHICAGO FACILITIES(2)
Hillside, Illinois.......................................... Leased 06/94
Willow Springs, Illinois.................................... Owned 07/96
Niles, Illinois............................................. Leased 08/96
Elk Grove Village, Illinois................................. Owned 10/96
Chicago, Illinois........................................... Leased 10/96
Bolingbrook, Illinois....................................... Leased 02/97
Elmhurst, Illinois.......................................... Leased 06/98
Gurnee, Illinois............................................ Leased 07/98
Mount Prospect, Illinois.................................... Owned 03/99
Arlington Heights, Illinois................................. Owned 03/99
Northbrook, Illinois........................................ Leased 04/99
Zion, Illinois.............................................. Owned 09/99
Frankfort, Illinois......................................... Leased 01/00
Palos Heights, Illinois..................................... Leased 11/02
Harwood Heights, Illinois................................... Leased 04/03
Deerfield, Illinois......................................... Leased 06/03
MARINE-WISCONSIN FACILITIES
Cedarburg, Wisconsin........................................ Owned 09/97
Grafton, Wisconsin.......................................... Owned 09/97
Pewaukee, Wisconsin......................................... Leased 02/98
Wauwatosa, Wisconsin........................................ Leased 05/98
Milwaukee, Wisconsin........................................ Leased 04/99
Franklin, Wisconsin......................................... Leased 08/00
Brookfield, Wisconsin....................................... Leased 09/01
CIB-INDIANA FACILITIES
Indianapolis, Indiana (Fox Road)............................ Leased 03/98
Indianapolis, Indiana (Emerson Way)......................... Leased 09/98
Indianapolis, Indiana (Monument Circle)..................... Leased 04/99
Indianapolis, Indiana (Rockville Road)...................... Owned 03/00
Carmel, Indiana............................................. Leased 08/00
MARINE FSB FACILITIES
Omaha, Nebraska............................................. Leased 11/99
Scottsdale, Arizona......................................... Leased 10/01
Henderson, Nevada........................................... Leased 01/02
CITRUS BANK FACILITIES
Vero Beach, Florida......................................... Owned 04/90
Sebastian, Florida.......................................... Owned 02/93
Barefoot Bay, Florida....................................... Owned 09/96
North Miami Beach, Florida.................................. Leased 12/01
Sebring, Florida............................................ Leased 01/02
Biscayne Bay, Florida....................................... Leased 04/03
Coral Gables, Florida....................................... Leased 04/03
Boca Raton, Florida......................................... Leased 04/03
</Table>
28
<Table>
<Caption>
OWNED OR DATE OPENED
LOCATION LEASED OR ACQUIRED
- -------- --------- -----------
NONBANK SUBSIDIARIES:
MICR, INC.
Mukilteo, Washington........................................ Leased 10/00
MORTGAGE SERVICES, INC.(3)
Waukesha, Wisconsin......................................... Leased 12/02
CIB MARINE BANCSHARES, INC.
Champaign, Illinois......................................... Leased 10/99
</Table>
- ---------------
(1) CIB Marine's subsidiary banks are in the process of evaluating the
effectiveness of their respective branch networks, which may result in the
sale or closure of certain of these branches. See Branch Activities in Note
27 -- Subsequent Events for further information.
(2) CIB Marine sold CIB -- Chicago in November 2004.
(3) CIB Marine sold the operations of Mortgage Services, Inc. and its Comcor
division in the third quarter of 2004.
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, 2003.
<Table>
<Caption>
OWNED OR DATE OPENED DATE SOLD OR LEASE
LOCATION LEASED OR ACQUIRED TERMINATED
- -------- --------- ----------- ------------------
CANRON CORPORATION
Rexdale, Ontario............................... Owned 10/02 4/05
Conklin, New York.............................. Owned 10/02 2/04
New York, New York............................. Leased 10/02 1/04
Regina, Saskatchewan........................... Owned 10/02 9/04
Edmonton, Alberta.............................. Leased 10/02 1/04
Piscataway, New Jersey......................... Leased 10/02 1/04
</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
Material pending litigation, other than that of a routine nature in the
ordinary course of business, is as follows:
In August 2003, Keith Burchett, a shareholder of CIB Marine and a borrower
of CIB -- Chicago, commenced an action in the Circuit Court of Cook County,
Illinois, against CIB Marine, Central Illinois Bank, CIB -- Chicago and two of
their now former directors and/or officers for damages arising out of alleged
fraudulent misrepresentations relative to the financial condition of Canron and
its principal shareholder by defendants to induce the plaintiff to borrow money
from CIB -- Chicago and make a $0.5 million investment in Canron. Plaintiff
asserts claims for fraud and shareholder remedies. The shareholder remedies
action alleges the defendants' violations of lending regulations caused a
decline in the plaintiff's investment in CIB Marine. Plaintiff seeks an
unspecified amount of compensatory and punitive damages, requests an order
requiring CIB Marine and the banks to repurchase his CIB Marine shares of stock
at fair value, and other forms of relief. While the outcome of these claims
cannot be determined at this time, CIB Marine intends to vigorously defend this
action. Central Illinois Bank has been removed as a defendant in subsequent
amended complaints filed by the plaintiff. On November 30, 2004, CIB Marine sold
CIB -- Chicago.
In June 2004, Central Illinois Bank ("CIB") commenced an action in the
Circuit Court of the Sixth Judicial Circuit, Champaign County, Illinois, against
John C. Hadley and Mary Lydia Hadley, CIB Marine's
29
largest individual shareholders, for damages arising out of the Hadleys' default
in December 2003 of certain loan obligations (the "State Litigation") and
subsequently obtained a confession of judgment. The loans approximate $9.0
million and are secured by CIB Marine stock and the accounts receivable,
inventory, equipment and other personal property of the borrowers and their
restaurant supply and coin businesses. In December 2004, the Hadleys consented
to the entry of an order for relief under Chapter 11 of the Bankruptcy Code
pending in the United States Bankruptcy Court for the Central District of
Illinois (the "Bankruptcy Case"). In August 2004, and prior to the bankruptcy
consent orders, the Hadleys filed a motion to vacate the confession of judgment
in the State Litigation and sought leave to file a proposed counterclaim to
recover $35.0 million in actual damages and punitive damages for the alleged
loss or substitution by CIB of certain rare coins and collectibles which the
Hadleys allege were pledged to CIB as collateral. The Hadleys' motion remains
pending in the State Litigation, which has been stayed by the pendency of the
Bankruptcy Case. CIB intends to vigorously defend the counterclaim if it is
pursued. The ultimate outcome of the counterclaim cannot be determined at this
time. CIB has filed a motion to modify the automatic stay to permit CIB to
proceed with the State Litigation and to foreclose on its collateral if the
Hadleys do not provide adequate protection.
In June 2004, John C. Ruedi, a former employee of CIB Marine, filed an
action against CIB Marine, "Central Illinois Bancorp, Inc." and KPMG LLP in the
Circuit Court of the Sixth Judicial District, Champaign County, Illinois for
rescission or damages, including punitive damages, in connection with
plaintiff's October 1, 2002 exercise of options issued by CIB Marine to acquire
36,688 shares of CIB Marine common stock at various exercise prices. Plaintiff
claims that but for CIB Marine's and Central Illinois Bancorp, Inc.'s alleged
fraudulent concealment of material facts regarding the financial condition of
CIB Marine and KPMG's alleged professional negligence he would not have
exercised his options. Plaintiff also seeks to recover from Central Illinois
Bancorp, Inc. and CIB Marine in excess of $40,000 allegedly due Plaintiff
pursuant to a purported memorandum providing for the payment of an incentive to
Plaintiff. The claim against KPMG LLP was subsequently dismissed and in March
2005 Plaintiff amended his complaint to add the former President and CEO of CIB
Marine, KPMG LLP and the KPMG LLP partner in charge of CIB Marine's audit as
defendants based upon claims of alleged fraudulent concealment (as to the former
President and CEO of CIB Marine) and professional negligence (as to KPMG and the
partner in charge of CIB Marine's audit). CIB Marine filed a motion to dismiss
several of Plaintiff's claims and answered the others denying liability. That
motion to dismiss was denied and CIB Marine answered the remaining counts
against it, denying liability. Plaintiff filed a motion for summary judgment
seeking recovery of $40,000 from CIB Marine on his incentive payment claim. This
motion has been denied. Plaintiff has voluntarily dismissed his claims against
both KPMG LLP and the partner in charge of CIB Marine's audit. All discovery has
been stayed in this action by an order of the federal court in the Dennis Lewis
case described later in this section. While the ultimate outcome of these claims
cannot be determined at this time, CIB Marine intends to vigorously defend the
action.
In November 2004, CIB -- Chicago and/or Marine -- Wisconsin commenced three
lawsuits in Illinois against Miss Mimi Corporation, Gerard M. Jacobs and T.
Benjamin Jennings for damages arising out of the defendants' default of certain
loan obligations. The bank claims damages of approximately $15.3 million. In
December 2004, the defendants filed a counterclaim against CIB -- Chicago, CIB
Marine and certain of its current and former directors and officers for damages
arising out of alleged fraudulent misrepresentations relative to defendants'
purchase of CIB Marine stock from one of CIB Marine's largest borrowers at the
time, and breach of fiduciary duties. Defendants seek compensatory damages in
excess of $0.5 million and punitive damages of $2.0 million on the fraud claim,
and compensatory damages of $2.5 million and punitive damages of $5.0 million on
the breach of fiduciary duties claim. CIB Marine intends to vigorously defend
this action. The ultimate outcome of this action cannot be determined at this
time. On November 30, 2004, CIB Marine sold CIB -- Chicago.
On June 3, 2005, a first consolidated complaint was filed by Dennis Lewis,
a shareholder, and various other alleged shareholders of CIB Marine in the
United States District Court for the Central District of Illinois, Urbana
Division, against CIB Marine, certain of its current and former officers and
directors, and KPMG LLP. The filing consolidated two actions that had been filed
in January 2005: one filed by Lewis in
30
the United States District Court for the Central District of Illinois, Urbana
Division and another filed in the United States District Court for the Central
District of Illinois, Peoria Division by Elaine Sollberger, a purported
shareholder, whose claims were voluntarily dismissed in connection with the
consolidation, and have not been reasserted in the consolidated complaint.
Plaintiffs seek to maintain the action as a class action on behalf of all
persons who purchased common stock of CIB Marine between April 12, 1999, and
April 12, 2004, claiming violations of Section 10(b) of the Securities Exchange
Act and Rule 10b-5 thereunder by CIB Marine and other defendants and liability
of certain defendants other than CIB Marine and KPMG under Section 20(a) of the
Securities Exchange Act as controlling persons. The gravamen of the complaint is
that the financial condition of CIB Marine was overstated with the result that
members of the purported class acquired their CIB Marine stock at inflated
prices. All defendants have moved to dismiss the action on various grounds. As a
result of the filing of these motions, all discovery in this action is
automatically stayed. The court has granted the motion of CIB Marine and several
other defendants to transfer the action to the United States District Court for
the Eastern District of Wisconsin, sitting in Milwaukee, Wisconsin. CIB Marine
intends to vigorously contest class action certification and defend this action.
The ultimate outcome of this action cannot be determined at this time.
In April 2005, James Fasano and Thomas Arundel, shareholders of CIB Marine
and borrowers of CIB -- Chicago, commenced an action in the Circuit Court of
Cook County, Illinois, against CIB Marine, CIB -- Chicago and two of their now
former directors and/or officers for damages arising out of alleged fraudulent
misrepresentations relative to the financial condition of Canron and its
principal shareholder to induce the plaintiffs to borrow $0.5 million from
CIB -- Chicago and invest it in Canron. Plaintiffs assert claims for fraud and
shareholder remedies. The shareholder remedies action alleges the defendants'
violations of lending regulations caused a decline in the plaintiffs' investment
in CIB Marine. Plaintiffs seek an unspecified amount of compensatory and
punitive damages, request an order requiring CIB Marine and the bank to
repurchase their CIB Marine shares of stock at fair value, and other forms of
relief. While the outcome of these claims cannot be determined at this time, CIB
Marine intends to vigorously defend this action. On November 30, 2004, CIB
Marine sold CIB -- Chicago.
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 2003.
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. As of September 30, 2005, there were approximately 1,598 holders of
record of CIB Marine's common stock.
CIB Marine has not paid cash dividends on its common stock. As a result of
recent losses, CIB Marine does not currently have any intentions to pay a cash
dividend. Further, CIB Marine is restricted by the regulators from paying cash
dividends. Restrictions on CIB Marine's ability to pay dividends and the ability
of its subsidiaries to transfer funds to it for the payment of dividends are
discussed under Item 1, "Business -- Supervision and Regulation -- Dividend
Restrictions" and also Note 15 -- Stockholders' Equity to the consolidated
financial statements. CIB Marine will periodically evaluate its financial
position to determine whether to pay cash dividends in the future.
31
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth CIB Marine's selected consolidated financial
data. The following information should be read in conjunction with the
consolidated financial statements, including the related notes, and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere herein. The statements of operations data for
the years ended December 31, 2002 and 2001 and the financial condition as of
December 31, 2002, 2001, 2000 and 1999, and all related share, financial ratios
and other data have been restated. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Restatement" and
Note 2 -- Restatement of 2002 and 2001 Consolidated Financial Statements in Item
8 of this Form 10-K for further information.
SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS DATA
Interest and dividend income............ $ 189,557 $ 204,001 $ 203,005 $ 190,565 $ 122,300
Interest expense........................ 86,185 97,335 115,723 112,722 64,712
----------- ----------- ----------- ----------- -----------
Net interest income..................... 103,372 106,666 87,282 77,843 57,588
Provision for credit losses............. 160,593 46,510 14,395 9,454 6,785
----------- ----------- ----------- ----------- -----------
Net interest income (loss) after
provision for credit losses...... (57,221) 60,156 72,887 68,389 50,803
Noninterest income(1)................... 18,931 16,533 17,619 7,767 5,594
Noninterest expense..................... 95,551 64,484 51,377 44,510 35,888
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes................... (133,841) 12,205 39,129 31,646 20,509
Income tax expense (benefit)............ (3,148) 2,596 13,400 10,975 7,250
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations....................... (130,693) 9,609 25,729 20,671 13,259
Discontinued operations
Pre-tax loss from discontinued
operations.......................... (5,937) (650) -- -- --
Income tax expense.................... 1,018 152 -- -- --
----------- ----------- ----------- ----------- -----------
Loss from discontinued operations... (6,955) (802) -- -- --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....................... $ (137,648) $ 8,807 $ 25,729 $ 20,671 $ 13,259
=========== =========== =========== =========== ===========
COMMON SHARE DATA
Earnings (loss) per Share
Basic
Income (loss) from continuing
operations.......................... $ (7.15) $ 0.53 $ 1.45 $ 1.19 $ 0.80
Discontinued operations............... (0.38) (0.05) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ (7.53) $ 0.48 $ 1.45 $ 1.19 $ 0.80
=========== =========== =========== =========== ===========
Diluted
Income (loss) from continuing
operations.......................... $ (7.15) $ 0.52 $ 1.42 $ 1.17 $ 0.79
Discontinued operations............... (0.38) (0.05) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ (7.53) $ 0.47 $ 1.42 $ 1.17 $ 0.79
=========== =========== =========== =========== ===========
Dividends............................... -- -- -- -- --
Book value per share.................... $ 5.94 $ 13.52 $ 12.86 $ 11.30 $ 9.60
Weighted average shares
outstanding -- basic.................. 18,286,550 18,167,379 17,751,752 17,381,478 16,528,981
Weighted average shares outstanding --
diluted............................... 18,286,550 18,547,515 18,083,013 17,622,964 16,741,410
</Table>
32
<Table>
<Caption>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FINANCIAL CONDITION DATA
Total assets............................ $ 3,186,237 $ 3,650,705 $ 2,942,018 $ 2,459,298 $ 1,907,067
Loans................................... 2,360,041 2,704,006 2,382,045 1,826,135 1,450,871
Allowance for loan losses............... (109,872) (65,122) (35,855) (23,988) (16,214)
Securities.............................. 637,356 516,744 420,507 506,600 368,134
Deposits................................ 2,821,218 2,848,404 2,269,710 2,038,093 1,607,547
Borrowings, including junior
subordinated debentures and guaranteed
trust preferred securities............ 200,734 494,086 421,870 204,779 123,206
Stockholders' equity.................... 108,523 247,563 229,825 198,714 163,871
FINANCIAL RATIOS AND OTHER DATA
Performance Ratios:
Net interest margin(2).................. 3.12% 3.43% 3.44% 3.73% 3.95%
Net interest spread(3).................. 2.81 3.03 2.84 3.05 3.27
Noninterest income to average
assets(4)............................. 0.54 0.41 0.51 0.35 0.36
Noninterest expense to average assets... 2.74 1.99 1.94 2.02 2.33
Efficiency ratio(5)..................... 76.95 52.86 50.08 51.02 55.88
Return on average assets(6)............. (3.94) 0.27 0.97 0.94 0.86
Return on average equity(7)............. (63.02) 3.57 11.89 11.53 8.78
Asset Quality Ratios:
Nonaccrual, restructured and 90 days or
more past due and still accruing loans
to total loans........................ 6.58% 1.80% 1.62% 1.00% 0.61%
Nonperforming assets and 90 days or more
past due and still accruing loans to
total assets.......................... 6.15 1.43 1.42 0.81 0.52
Allowance for loan losses to total
loans................................. 4.66 2.41 1.51 1.31 1.12
Allowance for loan losses to nonaccrual,
restructured and 90 days or more past
due and still accruing loans.......... 70.72 134.09 93.16 130.71 183.67
Net charge-offs to average loans........ 3.81 0.64 0.12 0.10 0.15
Capital Ratios:
Total equity to total assets............ 3.41% 6.78% 7.81% 8.08% 8.59%
Total risk-based capital ratio.......... 7.19 10.01 10.37 10.48 10.04
Tier 1 risk-based capital ratio......... 5.03 8.75 9.12 9.40 9.08
Leverage capital ratio.................. 4.23 8.30 9.01 8.69 8.75
Other Data:
Number of employees (full-time
equivalent)(8)........................ 898 844 685 612 551
Number of banking facilities............ 57 52 49 45 41
</Table>
33
- ---------------
(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
and a de minimis amount for the year ended December 31, 1999. There were no
gains or losses on securities for the year ended December 31, 2003.
(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 49 in 2003, 914
in 2002, 40 in 2001 and 42 in 2000.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The financial condition and results of operations presented in the
consolidated financial statements, accompanying notes to the consolidated
financial statements, selected financial data appearing elsewhere within this
report, and management's discussion and analysis are dependent upon CIB Marine's
accounting policies. The selection and application of these accounting policies
involve judgments about matters that affect the amounts reported in the
financial statements and accompanying notes.
Presented below are discussions of those accounting policies that
management believes are the most important ("Critical Accounting Policies") to
the portrayal and understanding of CIB Marine's financial condition and results
of operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. These estimates are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates or judgments. Certain
policies inherently have a greater reliance on the use of estimates and as such
have a greater possibility of producing results that could be materially
different than originally reported. See also Note 1 -- Summary of Significant
Accounting Policies in Item 8 of this Form 10-K.
ALLOWANCE FOR LOAN LOSSES
CIB Marine monitors and maintains an allowance for loan losses to absorb an
estimate of probable losses inherent in the loan portfolio. CIB Marine maintains
policies and procedures that address the systems of controls over the following
areas of the allowance: the systematic methodology used to determine the
appropriate level of the allowance to provide assurances they are maintained in
accordance with GAAP; the accounting policies for loan charge-offs and
recoveries; the assessment and measurement of impairment in the loan portfolio;
and the loan grading system.
CIB Marine evaluates certain commercial loans individually for impairment
as required by Statement of Financial Accounting Standard ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures.
Loans evaluated individually for impairment include nonaccrual loans, loans past
due 90 days or more and still accruing, restructured loans and other loans
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. Loans, including
all residential real estate, home equity and consumer loans which are not
evaluated individually are assessed for impairment under SFAS No. 5, Accounting
for Contingencies ("SFAS 5") with groups of loans that have similar
characteristics.
For loans which are not individually evaluated, CIB Marine makes estimates
of losses for groups of loans as required by SFAS 5. Loans are grouped by
similar characteristics, including the type of loan, the assigned loan grade and
the general collateral type. A loss rate reflecting the expected losses inherent
in a group of loans is derived based upon estimates of expected default and loss
rates for the group of loans in part based upon CIB Marine's loss history and
related migration analysis. The resulting estimate of losses for groups of loans
are adjusted for relevant environmental factors and other conditions, including:
borrower and industry concentrations; levels and trends in delinquencies,
charge-offs and recoveries; changes in underwriting standards and risk
selection; level of experience and ability of lending management; national and
local economic conditions; and off-balance sheet positions.
The amount of estimated impairment for individually evaluated loans and the
estimate of losses for groups of loans is added together for a total estimate of
loan 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
35
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 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.
During 2003, CIB Marine's policies and procedures over the determination of
the allowance for loan losses were not effective.
a) CIB Marine's policies and procedures to identify credit downgrades on
a timely basis and establish suitable loan workout plans were not
effectively followed;
b) CIB Marine lacked adequate credit procedures to analyze borrowers'
global cash flow; and
c) CIB Marine lacked adequate procedures to monitor loan collateral and
valuation on collateral dependent loans.
As a result of these internal control deficiencies, pertinent information was
not identified, captured and communicated in a form and timeframe that enabled
CIB Marine to analyze the appropriateness of the allowance for loan losses.
Consequently, CIB Marine's allowance for loan losses was materially understated
in previously issued consolidated financial statements for the fiscal quarters
ended March 31 and June 30, 2003 and the years ended December 31, 2002 and 2001.
These consolidated financial statements have been restated to reflect the
correction of the aforementioned errors.
OTHER INVESTMENTS
Investments in limited partnerships and other equity investments which are
not readily marketable are accounted for using the equity method when CIB
Marine's ownership is at least 3% in a limited partnership and 20% in a
corporation, but less than 51%. Investments not accounted for under the equity
method are accounted for using the cost method. All other investments are
periodically evaluated for impairments. If an investment is impaired, a loss is
recognized. To determine whether an investment is impaired CIB Marine looks to
previous transactions, if any, and the investee's financial condition. During
2003, CIB Marine recognized $2.0 million of impairment losses on other
investments. If different assumptions or conditions were to prevail, the
carrying value of these investments may need to be further reduced and a loss
recorded. At December 31, 2003 and 2002, other investments totaled $9.6 million
and $10.0 million, respectively, all of which are illiquid.
ASSETS OF COMPANIES HELD FOR SALE OR DISPOSAL
Companies, and/or the operations of companies, which have been acquired
through loan collection activities and held for sale or disposal are initially
valued at the lower of cost or fair market value based upon independent
valuations less estimated selling costs. 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 Financial
Accounting Standards Board ("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 carrying value of 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. Once a company meets
the accounting criteria of held for sale, the net assets are carried at the fair
value less estimated selling costs. At December 31, 2003 and 2002, the net
carrying amount of companies held for disposal was $11.7 million and $36.7
million, respectively.
36
INCOME TAXES
CIB Marine recognizes expense for federal and state income taxes currently
payable as well as for deferred federal and state taxes for estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the consolidated balance sheets, as well as loss
carryforwards and tax credit carryforwards. Realization of deferred tax assets
is dependent upon CIB Marine generating sufficient taxable income in either the
carryforward or carryback periods to cover net operating losses generated by the
reversal of temporary differences. A valuation allowance is provided by way of a
charge to income tax expense if it is determined that it is not more likely than
not that some portion or all of the deferred tax asset will be realized. If
different assumptions and conditions were to prevail, the valuation allowance
may not be adequate to absorb unrealized deferred taxes and the amount of income
taxes payable may need to be adjusted by way of a charge or credit to expense.
Furthermore, income tax returns are subject to audit by the IRS, state taxing
authorities, and foreign government taxing authorities. Income tax expense for
current and prior periods is subject to adjustment based upon the outcome of
such audits. CIB Marine believes it has adequately accrued for all probable
income taxes payable and provided valuation allowances for deferred tax assets
where it has been determined to be not more likely than not that such assets are
realizable. Accrual of income taxes payable and valuation allowances against
deferred tax assets are estimates subject to change based upon the outcome of
future events.
CIB Marine has entered into tax allocation agreements with its subsidiary
entities included in the consolidated US Federal and unitary and combined state
income tax returns, including US operations of companies held for sale or
disposal. These agreements govern the timing and amount of income tax payments
required by the various entities.
Due to the significant losses incurred in 2003 and the expectation of
additional losses in 2004, management has determined that it is not more likely
than not that net deferred tax assets from continuing operations of $49.7
million at December 31, 2003 will be realized. Therefore, a valuation allowance
of $48.8 million has been established for continuing operations.
INTRODUCTION
The following is a discussion and analysis of CIB Marine's consolidated
financial condition as of December 31, 2003 and 2002, and its changes in
financial condition and results of operations for the three years ended December
31, 2003, 2002 and 2001. References in the discussion below to "CIB Marine"
include CIB Marine's subsidiaries unless otherwise specified.
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.
RESTATEMENT
The consolidated statements of operations and the consolidated statements
of cash flows as presented for the years ended December 31, 2002 and 2001, and
the consolidated balance sheets as of December 31, 2002 and December 31, 2001
have been restated to reflect the following:
LOAN AND OTHER CREDIT LOSSES
In the third quarter of 2003, CIB Marine began a comprehensive review of
the adequacy of its allowance for loan losses in response to deterioration in
the credit quality of the Company's loan portfolio, including a significant
increase in nonperforming loans, which was noted by the Company's banking
regulators at certain subsidiary banks. A Special Review Committee of the Board
was formed to further review these items and engaged outside advisors to conduct
an independent review of loan related matters. As a result of this
37
comprehensive review, the Company identified errors in the timing of loan
downgrades. The consolidated financial statements for 2002 and 2001 have been
restated to reflect loan downgrades in the appropriate periods. The impact of
these restatement adjustments was an increase in Provision for credit losses of
$10.8 million and $1.7 million in 2002 and 2001, respectively, and an increase
in the Allowance for loan losses of $12.8 million and $1.8 million in 2002 and
2001, respectively.
INTEREST INCOME -- LOANS
In addition, errors were also identified in the timing of when loans were
classified as nonperforming which resulted in loans not being placed on
nonaccrual status in the correct reporting period. The consolidated financial
statements for 2002 and 2001 have been restated to reflect loans being placed on
nonaccrual status in the appropriate periods. The impact of these restatement
adjustments was a reduction in Interest income -- loans of $0.2 million and $0.1
million in 2002 and 2001, respectively, and a corresponding reduction in Net
loans.
INCOME TAX EXPENSE
The consolidated financial statements for 2002 and 2001 have also been
restated to reflect the income tax effect of the above restatement adjustments.
The effect of these restatement adjustments was a reduction in income tax
expense on income from continuing operations of $4.2 million and $0.6 million in
2002 and 2001, respectively.
RECEIVABLES FROM SALE OF STOCK
During the regular 2003 regulatory examination, it was noted that certain
of the Company's subsidiary banks had originated loans, the proceeds of which
were used to purchase stock of the Company. Loans originated by CIB Marine's
subsidiary banks to purchase CIB Marine stock should have been accounted for as
a reduction in Stockholders' Equity unless the loan had been repaid prior to the
issuance of the financial statements or the loan had been adequately
collateralized, exclusive of the value of CIB Marine stock pledged as
collateral, if any. The consolidated financial statements for 2002 and 2001 have
been restated to reduce loans to purchase CIB Marine stock (as described above)
and report those loans as a contra-equity account entitled "Receivables from
sale of stock". The effect of these restatement adjustments was a reduction of
Loans and a corresponding reduction of Stockholders' Equity of $7.9 million and
$7.4 million as of December 31, 2002 and 2001, respectively, and a reduction of
Stockholders' Equity of $5.1 million as of December 31, 2000. See Note
15 -- Stockholders' Equity -- Receivables from Sale of Stock for further
information.
RECLASSIFICATION OF SECURITIES AND ADJUSTMENT TO ACCUMULATED OTHER
COMPREHENSIVE INCOME
During the fourth quarter of 2004, CIB Marine determined that it no longer
had the intent to hold to maturity its tax exempt securities classified as held
to maturity. In the first nine months of 2005, CIB Marine sold $9.3 million of
these securities at a gain of $0.4 million. As a result of a material
contradiction related to management's previous assertion regarding its intent
and ability to hold securities to maturity, CIB Marine determined the
consolidated financial statements should be restated for all years presented to
reclassify all held to maturity securities to available for sale. The effect of
this restatement is to increase available for sale securities by $72.8 million
and $98.7 million, and decrease held to maturity securities by $70.1 million and
$96.6 million, at December 31, 2002 and 2001, respectively. The effect of this
restatement also resulted in an increase in accumulated other comprehensive
income and total Stockholders' Equity of $1.7 million, $1.3 million and $0.4
million as of December 31, 2002, 2001 and 2000, respectively, for the net
unrealized gains on the reclassified securities. The difference in the increase
in available for sale securities and the increase in accumulated other
comprehensive income as of December 31, 2002 and 2001, is the deferred income
tax effect on the net unrealized gain on securities of $1.0 million and $0.8
million, at December 31, 2002 and 2001, respectively, which resulted in a
decrease in net deferred tax assets included in other assets at December 31,
2002 and an increase in deferred tax liabilities included in other liabilities
at December 31, 2001.
38
The cumulative impact of the above restatements is a decrease of net income
of $6.8 million and $1.2 million for the years ended December 31, 2002 and 2001,
respectively, and a decrease in Stockholders' Equity of $14.2 million and $7.3
million as of December 31, 2002 and 2001, respectively. See Note 2 --
Restatement of 2002 and 2001 Consolidated Financial Statements in Item 8 of this
Form 10-K for further information.
OVERVIEW
CIB Marine had a net loss of $137.6 million in 2003 and net income of $8.8
million in 2002 and $25.7 million in 2001. Total assets at December 31, 2003
were $3.2 billion, which represented a 12.7% decrease from total assets of $3.7
billion at December 31, 2002. Total assets increased 24.1% during 2002, from
$2.9 billion at December 31, 2001.
In 2003, CIB Marine commenced a comprehensive review of the adequacy of its
allowance for loan losses. This review resulted from regular examinations at
certain of CIB Marine's subsidiary banks by banking regulators and a
deterioration in the credit quality of the loan portfolio, including a
significant increase in nonperforming loans. External resources were employed to
assist in the review of the loan portfolio and to investigate other loan related
matters. See "Subsequent Events -- Independent Review and Investigation" for
further information. As a result of CIB Marine's review process, CIB Marine
increased its loan loss allowance and recognized an impairment loss of all
goodwill relating to certain of its bank subsidiaries. These losses, and the
related tax effects, significantly contributed to the net losses for 2003. In
order to improve the financial strength of CIB Marine, including its liquidity
and capital, CIB Marine directed its focus beginning in 2003 to improving the
credit quality of its loan portfolio and enhancing its lending, credit and
management culture. The reduction in assets from 2002 to 2003 is primarily a
result of a reduction in loans, loans held for sale, and assets of companies
held for disposal, and the write-off of goodwill. The reduction in loans was
primarily due to loan collections and charge-offs, and a reduction in new loan
originations resulting from CIB Marine's focus on improving credit quality.
In January 2003, CIB -- Chicago entered into a Memorandum of Understanding
with the DBRE and the FDIC. In May 2004, CIB -- Chicago, Central Illinois Bank,
Marine -- Wisconsin and CIB -- Indiana entered into Cease and Desist Orders with
banking regulators. In May 2004, CIB Marine entered into a Written Agreement
with the Federal Reserve Bank of Chicago. In August 2004, Citrus Bank entered
into a Written Agreement with the Office of the Comptroller of the Currency.
Among other items, the Orders and Agreements require minimum capital levels,
correction of loan administration deficiencies and a reduction in credit
concentrations and problem credits, and place restrictions on loan growth, total
asset growth, and dividend payments from subsidiary banks to CIB Marine. In
April 2005, Central Illinois Bank, Marine -- Wisconsin and CIB -- Indiana each
entered into a Memorandum of Understanding with the FDIC and their applicable
state banking regulator with respect to information technology. In April 2005,
the Cease and Desist Orders at Marine -- Wisconsin and CIB -- Indiana were each
released and replaced with Memoranda of Understanding which were entered into in
March 2005. See "Regulatory Matters" for further information.
Beginning in the second half of 2003 and continuing into 2004, CIB Marine
took steps to improve credit quality, capital and liquidity. Several changes
occurred in the senior management of CIB Marine and its subsidiaries; actions
were taken to improve the credit underwriting procedures; steps were taken to
increase the overall quality of its credit portfolio; and additional expense
control measures were implemented.
At December 31, 2003, CIB -- Chicago was significantly undercapitalized as
a result of significant deterioration in credit quality and credit losses.
During 2004, CIB Marine explored a number of alternatives to improve capital and
strengthen the organization, including the sale of CIB -- Chicago and other of
its banking subsidiaries. On November 30, 2004, CIB Marine sold CIB -- Chicago.
A portion of the proceeds were used to pay off CIB Marine's outstanding balance
on its line of credit and infuse capital into Central Illinois Bank, allowing
the bank to meet its regulatory capital requirements. As a result of this sale,
CIB Marine's total assets at December 31, 2004 were significantly less than
total assets at December 31, 2003. CIB Marine also sold the assets of CIB Marine
Commercial Finance, LLC and Mortgage Services, Inc. during 2004. See Note 27 --
Subsequent Events in Item 8 of this Form 10-K for further information.
39
RESULTS OF OPERATIONS
NET INCOME
CIB Marine's net loss was $137.6 million in 2003 compared to net income of
$8.8 million in 2002. The decrease in net income in 2003 was primarily
attributable to a $114.1 million increase in the provision for credit losses, a
$48.7 million tax expense to reduce net deferred tax assets, a $31.1 million
increase in noninterest expense, including a $14.4 million impairment loss on
goodwill and other intangibles, and a $6.2 million increase in losses from
discontinued operations, partially offset by an $5.7 million reduction in income
taxes from continuing operations. Loss from discontinued operations, which
increased from $0.8 million during 2002 to $7.0 million in 2003, is comprised of
the consolidated operating and impairment losses of CIB Construction, including
its Canron subsidiary.
The increase in the provision for credit losses in 2003 was the result of
an increase in the net loan charge-offs, which were $101.1 million, and
additional provisions as a result of the deterioration in the quality of the
loan portfolio, including an increase in the level of nonperforming loans. The
majority of the increase in noninterest expense was attributable to a $14.4
million impairment loss on goodwill and customer base intangibles, a $7.2
million increase in compensation and employee benefits and a $5.4 million loss
related to the impairment and sale of equity investments and foreclosed
properties. The increased loss from discontinued operations was driven by a $4.7
million impairment loss.
The effective tax (benefit) rate from continuing operations for 2003 was
(2.4%) as compared to a tax provision rate of 21.3% for 2002 and 34.2% for 2001.
The 2003 change in the effective tax rate was mainly due to a provision for a
valuation allowance for deferred tax assets. Due to the significant losses in
2003 and the expectation of additional losses in 2004, CIB Marine determined
that it was not more likely than not that the net deferred tax assets at
December 31, 2003 would be realized in their entirety. Therefore, in 2003, a
valuation allowance of $48.7 million was provided by way of a charge to tax
expense to reduce the net deferred tax assets.
NET INTEREST INCOME
Net interest income is the most significant component of CIB Marine's
earnings. Net interest income is the difference between interest earned on
interest-earning assets and interest paid on deposits and other borrowed funds.
Net interest margin is this difference expressed as a percentage of average
interest-earning assets. The amount of CIB Marine's net interest income is
affected by several factors, including interest rates and the volume and
relative mix of interest-earning assets and interest-bearing liabilities.
Although CIB Marine can control certain of these factors, others, such as the
general level of credit demand, fiscal policy and Federal Reserve Board monetary
policy, are beyond CIB Marine's control.
40
The following table sets forth information regarding average balances,
interest income, or interest expense, and the average rates earned or paid for
each of CIB Marine's major asset, liability and stockholders' equity categories.
Interest income is expressed 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 for the years ended December 31, 2003, 2002 and 2001. In the
future, CIB Marine may not realize all of the tax benefits associated with these
tax-exempt assets due to the substantial losses incurred in 2003. See Note
22 -- Income Taxes to the consolidated financial statements for additional
information.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
---------- ----------- ---------- ---------- ----------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS
(TE):
Securities:
Taxable................ $ 509,944 $ 13,622 2.67% $ 425,602 $ 18,284 4.30%
Tax-exempt(1).......... 61,646 3,411 5.53 61,270 3,910 6.38
---------- -------- ---- ---------- -------- ----
Total Securities....... 571,590 17,033 2.98 486,872 22,194 4.56
Loans(2,3):
Commercial............. 764,251 46,076 6.03 805,009 52,960 6.58
Commercial real
estate............... 1,834,966 118,272 6.45 1,707,594 122,056 7.15
Consumer............... 52,463 3,295 6.28 61,291 4,029 6.57
---------- -------- ---- ---------- -------- ----
Total loans............ 2,651,680 167,643 6.32 2,573,894 179,045 6.96
Federal funds sold....... 35,775 466 1.30 28,654 539 1.88
Loans held for sale...... 117,962 6,281 5.32 72,062 4,137 5.74
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets(1)............ 3,377,007 191,423 5.67 3,161,482 205,915 6.51
-------- ---- -------- ----
NONINTEREST-EARNING
ASSETS:
Cash and due from
banks.................. 51,078 36,892
Premises and equipment... 29,343 27,979
Allowance for loan
losses................. (94,243) (46,191)
Receivables from sale of
stock.................. (7,242) (7,814)
Accrued interest
receivable and other
assets................. 137,012 67,722
---------- ----------
Total noninterest-earning
assets................. 115,948 78,588
---------- ----------
Total Assets........... $3,492,955 $3,240,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand
deposits............. $ 70,731 $ 742 1.05% $ 57,831 $ 590 1.02%
Money market........... 427,919 6,993 1.63 285,178 5,829 2.04
Other savings
deposits............. 245,781 4,326 1.76 124,189 2,936 2.36
Time deposits(4)....... 1,953,816 64,316 3.29 1,960,349 76,129 3.88
---------- -------- ---- ---------- -------- ----
Total interest-bearing
deposits............. 2,698,247 76,377 2.83 2,427,547 85,484 3.52
Borrowings -- short-term... 212,363 3,449 1.62 274,490 5,958 2.17
Borrowings -- long-term(4).. 46,771 1,161 2.48 46,396 1,370 2.95
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2001
-------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS
(TE):
Securities:
Taxable................ $ 387,623 $23,026 5.94%
Tax-exempt(1).......... 59,841 4,372 7.31
---------- ------- -----
Total Securities....... 447,464 27,398 6.12
Loans(2,3):
Commercial............. 716,469 57,798 8.07
Commercial real
estate............... 1,297,281 110,837 8.54
Consumer............... 69,025 5,652 8.19
---------- ------- -----
Total loans............ 2,082,775 174,287 8.37
Federal funds sold....... 26,720 1,121 4.20
Loans held for sale...... 27,756 1,919 6.91
---------- ------- -----
Total interest-earning
assets(1)............ 2,584,715 204,725 7.92
------- -----
NONINTEREST-EARNING
ASSETS:
Cash and due from
banks.................. 19,150
Premises and equipment... 25,837
Allowance for loan
losses................. (28,923)
Receivables from sale of
stock.................. (6,283)
Accrued interest
receivable and other
assets................. 52,825
----------
Total noninterest-earning
assets................. 62,606
----------
Total Assets........... $2,647,321
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand
deposits............. $ 53,670 $ 1,061 1.98%
Money market........... 245,754 8,797 3.58
Other savings
deposits............. 45,893 1,210 2.64
Time deposits(4)....... 1,615,016 89,536 5.54
---------- ------- -----
Total interest-bearing
deposits............. 1,960,333 100,604 5.13
Borrowings -- short-term. 223,369 8,462 3.79
Borrowings -- long-term(4 57,301 2,633 4.60
</Table>
41
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
---------- ----------- ---------- ---------- ----------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Junior subordinated
debentures and
guaranteed trust
preferred securities... 60,005 5,198 8.66 45,260 4,523 9.99
---------- -------- ---- ---------- -------- ----
Total borrowed funds... 319,139 9,808 3.07 366,146 11,851 3.24
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities.......... 3,017,386 86,185 2.86 2,793,693 97,335 3.48
-------- ---- -------- ----
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
demand deposits........ 206,815 173,080
Accrued Interest and
other liabilities...... 50,329 26,366
---------- ----------
Total
noninterest-bearing
liabilities.......... 257,144 199,446
---------- ----------
Stockholders' Equity..... 218,425 246,931
---------- ----------
Total liabilities and
stockholders' equity... $3,492,955 $3,240,070
========== ==========
NET INTEREST INCOME AND
NET INTEREST
SPREAD(1,5)............ $105,238 2.81% $108,580 3.03%
======== ==== ======== ====
NET INTEREST-EARNING
ASSETS................. $ 359,621 $ 367,789
========== ==========
NET INTEREST
MARGIN(1,6)............ 3.12% 3.43%
==== ====
RATIO OF AVERAGE
INTEREST-EARNING ASSETS
TO AVERAGE
INTEREST-BEARING
LIABILITIES............ 1.12 1.13
========== ==========
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2001
-------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Junior subordinated
debentures and
guaranteed trust
preferred securities... 37,863 4,024 10.63
---------- ------- -----
Total borrowed funds... 318,533 15,119 4.75
---------- ------- -----
Total interest-bearing
liabilities.......... 2,278,866 115,723 5.08
------- -----
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
demand deposits........ 132,731
Accrued Interest and
other liabilities...... 19,322
----------
Total
noninterest-bearing
liabilities.......... 152,053
----------
Stockholders' Equity..... 216,402
----------
Total liabilities and
stockholders' equity... $2,647,321
==========
NET INTEREST INCOME AND
NET INTEREST
SPREAD(1,5)............ $89,002 2.84%
======= =====
NET INTEREST-EARNING
ASSETS................. $ 305,849
==========
NET INTEREST
MARGIN(1,6)............ 3.44%
=====
RATIO OF AVERAGE
INTEREST-EARNING ASSETS
TO AVERAGE
INTEREST-BEARING
LIABILITIES............ 1.13
==========
</Table>
- ---------------
(1) Tax-equivalent basis of 35%.
(2) Loan balance totals include nonaccrual loans.
(3) Interest earned on loans include amortized loan fees of $10.0 million, $9.1
million and $8.6 million for the years ended December 31, 2003, 2002 and
2001, respectively.
(4) Interest amounts include the effects of derivatives entered into for
interest rate risk management and accounted for as fair value hedges.
(5) Net interest rate spread is the difference between the average rates on
interest-earning assets and interest-bearing liabilities.
(6) Net interest margin is the ratio of net interest income, on a tax-equivalent
basis, to average interest-earning assets.
Net interest income, on a tax-equivalent basis, decreased $3.4 million, or
3.1%, from $108.6 million in 2002 to $105.2 million in 2003. This decrease was
primarily the result of an 84 basis point decline in the yield on average
interest-earning assets offset by an increase in the balance of average earning
assets and a decline in the average cost of borrowings. Net interest income on a
tax-equivalent basis increased $19.6 million, or 22.0%, during 2002 from $89.0
million in 2001. This increase was primarily the result of a 22.3% increase in
average interest-earning assets and a decline in the average cost of borrowings.
42
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, 2003 COMPARED TO YEAR ENDED DECEMBER 30, 2002 (AS RESTATED)
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 30, 2001
(AS RESTATED)(2) (AS RESTATED)(2)
---------------------------------------- --------------------------------------------
VOLUME RATE TOTAL % CHANGE VOLUME RATE TOTAL % CHANGE
------- -------- -------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST INCOME(1)
Securities -- taxable.......... $ 3,152 $ (7,814) $ (4,662) (25.50)% $ 2,093 $ (6,835) $ (4,742) (20.59)%
Securities -- tax-exempt....... 24 (523) (499) (12.76) 102 (564) (462) (10.57)
------- -------- -------- ------ ------- -------- -------- ------
Total Securities........... 3,176 (8,337) (5,161) (23.25) 2,195 (7,399) (5,204) (18.99)
Commercial..................... (2,596) (4,288) (6,884) (13.00) 6,614 (11,452) (4,838) (8.37)
Commercial real estate......... 8,719 (12,503) (3,784) (3.10) 31,279 (20,060) 11,219 10.12
Consumer....................... (560) (174) (734) (18.22) (588) (1,035) (1,623) (28.72)
------- -------- -------- ------ ------- -------- -------- ------
Total Loans (including
fees).................... 5,563 (16,965) (11,402) (6.37) 37,305 (32,547) 4,758 2.73
Federal funds sold............. 116 (189) (73) (13.54) 76 (658) (582) (51.92)
Loans held for sale............ 2,463 (319) 2,144 51.82 2,594 (376) 2,218 115.58
------- -------- -------- ------ ------- -------- -------- ------
Total Interest Income(1)..... 11,318 (25,810) (14,492) (7.04) 42,170 (40,980) 1,190 0.58
------- -------- -------- ------ ------- -------- -------- ------
INTEREST EXPENSE
Interest-bearing demand
deposits..................... 134 18 152 25.76 77 (548) (471) (44.39)
Money market................... 2,500 (1,336) 1,164 19.97 1,246 (4,214) (2,968) (33.74)
Other savings deposits......... 2,292 (902) 1,390 47.34 1,863 (137) 1,726 142.64
Time deposits.................. (253) (11,560) (11,813) (15.52) 16,756 (30,163) (13,407) (14.97)
------- -------- -------- ------ ------- -------- -------- ------
Total Deposits............. 4,673 (13,780) (9,107) (10.65) 19,942 (35,062) (15,120) (15.03)
Borrowings -- short-term....... (1,188) (1,321) (2,509) (42.11) 1,648 (4,152) (2,504) (29.59)
Borrowings -- long-term........ 11 (220) (209) (15.26) (439) (824) (1,263) (47.97)
Junior subordinated debentures
and guaranteed trust
preferred securities......... 1,334 (659) 675 14.92 750 (251) 499 12.40
------- -------- -------- ------ ------- -------- -------- ------
Total Borrowed Funds....... 157 (2,200) (2,043) (17.24) 1,959 (5,227) (3,268) (21.62)
------- -------- -------- ------ ------- -------- -------- ------
TOTAL INTEREST EXPENSE....... 4,830 (15,980) (11,150) (11.46) 21,901 (40,289) (18,388) (15.89)
------- -------- -------- ------ ------- -------- -------- ------
NET INTEREST INCOME(1)......... $ 6,488 $ (9,830) $ (3,342) (3.08)% $20,269 $ (691) $ 19,578 22.00%
======= ======== ======== ====== ======= ======== ======== ======
</Table>
- ---------------
(1) Tax-equivalent basis of 35%.
(2) Variances which were not specifically attributable to volume or rate have
been allocated proportionally between volume and rate using absolute values
as a basis for the allocation. Nonaccruing loans were included in the
average balances used in determining yields.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, decreased $14.5 million,
or 7.0%, from $205.9 million in 2002 to $191.4 million in 2003. The decrease was
the result of an 84 basis point decrease in the yield on average
interest-earning assets, partially offset by an increase in the average balance
of interest-earning assets. Interest income on loans decreased 6.4% due to a 64
basis point decrease in the loan yield and the increase in nonaccrual loans.
Interest income on securities declined 23.3% due to lower yields, partially
offset by higher investment balances which were increased to offset liquidity
risk. Interest income on loans held for sale increased 51.8% due to higher
average balances.
43
Total interest income, on a tax-equivalent basis, increased $1.2 million,
or 0.6%, during 2002 from $204.7 million in 2001. The increase was the result of
a 22.3% increase in average interest-earning assets, partially offset by a 141
basis point reduction in the yield on average earning assets. Interest income on
loans increased 2.7% due to increased average loan balances, partially offset by
lower loan yields. Interest income on securities declined by 19.0% due to lower
yields, partially offset by an increase in the average balance of securities.
Interest income on loans held for sale increased 115.6% due to the higher
average balances.
INTEREST EXPENSE
Total interest expense decreased $11.1 million, or 11.5%, from $97.3
million in 2002, to $86.2 million in 2003. This reduction was primarily the
result of a 62 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 10.7% due
to lower interest rates paid, partially offset by an increase in average deposit
balances. Interest expense on borrowed funds declined 17.2%, primarily as a
result of a reduction in the rate paid on borrowed funds and a decrease in the
average amount of borrowed funds outstanding.
Total interest expense decreased $18.4 million, or 15.9%, during 2002, from
$115.7 million in 2001. 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 declined by 15.0% due to lower rates, partially
offset by an increase in average deposit balances. Interest expense on borrowed
funds decreased 21.6% primarily as a result of lower interest rates paid offset
by an increase in the average amount of borrowed funds outstanding.
NET INTEREST MARGIN/NET INTEREST SPREAD
CIB Marine's net interest spread decreased by 22 basis points in 2003, and
the net interest margin decreased by 31 basis points. This decrease was
primarily the result of the rate earned on interest-earning assets declining
more rapidly than the rate paid on interest-bearing liabilities. This was the
result of rising nonaccrual loans, the interest rate environment and CIB
Marine's liquidity and market risk activities. To reduce liquidity risk,
management increased the percentage of shorter term but lower yielding liquid
assets to total earning assets, and reduced lower cost, shorter term borrowings
while increasing longer life, but higher yielding deposits.
CIB Marine's net interest spread increased by 19 basis points in 2002 from
2001. This increase was primarily the result of interest-bearing liabilities
repricing downward more rapidly than interest earning assets in a declining rate
environment. The net interest margin was decreased by one basis point in 2002
from the previous year.
PROVISION FOR CREDIT LOSSES
As a result of regular examinations at certain of CIB Marine's subsidiary
banks and a deterioration in the credit quality of the loan portfolio, including
a significant increase in nonperforming loans, CIB Marine significantly
increased its provision for credit losses. The provision for credit losses,
which represents provision for loan losses and losses on unfunded commitments
and standby letters of credit, was $160.6 million for the year ended December
31, 2003, as compared to $46.5 million in 2002 and $14.4 million in 2001. The
increase in the provision was driven by the deteriorating quality of the credit
portfolio including an increase in nonaccrual loans from $39.0 million as of
December 31, 2002 to $152.1 million as of December 31, 2003 and an increase in
net charge-offs from $16.4 million in 2002 to $101.1 million in 2003, and was
concentrated within a relatively small number of borrowing relationships.
Sixteen relationships accounted for $110.8 million, or 76% of the total
provision for loan losses in 2003 and one of these relationships accounted for
$39.5 million, or 27.1%. Additionally, increased loss rate percentages applied
in 2003 represented approximately $12.1 million, or 10.5% of the increase in
provision for loan losses from 2002 to 2003 and an increase in the loss
provision for unfunded commitments and standby letters of credit accounted for
$13.7 million, or 11.3% of the increase.
44
The increase in the provision in 2002 over 2001 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 further discussion.
NONINTEREST INCOME
Noninterest income increased $2.4 million, or 14.5%, from $16.5 million in
2002 to $18.9 million in 2003. The increase was primarily due to additional
mortgage banking revenue, partially offset by a decrease in gains on sales of
securities. In 2003, CIB Marine did not sell any of its securities portfolio,
and as a result, there were no gains on sales recognized during 2003 compared to
a $3.1 million gain in 2002.
Net mortgage banking revenue increased $4.5 million, or 90.8%, from $5.0
million in 2002 to $9.5 million in 2003. The increase in net mortgage banking
revenue was due primarily to an increase in the origination and sale of
residential mortgage loans, resulting from a relatively low interest rate
environment and the expansion of CIB Marine's mortgage operations. CIB Marine
subsequently sold the assets of its mortgage banking subsidiary in the last half
of 2004. See Note 3 -- Business Combinations in Item 8 of this Form 10-K for
further information. The increase in other income of $1.3 million was primarily
due to an increase in the equity income of a limited partnership and royalty
fees received by CIB Marine Information Services, Inc. from third parties.
Noninterest income decreased $1.1 million, or 6.2%, during 2002, from $17.6
million in 2001. Gains on the sale of investment securities decreased $0.9
million in 2002, from $4.0 million in 2001. CIB Marine repositioned its
securities portfolio during 2002, including the sales of securities during
market rate decreases, in order to promote long-term earnings. Loan fees
decreased $0.4 million, or 11.2%, from $3.7 million in 2001. Net mortgage
banking revenue decreased $0.2 million, or 4.3%, from $5.2 million in 2001 to
$5.0 million in 2002.
NONINTEREST EXPENSE
Total noninterest expense increased $31.1 million, or 48.2%, from $64.5
million in 2002, to $95.6 million in 2003. The increase was primarily the result
of the recognition of impairment losses on goodwill and other intangibles and
other assets, an increase in compensation and employee benefits expense and
additional expenses related to problem credits and foreclosed properties,
partially offset by a reduction in litigation settlements.
- Impairment of goodwill and other intangible assets was $14.4 million as a
result of annual impairment testing during 2003. Goodwill of $8.7
million, representing the unamortized balance, related to the acquisition
of CIB -- Chicago, and goodwill of $3.5 million and $2.0 million
associated with the acquisition of CIB Marine Commercial Finance, LLC and
MICR, respectively, was considered impaired. In addition, CIB Marine
recognized a $0.2 million impairment loss on customer-based intangibles
of CIB Marine Commercial Finance, LLC.
- During 2003, losses related to the impairment and sale of assets
increased $5.3 million. The increase was primarily due to a $3.3 million
write down of value on four foreclosed properties, a $1.2 million market
value loss relating to the unconsolidated interest CIB Marine has in a
closely held information services company and a $0.7 million market value
loss on equity in a limited liability company which was subsequently sold
in 2004 for a $0.2 million loss.
- Compensation and employee benefits expense is the largest component of
noninterest expense and represented 47.8% of total noninterest expense
for 2003 compared to 59.8% for 2002. Compensation and employee benefits
expense increased $7.2 million, or 18.5%, from $38.5 million in 2002 to
$45.7 million in 2003. 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, excluding companies held for
45
disposal, increased 6.4% from 844 at December 31, 2002 to 898 at December
31, 2003. The net operating results of MICR, including its compensation
expense, is included in other noninterest income.
- Litigation expense decreased $1.7 million from $1.8 million in 2002 to
$0.1 million in 2003. The 2002 expense was mainly due to the settlement
of two lawsuits related to CIB Marine's commercial lending business.
Professional services increased $1.1 million from $2.9 million in 2002 to
$4.0 million 2003 as a result of additional accounting, legal and
consulting fees primarily related to the previously mentioned problems in
the loan portfolio.
- Other noninterest expense increased $3.8 million, or 32.0%, from $11.8
million in 2002 to $15.6 million in 2003. The majority of the increase
related to loan collection expenses, which increased $1.6 million, and
additional foreclosed property expenses. The $1.1 million increase in
foreclosed property expenses was largely due to real estate taxes on
several large properties acquired in 2003. See the discussion of
"Nonperforming Assets and Loans 90 days or More Past Due and Still
Accruing" for further information.
During 2002, total noninterest expense increased $13.1 million, or 25.5%,
from $51.4 million in 2001. The increase was primarily attributable to CIB
Marine's growth, including internal growth, the opening of new banking
facilities and the extension of its mortgage operations, and increased legal and
collection fees related to problem credits and litigation settlements.
- Compensation and employee benefits expense increased $7.4 million in
2002, or 23.9%, from $31.1 million in 2001 to $38.5 million in 2002. The
increase in compensation and employee benefits is the result of the
hiring of personnel to staff new banking facilities, expansion of
mortgage banking operations, 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 companies held for disposal, increased 23.2% from
685 at December 31, 2001 to 844 at December 31, 2002.
- Equipment and occupancy expenses increased $1.2 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 $1.0 million or 53.8%, from $1.9
million in 2001 to $2.9 million in 2002. This increase was primarily the
result of additional legal expenses related to loan collection services.
- 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.
- Merger-related charges of $0.5 million were incurred during 2001 relating
to the acquisition of Citrus Financial. These merger-related charges
included asset write downs, contract cancellations, and professional
fees. CIB Marine did not incur any merger-related charges in 2002.
- Other noninterest expense increased $2.3 million, or 24.3%, from $9.5
million in 2001 to $11.8 million in 2002. The increases in other
noninterest expense were primarily the result of increased expenses
related to loan collection, an increase in losses resulting from CIB
Marine's equity ownership in low-income housing partnerships, increased
travel expenses, FDIC and state assessments on deposit accounts, postage
and delivery expenses, and supplies expense. These increases were
partially offset by an $0.8 million decrease in the amortization of
intangibles 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 8 to the consolidated financial statements for additional
information.
46
INCOME TAXES
CIB Marine provides for income taxes currently payable or currently
refundable, and 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 from continuing
operations for the years ended December 31, 2003, 2002, and 2001 were (2.4%),
21.3% and 34.2%, respectively. Included in income tax benefit for 2003 is $14.7
million for taxes paid in prior periods which are now recoverable due to the
carryback of net operating losses in 2003. A valuation allowance of $48.7
million was provided in 2003 to reduce the net deferred tax benefits, including
benefits related to net operating loss carryforwards, to $0.9 million. The
decrease in the effective tax rate in 2002 was primarily due to lower income
before taxes, the increase in the percentage of tax-exempt municipal interest as
compared to pre-tax income, lower state income tax expense and low-income
housing tax credits.
FINANCIAL CONDITION
OVERVIEW
At December 31, 2003, CIB Marine had total assets of $3.2 billion, a
decrease of $464.5 million, or 12.7% from $3.7 billion at December 31, 2002.
Based on substantial deterioration in credit quality in the loan portfolio
during 2003, including significant increases in nonperforming loans, and the
adverse results of the regulatory examinations at certain of CIB Marine's
subsidiary banks, CIB Marine began a review of its lending practices and
policies. The scope of the review included a re-evaluation of the adequacy of
its allowance for loan losses and other loan-related matters. See "Subsequent
Events-Independent Review and Investigation" for further information. External
resources were employed to assist in the review of the loan portfolio and to
investigate other loan-related matters. As a result of CIB Marine's review
process, CIB Marine recorded a loan loss provision of $145.9 million and net
loans charged-off of $101.1 million during 2003 resulting in an increase in the
allowance for loan losses of $44.8 million. Upon considering the results of the
comprehensive review of the adequacy of the allowance for loan losses which was
concluded in August 2005 and the results of the independent investigation, CIB
Marine also determined that it would be necessary to restate its previously
issued consolidated financial statements for the years ended December 31, 1999
through 2002 and the quarters ended March 31 and June 30, 2003. See Item 6,
Selected Financial Data and Note 2 to consolidated financial
statements -- Restatement of 2002 and 2001.
LOANS HELD FOR SALE
Loans held for sale, which comprise primarily residential first mortgage
loans, decreased $212.8 million from $229.5 million at December 31, 2002 to
$16.7 million at December 31, 2003. This decrease was due to a decline in the
volume of loans in the market place at that time and steps CIB Marine instituted
to decrease the number of days the loans were held prior to sale. CIB Marine
originated $0.5 billion, purchased $1.6 billion and sold $2.3 billion of loans
held for sale in 2003, as compared to $356.8 million, $901.0 million and $1.1
billion, respectively in 2002. The supply of loans purchased increased primarily
due to the lower mortgage rates, which caused higher levels of refinancing
activity in 2003.
SECURITIES
CIB Marine seeks to manage its investment portfolio in a manner that
promotes the achievement of its liquidity goals, optimizes after-tax net income,
provides collateral to secure borrowings, assists CIB Marine in meeting various
regulatory requirements and is consistent with its market risk policies. CIB
Marine manages the maturity structure of the investment portfolio to provide a
stream of cash flows to complement liquidity risk management, market risk
management and to promote long-term earnings.
47
The carrying value and tax-equivalent yield of CIB Marine's securities are
set forth in the following table.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
YIELD TO YIELD TO YIELD TO
AMOUNT MATURITY AMOUNT MATURITY AMOUNT MATURITY
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Treasuries................... $ 20,070 1.35% $ 10,024 2.53% $ 15,013 5.89%
U.S. government agencies.......... 291,000 2.03 145,185 3.18 111,072 5.64
States and political
subdivisions.................... 56,816 5.43 62,585 5.97 62,156 6.98
Other notes and bonds............. 1,050 6.27 1,050 6.83 1,050 6.83
Commercial paper.................. 7,369 1.46 8,300 1.77 6,999 2.30
Mortgage-backed securities........ 247,736 3.26 271,750 4.03 210,534 5.90
Federal Home Loan Bank and Federal
Reserve Bank stock.............. 11,131 6.40 10,394 5.97 6,575 5.78
-------- ---- -------- ---- -------- ----
Total Securities Before Market
Value Adjustment............. 635,172 2.87% 509,288 4.01% 413,399 5.93%
==== ==== ====
Available for sale market value
adjustment...................... 2,184 7,456 7,108
-------- -------- --------
TOTAL SECURITIES............. $637,356 $516,744 $420,507
======== ======== ========
</Table>
Total securities outstanding at December 31, 2003, were $637.3 million, an
increase of $120.6 million, or 23.3%, from $516.7 million at December 31, 2002.
The increase in the securities portfolio was due primarily to CIB Marine's
strategy to maintain an appropriate level of liquid assets in order to mitigate
the increased level of liquidity risk. The ratio of total securities to total
assets was 20.0%, 14.2%, and 14.3% at December 31, 2003, 2002 and 2001,
respectively.
At December 31, 2003, 49.0% of the portfolio consisted of U.S. Treasuries
and government agency securities, as compared to 30.5% at December 31, 2002. The
increase in the level of U.S. Treasuries and government agency securities is
primarily a result of CIB Marine's desire to change the portfolio mix based on
market and liquidity risk management strategies. Mortgage-backed securities
represented 39.0% of the portfolio at December 31, 2003 as compared to 53.4% at
December 31, 2002. The decrease in the level of mortgage-backed securities is a
result of high rates of prepayments and CIB Marine's decision not to reinvest in
these securities. Obligations of states and political subdivisions of states
represented 8.9% of the portfolio at December 31, 2003, as compared to 12.3% at
December 31, 2002. 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 1.2% of the portfolio at December 31,
2003 and 1.6% of the portfolio in 2002.
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 or classified as held for
maturity. 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.
During the fourth quarter of 2004, CIB Marine determined that it no longer
had the intent to hold to maturity its tax exempt securities classified as held
to maturity. In the first nine months of 2005, CIB Marine sold $9.3 million of
these securities at a gain of $0.4 million. As a result of a material
contradiction related to management's previous assertion regarding its intent
and ability to hold securities to maturity, CIB Marine determined the
consolidated financial statements should be restated for all years presented to
reclassify all held to maturity securities to available for sale. The effect of
this restatement is to increase available for sale securities by $72.8 million
and $98.7 million, and decrease held to maturity securities by $70.1 million and
48
$96.6 million, at December 31, 2002 and 2001, respectively. The effect of this
restatement also resulted in an increase in accumulated other comprehensive
income and total Stockholders' Equity of $1.7 million, $1.3 million and $0.4
million as of December 31, 2002, 2001 and 2000, respectively, for the net
unrealized gains on the reclassified securities. The difference in the increase
in available for sale securities and the increase in accumulated other
comprehensive income as of December 31, 2002 and 2001, is the deferred income
tax effect on the net unrealized gain on securities of $1.0 million and $0.8
million, at December 31, 2002 and 2001, respectively, which resulted in a
decrease in net deferred tax assets included in other assets at December 31,
2002 and an increase in deferred tax liabilities included in other liabilities
at December 31, 2001
Based on its evaluation of individual securities, CIB Marine has determined
it has no securities in its portfolio which are other than temporarily impaired.
The following table presents the maturities and weighted average yields of
securities as of December 31, 2003.
<Table>
<Caption>
DECEMBER 31, 2003
----------------------------------------------------------------------------------------------------------
1 YEAR AND LESS 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS
------------------- ------------------- ------------------ -------------------
YIELD TO YIELD TO YIELD TO YIELD TO TOTAL YIELD TO
BALANCE MATURITY BALANCE MATURITY BALANCE MATURITY BALANCE MATURITY BALANCE MATURITY
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Treasuries......... $ 10,042 1.30% $ 10,028 1.41% $ -- --% $ -- --% $ 20,070 1.35%
U.S. government
agencies.............. 87,375 1.95 191,477 1.90 3,026 2.22 9,122 5.51 291,000 2.03
Obligations of states
and political
subdivisions.......... 20,831 2.87 21,956 6.51 10,692 7.44 3,337 7.82 56,816 5.43
Other notes and bonds... 450 7.21 400 5.17 200 6.37 -- -- 1,050 6.27
Commercial paper........ 7,369 1.46 -- -- -- -- -- -- 7,369 1.46
Mortgage-backed
securities............ -- -- 20,222 3.56 69,848 3.31 157,666 3.21 247,736 3.26
Federal Home Loan Bank
and Federal Reserve
Bank stock............ -- -- -- -- -- -- 11,131 6.40 11,131 6.40
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total securities
before market value
adjustment.......... $126,067 2.04% $240,083 2.44% $83,766 3.81% $181,256 3.60% $635,172 2.87%
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Available for sale
market value
adjustment (FAS
115).................. 2,184
--------
TOTAL SECURITIES...... $637,356
========
</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. Exceptions to this
policy are permitted with the approval of the loan committee and exceptions to
the policy have, in the past, been approved by the loan committee.
Loans, net of the allowance for loan losses, were $2.3 billion at December
31, 2003, a decrease of $388.7 million, or 14.7%, from $2.6 billion at December
31, 2002, and represented 70.6% and 72.3% of CIB Marine's total assets at
December 31, 2003 and December 31, 2002, respectively. A significant amount of
the decrease in the loan portfolio occurred in the commercial and commercial
real estate construction balances which decreased 23.8% and 29.2% respectively,
from December 31, 2002 to December 31, 2003. The total of all commercial
categories, including factored receivables, represented 95.9% of gross loans at
December 31, 2003 compared to 96.1% at December 31, 2002. The 2003 decrease was
mainly due to
49
CIB Marine's shift in focus from business development to improving the asset
quality of the portfolio, including loan charge-offs and reductions in credit
concentrations.
In 2002, the loan portfolio, net of allowance for loan losses, grew $292.7
million from $2.3 billion at December 31, 2001. The increase in loans was
consistent with CIB Marine's business strategy to focus on establishing banking
relationships with small to medium-sized businesses.
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,
------------------------------------------------------------------
2003 2002 2001
------------------ --------------------- ---------------------
BALANCE % BALANCE % BALANCE %
---------- ----- ------------- ----- ------------- -----
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Commercial............ $ 708,252 29.9% $ 928,992 34.3% $ 913,962 38.2%
Factored
receivables......... 11,447 0.5 6,780 0.2 N/A N/A
Commercial real
estate.............. 1,184,542 50.1 1,157,136 42.7 975,904 40.8
Commercial real estate
construction........ 363,822 15.4 513,804 18.9 394,081 16.5
Residential real
estate.............. 85,893 3.6 91,577 3.4 92,022 3.9
Home equity loans..... 12,272 0.5 15,100 0.6 12,728 0.5
Consumer loans........ 3,554 0.2 6,032 0.2 8,469 0.4
Receivables from sale
of stock............ (5,208) (0.2) (7,937) (0.3) (7,437) (0.3)
---------- ----- ---------- ----- ---------- -----
Gross loans......... 2,364,574 100.0% 2,711,484 100.0% 2,389,729 100.0%
===== ===== =====
Deferred loan fees.... (4,533) (7,478) (7,684)
---------- ---------- ----------
Total loans......... 2,360,041 2,704,006 2,382,045
Allowance for loan
losses.............. (109,872) (65,122) (35,855)
---------- ---------- ----------
Net loans........... $2,250,169 $2,638,884 $2,346,190
========== ========== ==========
<Caption>
DECEMBER 31,
---------------------------------------------
2000 1999
--------------------- ---------------------
BALANCE % BALANCE %
------------- ----- ------------- -----
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Commercial............ $ 626,270 34.2% $ 577,051 39.7%
Factored
receivables......... N/A N/A N/A N/A
Commercial real
estate.............. 855,390 46.8 585,386 40.2
Commercial real estate
construction........ 282,000 15.4 214,251 14.7
Residential real
estate.............. 36,508 2.0 52,161 3.6
Home equity loans..... 16,364 0.9 10,395 0.7
Consumer loans........ 18,852 1.0 20,016 1.4
Receivables from sale
of stock............ (5,096) (0.3) (4,710) (0.3)
---------- ----- ---------- -----
Gross loans......... 1,830,288 100.0% 1,454,550 100.0%
===== =====
Deferred loan fees.... (4,153) (3,679)
---------- ----------
Total loans......... 1,826,135 1,450,871
Allowance for loan
losses.............. (23,988) (16,214)
---------- ----------
Net loans........... $1,802,147 $1,434,657
========== ==========
</Table>
Commercial Loans. At December 31, 2003, commercial loans totaled $708.3
million, a decrease of $220.7 million, or 23.8%, from the prior year end and
represented 29.9% of gross loans. Commercial loans increased $15.0 million, or
1.6%, during 2002. 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 through CIB
Marine Commercial Finance, LLC certain of the assets of a business engaged in
the factoring of receivables. This company provided 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, 2003, the total balance of the
receivables from factoring was $11.4 million compared to $6.8 million at
December 31, 2002. In June 2004, CIB Marine sold the assets of CIB Marine
Commercial Finance, LLC. The company was dissolved in November 2004.
Commercial Real Estate Loans. At December 31, 2003, commercial real estate
loans increased $27.4 million, or 2.4%, from the prior year end and represented
50.1% of gross loans. Commercial real estate loans increased $181.2 million, or
18.6%, during 2002. Commercial real estate loans are made to finance
50
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, 2003,
commercial real estate construction loans totaled $363.8 million, a decrease of
$150.0 million, or 29.2%, over the prior year end and represented 15.4% of gross
loans. Commercial real estate construction loans increased $119.7 million, or
30.4%, during 2002. Commercial real estate construction loans include loans for
the construction of office buildings, multi-family residences, motels, strip
malls, warehouses, and other commercial real estate projects. 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
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, 2003, residential mortgage
loans, which are not held for sale totaled $85.9 million and represented 3.6% of
gross loans, as compared to $91.6 million and 3.4%, respectively, at December
31, 2002. 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 $15.8 million at December 31, 2003 and
represented 0.7% of gross loans, as compared to $21.1 million and 0.8%,
respectively, at December 31, 2002.
Leveraged Financing. CIB Marine has also provided leveraged financing,
including mezzanine loans, to certain of its borrowers through 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. Mezzanine loans are, by their
nature, inherently riskier than senior debt position loans. These loans are
typically secured by a junior position on some or all of the assets of the
borrower. CIB Marine may have also required other credit enhancements, such as
personal and corporate guarantees, on these borrowings. At December 31, 2003,
CIB Marine Capital had approximately $19.0 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 which was $5.4 million at December 31, 2003. During
the fourth quarter of 2003, CIB Marine Capital ceased to offer new loans and
began the winding down of its affairs, including the sale and collection of
outstanding loans. CIB Marine does not expect the mezzanine loan portfolio will
represent a significant portion of the total loan portfolio in the future.
Receivables from Sale of Stock. CIB Marine's subsidiary banks have made
loans to borrowers to purchase CIB Marine stock in private placement offerings
from CIB Marine or from other shareholders. Loans originated by CIB Marine's
subsidiary banks to purchase CIB Marine stock that are not sufficiently
collateralized by assets other than CIB Marine stock are accounted for as a
reduction of stockholders' equity unless the loan has been repaid prior to the
issuance of the financial statements. Such loans are recorded as Receivables
from sale of stock (a contra-equity account) and totaled $5.2 million in 2003,
$7.9 million in 2002, and $7.4 million in 2001. Interest earned on these loans
was $0.3 million in 2003 and $0.5 million in 2002 and 2001 and is included in
"Interest and Dividend Income-Loans."
51
Loan Maturities. The following table sets forth the maturity distribution
and interest rate sensitivity of selected loan categories as of December 31,
2003. Maturities are based upon contractual terms of the underlying loans.
<Table>
<Caption>
1 YEAR 1 TO 5 OVER 5
AND LESS YEARS YEARS TOTAL
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial............................ $ 452,252 $ 227,547 $ 28,453 $ 708,252
Factored receivables.................. 10,813 634 -- 11,447
Commercial real estate................ 440,354 639,822 104,366 1,184,542
Commercial real estate construction... 260,244 102,121 1,457 363,822
Residential real estate............... 30,632 45,570 9,691 85,893
Home equity loans..................... 1,642 10,593 37 12,272
Consumer loans........................ 1,799 1,559 196 3,554
Receivables from sale of stock........ (5,208) -- -- (5,208)
---------- ---------- -------- ----------
Total gross loans................... $1,192,528 $1,027,846 $144,200 $2,364,574
========== ========== ======== ==========
SENSITIVITY TO CHANGES IN INTEREST
RATES
Fixed rates........................... 207,742 435,524 38,498 681,764
Variable rates........................ 984,786 592,322 105,702 1,682,810
---------- ---------- -------- ----------
Total gross loans................... $1,192,528 $1,027,846 $144,200 $2,364,574
========== ========== ======== ==========
</Table>
CREDIT CONCENTRATIONS
At December 31, 2003, CIB Marine had fifteen secured borrowing
relationships (loans to one borrower or a related group of borrowers) that
exceeded 25% of stockholders' equity as compared to four such relationships at
December 31, 2002. The increase in the number of concentrations is largely due
to a significant decrease in stockholders' equity, which resulted in a lower
threshold for determining credit concentrations. The total outstanding
commitments at December 31, 2003, including lines of credit not fully drawn, on
these relationships ranged from 26% to 83% of equity and from 1% to 4% of total
loans. The principal drawn and outstanding on these relationships ranged from
$27.8 million to $85.1 million and the aggregate balance outstanding on these
fifteen relationships was $585.1 million. Five of these relationships included
loans that were on nonaccrual status and impaired. The outstanding balance of
the nonaccrual or impaired loans within these five relationshipS at December 31,
2003 was $74.9 million and the specific allowance for loss provided on these
loans was $16.9 million. See further discussion of these loans under
"Nonperforming Assets and Loans 90 Days or More Past Due and Still Accruing".
The majority of loans within four of these five relationships were at
CIB -- Chicago, which was sold in November 2004. See Note 27 -- Subsequent
Events to the consolidated financial statements in Item 8 of this Form 10-K. At
December 31, 2004, the remaining loans within these five relationships that were
on nonaccrual status and/or impaired was $10.3 million and had specific reserves
of $1.8 million.
52
At December 31, 2003, CIB Marine also had credit relationships within ten
industries or industry groups that exceeded 25% of its stockholders' equity.
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
% OF % OF
OUTSTANDING % OF STOCKHOLDERS' OUTSTANDING % OF STOCKHOLDERS'
INDUSTRY BALANCE LOANS EQUITY BALANCE LOANS EQUITY
- -------- ----------- ----- ------------- ----------- ----- -------------
(AS RESTATED)
(DOLLARS IN MILLIONS)
Commercial Real Estate
Developers................... $527.3 22% 486% $595.7 22% 241%
Residential Real Estate
Developers................... 465.7 20 429 665.8 25 269
Motel and Hotel................ 217.1 9 200 214.6 8 87
Manufacturing.................. 184.8 8 170 213.5 8 86
Nursing/Convalescent Home...... 133.2 6 123 146.3 5 59
Health Care Facility........... 120.6 5 111 116.0 4 47
Retail Trade................... 100.6 4 93 117.4 4 47
Finance and Insurance.......... 58.2 2 54 161.0 6 65
Administrative, Support, Waste
Management and Remediation
Services..................... 46.0 2 42 46.5 2 19
Arts, Entertainment and
Recreation................... 40.1 2 37 23.7 1 10
</Table>
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 or approved or ratified by the applicable loan
committee each of which has 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
53
subsidiary, and approves loans where the borrowing relationship is greater than
$1.0 million. During 2003, CIB Marine made a number of changes to its loan
approval process. In February 2003, the Board created an Executive Loan
Committee. The Executive Loan Committee reviews 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, which threshold was further reduced to $10.0 million in January
2004. In April 2004, the Board reaffirmed its commitment to limiting credit
relationships to no more than $25.0 million, except under certain circumstances,
and set internal goals to reduce then existing industry and borrower
concentrations to no more than $100.0 million and $65.0 million, respectively.
In October 2003, the loan policy was amended to prohibit any new or additional
loans secured by CIB Marine stock. CIB Marine's President and CEO and/or the
Chief Credit Officer have veto authority over any loan and do not have any
individual loan approval authority except that the Chief Credit Officer has
lending authority with respect to work out credits. 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 loan review function is responsible for
assessing the credit quality of the loan portfolio, establishing and monitoring
adherence to underwriting standards and promptly identifying loans with
potential credit exposure. Loan reviews are conducted on a regular basis as
established by the loan policy. These analyses are completed annually, or more
frequently if warranted, and include a comprehensive assessment of collateral
and debt service ability at both CIB Marine and other creditors. These analyses
also include an evaluation of geographic, industry and other credit risks. 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. In 2003, the loan
review function began reporting directly to the Board of Directors and a
corporate loan review manager was hired. In 2004, CIB Marine outsourced its loan
review function.
Loans with identified weaknesses are monitored on an on-going basis by
management, the applicable subsidiary's Board of Directors. CIB Marine also
improved the monitoring of risk rating procedures through the establishment of
an Early Identification/Warning process, which enhances the prompt
identification, evaluation, and monitoring of weak credits. CIB Marine also
implemented a loan grade certification program requiring a periodic assessment
and certification by individual lenders of portfolio risk ratings.
ALLOWANCE FOR LOAN LOSSES
CIB Marine monitors and maintains an allowance for loan losses to absorb an
estimate of probable losses inherent in the loan portfolio. At December 31,
2003, the allowance for loan losses was $109.9 million, or 4.7%, of total loans,
compared to $65.1 million, or 2.4% of total loans, at December 31, 2002. The
allowance is increased by the amount of provision for loan losses and recoveries
of previously charged-off loans, and is decreased by the amount of loans
charged-off. Total charge-offs for 2003 were $103.1 million, while recoveries
were $2.0 million, as compared to $17.5 million and $1.1 million, respectively,
for 2002. The increase in the allowance was primarily due to the deteriorating
quality of the credit portfolio which was concentrated within a relatively small
number of borrowing relationships and the increased loss rate percentages
applied to 2003. 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 and may require CIB Marine to make additional provisions to the
allowance or may downgrade loan ratings, which may result in additional
provisions to the allowance based upon their judgments about information
available to them at the time of their examinations. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Matters" and Note 15 -- Stockholders' Equity in Item 8
of this Form 10-K.
During 2003, CIB Marine charged-off $103.1 million in loans. Fifteen
borrowing relationships (loans to one borrower or a related group of borrowers)
accounted for $83.2 million, or 80.7% of the total charge-offs and two of the
fifteen borrowing relationships accounted for $54.0 million or 52.4% of the
total charge-offs.
54
One of the two borrowing relationships had $45.7 million of charged-off loans,
of which $41.7 million related to the outstanding balance on loans obtained to
convert a commercial office building into condominiums. In the fourth quarter of
2003, the outstanding balances on the loans within this borrowing relationship
were charged-off and the commercial property securing the majority of these
loans was acquired by CIB Marine through a Deed in Lieu of Foreclosure. See the
foreclosed property section for further discussion of this acquired property.
The second largest charge-off to a related group of borrowers was for $8.3
million and was for commercial construction loans, the proceeds of which were
used to construct two waste-to-energy electric plants in Central Illinois. In
the first quarter of 2003, the borrower filed for bankruptcy and with CIB
Marine's consent, and that of the bankruptcy trustee, the equipment at the
various locations was sold. Due to potential environmental liabilities
associated with the property, CIB Marine did not foreclose on the property and
in the third quarter of 2003, the remaining balances on the loans in this
borrowing relationship were charged-off.
The following table summarizes changes in the allowance for loan losses for
each of the periods indicated.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF YEAR.............. $ 65,122 $ 35,855 $ 23,988 $ 16,214 $ 11,118
Loans charged-off:
Commercial:
Commercial............................ (31,011) (14,443) (1,893) (930) (1,280)
Factored receivables.................. (95) -- -- -- --
Commercial Real Estate:
Commercial real estate................ (18,115) (2,752) (660) (470) (191)
Commercial real estate construction... (53,668) -- (100) -- (36)
Consumer:
Residential real estate............... (153) (79) (74) (152) --
Home equity........................... -- (70) -- -- --
Consumer.............................. (97) (155) (272) (372) (351)
---------- ---------- ---------- ---------- ----------
TOTAL CHARGED-OFF..................... (103,139) (17,499) (2,999) (1,924) (1,858)
---------- ---------- ---------- ---------- ----------
Recoveries of loans charged-off:
Commercial:
Commercial............................ 1,830 757 357 59 60
Factored receivables.................. 4 -- -- -- 25
Commercial Real Estate:
Commercial real estate................ 155 294 39 20 --
Commercial real estate construction... -- -- -- -- 46
Consumer:
Residential real estate............... 3 20 16 -- 9
Home equity........................... -- 6 -- -- --
Consumer.............................. 51 57 59 165 29
---------- ---------- ---------- ---------- ----------
TOTAL RECOVERIES...................... 2,043 1,134 471 244 169
---------- ---------- ---------- ---------- ----------
NET LOANS CHARGED-OFF..................... (101,096) (16,365) (2,528) (1,680) (1,689)
Allowance acquired........................ -- 122 -- -- --
Provision for loan losses................. 145,846 45,510 14,395 9,454 6,785
---------- ---------- ---------- ---------- ----------
BALANCE AT END OF YEAR.................... $ 109,872 $ 65,122 $ 35,855 $ 23,988 $ 16,214
========== ========== ========== ========== ==========
</Table>
55
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
RATIOS
Allowance for loan losses to total
loans................................... 4.66% 2.41% 1.51% 1.31% 1.12%
Allowance for loan losses to nonaccrual,
restructured and 90 days or more past
due and still accruing loans............ 70.72 134.09 93.16 130.71 183.67
Net charge-offs to average loans:
Commercial.............................. 3.83 1.70 0.21 0.15 0.25
Commercial real estate.................. 3.90 0.14 0.06 0.04 0.03
Consumer................................ 0.36 0.36 0.39 0.51 0.41
Total loans........................... 3.81 0.64 0.12 0.10 0.15
Ratio of recoveries to loans
charged-off............................. 1.98 6.48 15.71 12.67 9.10
Total loans............................... $2,360,041 $2,704,006 $2,382,045 $1,826,135 $1,450,871
Average total loans....................... 2,651,680 2,573,894 2,082,775 1,664,246 1,161,876
</Table>
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,
------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------- -------- --------- -------- --------- --------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Commercial.............. $ 48,504 6.85% $25,937 2.78% $16,631 1.82%
Factored receivables.... 355 3.10 237 3.50 -- --
Commercial real
estate................ 48,813 4.12 22,658 1.97 11,918 1.22
Commercial real estate
construction.......... 9,456 2.60 11,012 2.14 3,981 1.01
Residential real
estate................ 2,027 2.36 3,802 4.15 1,541 1.67
Home equity loans....... 104 0.84 225 1.49 213 1.67
Consumer loans.......... 47 1.32 160 2.65 232 2.74
Unallocated............. 566 -- 1,091 -- 1,339 --
-------- ---- ------- ---- ------- ----
Total Allowance......... $109,872 4.66% $65,122 2.41% $35,855 1.51%
======== ==== ======= ==== ======= ====
<Caption>
DECEMBER 31,
-------------------------------------------
2000 1999
-------------------- --------------------
% OF % OF
LOANS IN LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
AMOUNT CATEGORY AMOUNT CATEGORY
--------- -------- --------- --------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Commercial.............. $ 8,742 1.40% $ 7,383 1.28%
Factored receivables.... -- -- -- --
Commercial real
estate................ 8,616 1.01 3,486 0.60
Commercial real estate
construction.......... 2,006 0.71 1,186 0.55
Residential real
estate................ 317 0.87 332 0.64
Home equity loans....... 142 0.87 66 0.64
Consumer loans.......... 212 1.12 222 1.11
Unallocated............. 3,953 -- 3,539 --
------- ---- ------- ----
Total Allowance......... $23,988 1.31% $16,214 1.12%
======= ==== ======= ====
</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.
56
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,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS
Nonaccrual loans:
Commercial.................... $ 58,161 17,329 $ 20,026 $ 2,391 $ 1,465
Factored receivables.......... -- -- -- -- --
Commercial real estate........ 77,960 15,507 15,678 12,682 798
Commercial real estate
construction............... 13,310 5,221 -- -- 180
Residential real estate....... 2,622 756 610 586 654
Home equity loans............. -- 100 220 -- --
Consumer loans................ 11 45 110 93 362
---------- ---------- ---------- ---------- ----------
Total Nonaccrual Loans..... 152,064 38,958 36,644 15,752 3,459
Foreclosed property........... 40,715 3,678 3,168 1,626 1,099
Restructured loans............ 2,946 3,210 309 1,505 1,853
---------- ---------- ---------- ---------- ----------
Total Nonperforming
Assets................... $ 195,725 $ 45,846 $ 40,121 $ 18,883 $ 6,411
========== ========== ========== ========== ==========
LOANS 90 DAYS OR MORE PAST DUE
AND STILL ACCRUING
Commercial.................... -- $ 3,022 $ 758 $ 235 $ 1,092
Factored receivables.......... -- -- -- -- --
Commercial real estate........ 352 2,292 195 20 1,421
Commercial real estate
construction............... -- -- 152 -- 850
Residential real estate....... -- 1,076 408 797 126
Home equity loans............. -- -- -- -- --
Consumer loans................ 7 6 22 43 27
---------- ---------- ---------- ---------- ----------
Total Loans 90 Days or More
Past Due and Still
Accruing................. $ 359 $ 6,396 $ 1,535 $ 1,095 $ 3,516
========== ========== ========== ========== ==========
Allowance for loan losses....... $ 109,872 $ 65,122 $ 35,855 $ 23,988 $ 16,214
Loans at end of period.......... $2,360,041 $2,704,006 $2,382,045 $1,826,135 $1,450,871
========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
RATIOS
Nonaccrual loans to total loans...... 6.44% 1.44% 1.54% 0.86% 0.24%
Foreclosed properties to total
assets............................. 1.28 0.10 0.11 0.07 0.06
Nonperforming assets to total
assets............................. 6.14 1.26 1.36 0.77 0.34
Nonaccrual, restructured and 90 days
or more past due and still accruing
loans to total loans............... 6.58 1.80 1.62 1.00 0.61
Nonperforming assets and 90 days or
more past due and still accruing
loans to total assets.............. 6.15 1.43 1.42 0.81 0.52
</Table>
57
As a result of deterioration in the quality of the credit portfolio,
nonaccrual loans increased $113.1 million, or 290.3%, from $39.0 million at
December 31, 2002 to $152.1 million at December 31, 2003. Total nonaccrual loans
increased $2.3 million, or 6.3%, during 2002 from $36.6 million at December 31,
2001. The ratio of nonaccrual loans to total loans was 6.44%, 1.44%, and 1.54%
at December 31, 2003, 2002 and 2001, respectively. Foregone interest on
nonaccrual loans reduced interest income by $10.7 million in 2003, $3.3 million
in 2002 and $2.4 million in 2001.
At December 31, 2003, $129.3 million, or 85.0% of nonaccrual loans
consisted of the following fifteen lending relationships:
- Commercial real estate and construction loans totaling $20.4 million to
related borrowers secured primarily by second mortgages on condominium
development projects in Chicago. Subsequent to 2003, CIB Marine moved
from a second to a first lien position on the secured properties when the
first lien holder was paid in full through loan collateral sales. CIB
Marine also received $2.5 million in payments due to loan collateral
sales. Additionally, CIB Marine received payments of $1.2 million on
loans within this borrowing relationship and charged-off $0.2 million. In
2004, due to the borrower being in default with the first lien holder,
CIB Marine funded and charged-off a $5.0 million letter of credit on
commercial retail space associated with one project within this borrowing
relationship. The loss on the letter of credit had been fully accrued for
in 2003. As a result of the sale of CIB -- Chicago, total outstanding
balances owed to CIB Marine with respect to this relationship totaled
$2.7 million, all of which were classified as nonaccrual.
- Commercial loans totaling $20.2 million to related borrowers secured by a
first lien on business assets and intellectual property. The loans were
transferred to nonaccrual in the fourth quarter of 2003. Specific
reserves in the amount of $9.4 million were allocated by December 31,
2003. In 2004, additional reserves were specifically allocated in the
amount of $0.2 million and certain of the loans were charged down by $5.0
million based on new collateral appraisals. While CIB Marine believes
that the value of the collateral securing the obligation approximates the
amount owed, 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 and commercial real estate loans totaling $15.0 million to
related borrowers secured by first mortgages on multi-family development
projects. At December 31, 2003, there were specific reserves of $0.2
million allocated to these loans. During 2003, CIB Marine charged-off
$1.5 million of loans related to this borrowing relationship. Subsequent
to December 31, 2003, CIB Marine sold one loan for $12.5 million and
charged-off $0.2 million. As a result of the sale of CIB -- Chicago, CIB
Marine does not have any outstanding balances with respect to this
relationship.
- Commercial and commercial real estate loans totaling $12.8 million to
related borrowers secured by closely held stock and a first lien mortgage
on multi-family zoned undeveloped land. At December 31, 2003, there were
specific reserves of $0.4 million allocated to these loans. During 2004,
CIB Marine charged-off $6.8 million with respect to this relationship. As
a result of the sale of CIB -- Chicago, CIB Marine does not have any
outstanding balances with respect to this relationship.
- Commercial real estate loans totaling $11.1 million to related borrowers
secured by first mortgages on a housing project and the adjacent land.
During the third quarter of 2004, the properties were sold, $1.0 million
was charged-off and the balance was repaid.
- Commercial real estate loan in the amount of $8.0 million to a borrower
secured by a first mortgage on a tenanted office building. The property
was sold in the second quarter of 2004 resulting in a full payoff of the
loan and a $0.2 million recovery on a related note that had been
charged-off in 2003.
- Commercial and commercial real estate loans totaling $8.0 million to a
borrower secured by all business assets and a first mortgage on three
commercial real estate properties. A specific reserve in the amount of
$3.1 million was allocated to the loans in the third quarter of 2003.
During 2004, $4.4 million was charged-off based on updated collateral
valuations obtained in 2004. While CIB Marine believes that the value of
the collateral securing the obligation approximates the amount
58
owed, CIB Marine cannot provide assurances that the value will be
maintained or that there will be no further losses with respect to this
relationship.
- Two commercial real estate loans in the aggregate amount of $6.5 million
to related borrowers secured by first mortgages on development projects
relating to an office building and a condo conversion. These loans were
sold in the second quarter of 2004.
- Commercial and commercial real estate loans in the total amount of $6.0
million to related borrowers secured by business assets and a first
mortgage on a hotel. During 2003, CIB Marine charged-off $1.0 million of
loans related to this borrowing relationship. At December 31, 2003, the
amount of specific reserves relating to loans within this relationship
was $0.3 million. During 2004, the loan was repaid in full and the $1.0
million charge-off was recovered.
- Commercial real estate loan in the amount of $4.2 million secured by a
first mortgage on a restaurant property. During 2003, $3.0 million was
charged-off, and in the third quarter of 2004 the remaining balance was
paid in full.
- Commercial real estate construction loans totaling $3.9 million to a
borrower secured by a first mortgage on a condominium development
project. At December 31, 2003, there were specific reserves of $0.1
million allocated to these loans. During 2004, CIB Marine charged-off
$0.5 million with respect to this relationship. As a result of the sale
of CIB -- Chicago, CIB Marine does not have any outstanding balances with
respect to this relationship.
- Commercial real estate construction loan in the amount of $3.5 million to
a borrower secured by a first mortgage on a residential property.
Specific reserves in the amount of $0.3 million were allocated to this
loan in 2003 based on a current appraisal. The loan is in process of
foreclosure. While CIB Marine believes that the value of the collateral
securing the obligation approximates the amount owed, 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 related borrowers in the amount of $3.4 million
secured by business assets and privately held stock. In the first quarter
of 2004, CIB Marine charged-off $0.8 million and the borrowers repaid the
loans in full.
- Commercial loans in the amount of $3.2 million to related borrowers
secured by first priority security interests in business assets and a
second mortgage on residential real estate. The business was liquidated
in the fourth quarter of 2004 resulting in a pay down of $1.2 million and
a charge-off totaling $1.0 million. CIB Marine is commencing foreclosure
on the residential real estate. At December 31, 2004, CIB Marine had a
$0.4 million specific reserve with respect to this relationship. While
CIB Marine believes that the value of the collateral securing the
obligation approximates the amount owed, 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 real estate loans aggregating $3.1 million to a borrower
secured by a first mortgage. The loans were transferred to nonaccrual in
December 2003. The borrower repaid the loans in full during the second
quarter of 2004.
Foreclosed properties were $40.7 million at December 31, 2003 and consisted
of nine commercial properties, six of which were acquired during 2003. At
December 31, 2002, foreclosed properties were $3.7 million and consisted of
seven properties. All foreclosed properties were held for sale. At December 31,
2003, $36.2 million or 88.9% of foreclosed properties consisted of the
following:
- Commercial office building located in Illinois which had a balance of
$25.2 million at December 31, 2003 and was subject to a $26.7 million
first mortgage held by a nonaffiliated financial institution. It was
being converted into residential condominiums and was acquired through a
Deed in Lieu of Foreclosure Settlement Agreement ("DIL") from a borrower
who was in default on its obligation. CIB -- Chicago held the second
position on the property. During 2003, CIB Marine charged-off $41.7
million of loans secured by the second position and recognized a $1.5
million impairment loss on
59
the foreclosed property. Pursuant to the DIL Agreement, CIB Marine
acquired the property subject to the first lien held by an outside
financial institution ("Lender") and assumed the borrower's financial
obligation relating to that first lien. The assumed financial obligation
is reported as an outstanding nonrecourse mortgage note payable and had a
balance of $26.7 million at December 31, 2003. Under the terms of the
assumption, CIB Marine's liability to the Lender for payment on the
assumed obligation was limited to monies received through the liquidation
of the acquired collateral. In the second quarter of 2004, CIB -- Chicago
transferred its interest in the acquired property to the Lender in return
for the forgiveness of the assumed mortgage note payable. The decision
was made after exhaustive efforts to sell the property proved carrying
the property was not economically feasible. The transfer of interest in
the acquired property to the Lender in return for the forgiveness of the
assumed mortgage note payable resulted in no additional gain or loss.
During 2004, CIB Marine recognized $1.4 million in expenses related to
the carrying costs of this property and $0.7 million of interest expense
on the mortgage note payable.
- Parking structure located in Illinois which had a balance of $8.8 million
at December 31, 2003. The property was sold in June 2004 resulting in a
$0.6 million loss.
- Condominium development project located in Illinois which had a balance
of $2.2 million at December 31, 2003. CIB -- Chicago acquired the
property through foreclosure. As a result of the sale of CIB -- Chicago
on November 30, 2004, CIB Marine no longer owns this property.
Restructured loans were $2.9 million at December 31, 2003 and consisted of
two loans to the same borrower. These loans were classified as restructured in
the first quarter of 2002. At December 31, 2003, a specific reserve of $0.9
million was allocated to these loans. One loan, a commercial loan with a balance
of $1.3 million at December 31, 2003 was charged-off in full during the fourth
quarter of 2004. The second loan, a commercial real estate loan with a balance
of $1.6 million at December 31, 2003 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.
Loans that were 90 days or more past due and still accruing decreased $6.0
million from $6.4 million at December 31, 2002 to $0.4 million at December 31,
2003. The majority of this decrease was due to payoffs in 2003 on three lending
relationships which had an aggregate outstanding balance of $4.7 million at
December 31, 2002. Accrued interest on loans 90 days or more past due and still
accruing as of December 31, 2002 was $0.1 million. There was no accrued interest
due on these loans as of December 31, 2003.
REGULATORY MATTERS
On January 30, 2003, CIB -- Chicago entered into a Memorandum of
Understanding (the "Memorandum") with the Division of Banks and Real Estate of
the Illinois Department of Financial and Professional Regulation (the "DBRE")
and the FDIC. 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 DBRE's
regular examination of CIB -- Chicago, which commenced on August 31, 2002.
Pursuant to the Memorandum, CIB -- Chicago agreed to take certain actions
to correct the deficiencies noted within the examination report. In addition,
during the period in which the Memorandum was in effect, the bank agreed to
maintain a Tier 1 capital level equal to or exceeding 8% of the bank's total
assets as calculated in accordance with Part 325 of the FDIC rules and
regulations ("Part 325"), 12 C.F.R. Part 325. In the event such ratio is less
than 8% as of June 30 or December 31 of each calendar year the Memorandum was in
effect, the bank was 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, the bank 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 without regulatory approval.
60
Subsequently, in May 2004, CIB -- Chicago, Central Illinois Bank, Marine
-- Wisconsin and CIB -- Indiana entered into Cease and Desist Orders with
banking regulators. The Memorandum was released as a result of entering into the
Cease and Desist Order. CIB Marine sold CIB -- Chicago in November 2004. In May
2004, CIB Marine entered into a Written Agreement with the Federal Reserve Bank
of Chicago. The Orders and Agreements impose certain restrictions and reporting
requirements on CIB Marine and such subsidiary banks and require various actions
to be taken. The items include, among others:
- Maintenance of minimum capital levels;
- Restrictions on dividend payments and redemption of shares of CIB Marine
without regulatory approval;
- Limitations on asset and loan growth;
- Adoption of a comprehensive plan to improve earnings;
- Development of a plan to reduce concentrations of credit and loan
relationships classified as substandard or doubtful;
- Development of a system to correct loan administration deficiencies; and
- Development of a plan to correct and prevent violations of banking laws
and regulations related to affiliate transactions.
These regulatory Orders and Agreements were filed with the SEC on June 1,
2004. In August 2004, Citrus Bank entered into a Written Agreement with the OCC,
the provisions of which are similar to the Cease and Desist Orders. The Written
Agreement was filed with the SEC on August 23, 2004. In April 2005, the Cease
and Desist Orders at Marine -- Wisconsin and CIB -- Indiana were each released
and replaced with a Memorandum of Understanding, which were entered into in
March 2005, as a result of improvements at such banks. Pursuant to the
Memoranda, the banks have agreed to maintain minimum capital levels, correct
loan administration deficiencies, reduce credit concentrations and problem
credits, and not to declare or pay cash dividends without regulatory approval.
In April 2005, Central Illinois Bank, Marine -- Wisconsin and
CIB -- Indiana each entered into a Memorandum of Understanding with the FDIC and
its applicable state banking regulators as a result of deficiencies in internal
controls in the area of information technology. The banks agreed to take certain
actions to document and fully implement its information security program,
exercise appropriate diligence in overseeing arrangements with service providers
and assess, develop and implement certain security standards and procedures.
Management believes that CIB Marine, Central Illinois Bank,
Marine -- Wisconsin, CIB -- Indiana and Citrus Bank have complied with the
majority of the provisions of their respective Orders and Agreements and are in
the process of complying with the remaining provisions.
COMPANIES HELD FOR DISPOSAL
CIB CONSTRUCTION
CIB Marine acquired Canron, a steel fabrication and erection company, in
October 2002 as a result of loan collection activities from a borrower pursuant
to a Settlement Order entered in the Bankruptcy Court and subsequently
transferred its interest in Canron to CIB Construction. During the third quarter
of 2003, the Boards of Directors of CIB Marine and of Canron authorized
management to cease operating Canron and commence the liquidation of Canron's
assets. During 2003, Canron sold the Western Canada, Western United States and
Mexico operations of the company, sold or closed certain of its other facilities
and reduced its work force from 874 to 8 full-time equivalent employees. The net
after-tax loss for 2003 was $7.0 million including $4.7 million of impairment
losses recorded.
61
The following table summarizes the composition of CIB Construction's
consolidated balance sheets. The December 31, 2003 balance sheet reflects
current expectations of liquidation values:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit at CIB Marine............................. $ 2,407 $ 332
Accounts receivable....................................... 12,807 33,610
Inventories and contracts in progress..................... 1,438 7,629
Other current assets...................................... -- 4,195
------- -------
Current assets......................................... 16,652 45,766
Deferred tax asset........................................ -- 4,269
Property and equipment, net............................... 12,312 17,026
------- -------
Total assets......................................... $28,964 $67,061
======= =======
Liabilities and Stockholder's Equity:
Current portion of loans payable to CIB Marine and its
affiliates............................................. $11,625 $ 3,921
Income tax payable........................................ 1,074 3,104
Other liabilities......................................... 13,623 31,127
------- -------
Current liabilities.................................... 26,322 38,152
Loans payable to CIB Marine and its affiliates............ -- 22,272
Loans payable to nonaffiliated banks...................... 2,137 1,814
------- -------
Total liabilities.................................... 28,459 62,238
Stockholder's equity...................................... 505 4,823
------- -------
Total liabilities and stockholder's equity............. $28,964 $67,061
======= =======
</Table>
CIB Construction and its subsidiaries are classified as companies held for
disposal and their gross assets and liabilities are reported separately on the
consolidated balance sheet as assets and liabilities of companies held for
disposal. Intercompany loan and cash balances and interest income and expense
between CIB Construction and its subsidiaries and CIB Marine have been
eliminated from the totals shown on the consolidated financial statements. The
consolidated net loss associated with CIB Construction is presented as
discontinued operations in CIB Marine's statement of operations.
MICR, INC.
In 2000, CIB Marine acquired and/or assumed through MICR, Inc. ("MICR"), 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. At the time MICR was acquired, it was valued
at fair value based on an independent appraisal. Due to the regulatory
requirement to sell or dispose of MICR, its assets and liabilities are
classified as companies held for disposal in 2003, 2002 and 2001. The pre-tax
income for MICR was $1.1 million, $1.2 million and $1.2 million for the periods
ended December 31, 2003, 2002, and 2001, respectively. In 2003, CIB Marine
obtained updated valuation information and as a result recognized in noninterest
expense an impairment loss of $2 million on its investment in MICR.
62
OTHER ASSETS
The following table summarizes the composition of CIB Marine's other
assets:
<Table>
<Caption>
DECEMBER 31,
---------------------------------------
2003 2002 2001
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Prepaid expenses................................... $ 1,616 $ 1,293 $ 1,179
Accounts receivable................................ 1,531 551 1,247
Fair value of derivatives.......................... 3,945 8,022 4,870
Trust preferred securities underwriting fee, net of
amortization..................................... 1,500 1,555 1,150
Investment in trust preferred securities........... 2,310 -- --
Other investments.................................. 9,572 9,999 6,376
Deferred taxes..................................... 911 9,405 --
Income tax receivable.............................. 25,926 3,853 --
Other.............................................. 402 324 313
------- ------- -------
$47,713 $35,002 $15,135
======= ======= =======
</Table>
Other assets increased $12.7 million or 36.3%, from $35.0 million at
December 31, 2002 to $47.7 million at December 31, 2003. The majority of this
increase was the result of an increase in income tax refunds receivable due to
the overpayment of estimated taxes in 2003 and the carryback of 2003 net
operating losses to recover taxes paid in prior years. A valuation allowance has
been established to reduce net deferred tax assets at December 31, 2003 to $0.9
million.
Other investments include the following:
- Investments in various affordable housing partnerships. The carrying
value of these investments was $5.7 million at December 31, 2003, $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.
- Interests in three limited partnerships. The carrying value of these
investments was $2.2 million, $3.0 million and $2.6 million at December
31, 2003, 2002, and 2001 respectively. The limited partnership interests
were deemed impaired at December 31, 2003 and an impairment loss of $0.7
million was recorded in "write down and losses on assets". There were no
impairment losses in 2002 or 2001. Equity income recorded on the limited
partnerships was $1.0 million in 2003, $0.3 million in 2002, and $0.1
million in 2001. In the first quarter of 2004, these investments were
sold and a $0.2 million loss was realized.
- Interests in two companies operating as small business investment
companies under the Small Business Investment Act of 1958, as amended.
CIB Marine committed to a $1.1 million investment in these companies and
as of December 31, 2003 has invested $0.9 million. The carrying value of
these investments is at cost less other than temporary impairment which
was estimated to be $0.8 million, $0.6 million and $0.5 million at
December 31, 2003, 2002 and 2001, respectively. The asset was deemed
impaired at December 31, 2002 and an impairment loss of $0.1 million was
recorded. There were no impairment losses in 2003 or 2001.
- 240,770 shares of the common stock of a closely held information services
company, which represents less than a 5% interest in the company. The
amount of this investment is carried at cost less other than temporary
impairment, which was estimated to be $0.5 million at December 31, 2003
and $1.7 million at December 31, 2002 and 2001. During 2003, the asset
was deemed impaired, and an impairment loss
63
of $1.2 million was recorded in "write down and losses on assets." There
were no impairment losses in 2002 or 2001.
- 5,167 shares at December 31, 2003 and 12,500 shares at December 31, 2002
and 2001 of common stock in a closely-held bank holding company. During
2003, CIB Marine sold 7,333 shares for an amount equal to the recorded
investment. The investment represents less than a 5% interest in the
company, and the amount of this investment is carried at cost less other
than temporary impairment, which was estimated to be $0.1 million at
December 31, 2003 and $0.2 million at December 31, 2002 and 2001. In the
third quarter of 2004, the 5,167 remaining shares were sold for a gain of
$13 thousand.
DEPOSITS
Average total deposits increased 11.7% to $2.9 billion in 2003, as compared
to $2.6 billion in 2002. The ratio of average deposits to average earning assets
was 86.0% in 2003, 82.3% in 2002 and 81.0% in 2001.
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,
---------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------- --------------------------------- ---------------------------------
AVERAGE % OF TOTAL AVERAGE AVERAGE % OF TOTAL AVERAGE AVERAGE % OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing
demand................. $ 70,731 2.43% 1.05% $ 57,831 2.22% 1.02% $ 53,670 2.57% 1.98%
Money market............. 427,919 14.73 1.63 285,178 10.96 2.04 245,754 11.74 3.58
Other savings............ 245,781 8.46 1.76 124,189 4.78 2.36 45,893 2.19 2.64
Time deposits............ 1,953,816 67.26 3.29 1,960,349 75.38 3.88 1,615,016 77.16 5.54
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total interest-bearing
deposits............. 2,698,247 92.88 2.83 2,427,547 93.34 3.52 1,960,333 93.66 5.13
Noninterest-bearing...... 206,815 7.12 -- 173,080 6.66 -- 132,731 6.34 --
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total deposits....... $2,905,062 100.00% 2.62% $2,600,627 100.00% 3.29% $2,093,064 100.00% 4.81%
========== ====== ==== ========== ====== ==== ========== ====== ====
</Table>
Average interest-bearing deposits as a percentage of average total deposits
was 92.9% in 2003, 93.3% in 2002, and 93.7% in 2001. Time deposits represent the
largest component of interest-bearing deposit liabilities. The percentage of
average time deposits to average total interest-bearing deposits was 72.4% in
2003, 80.8% in 2002, and 82.4% in 2001. While declining, these percentages
reflect CIB Marine's significant reliance on time deposits as a source of
funding.
Average time deposits declined $6.5 million, or 0.3%, in 2003; while
average savings accounts increased $121.6 million, or 97.9%, and average money
market accounts increased $142.7 million, or 50.1%. Average noninterest bearing
demand deposits increased by $33.7 million, or 19.5%, in 2003. The increase in
average deposits is partially due to economic conditions as funds moved to lower
risk investments, and the relationship banking activity actively pursued by CIB
Marine during most of 2003. During 2003, the economic conditions favored liquid
accounts that paid competitive rates. This, combined with CIB Marine's active
campaign to increase core deposits, resulted in a decrease in time deposits
while increasing demand, money market and savings deposits.
Total time deposits of $100,000 or more, including brokered deposits, were
$617.2 million or 33.6% of total time deposits at December 31, 2003, $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 $183.0
million, or 10.0% of total time deposits and 6.5% of total deposits at December
31, 2003, and $222.8 million, or 11.1% of total time deposits and 7.8% of total
deposits at December 31, 2002. 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.
64
The following table provides information on the maturity distribution of
time deposits of $100,000 or more.
<Table>
<Caption>
DECEMBER 31,
2003
------------
(DOLLARS IN
THOUSANDS)
MATURITY
3 months or less............................................ $118,333
Over 3 through 6 months..................................... 122,122
Over 6 through 12 months.................................... 108,962
Over 12 months.............................................. 267,772
--------
$617,189
========
</Table>
BORROWINGS
CIB Marine also uses various types of borrowings to meet liquidity needs,
fund asset growth and/or when the pricing on these borrowings is more favorable
than deposits.
During the first half of 2003 and during 2004, some of the borrowing
sources customarily utilized by CIB Marine were restricted or unavailable due to
noncompliance with debt covenants and the inability to provide audited
consolidated financial statements. Various federal funds purchased became
available only after CIB Marine pledged fixed income investment securities, the
Federal Home Loan Bank of Chicago restricted borrowing term availability, and
derivative counterparties increased collateral requirements. Brokered deposits
became available only after a waiver was obtained from the FDIC, and three of
CIB Marine's subsidiary banks were required to pledge investment securities
before they were allowed access to the Federal Reserve discount window.
The following table sets forth information regarding selected categories of
borrowings as of the dates indicated.
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
% OF TOTAL % OF TOTAL
BALANCE AVG RATE BORROWINGS BALANCE AVG RATE BORROWINGS
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
SHORT-TERM BORROWINGS
Fed funds purchased........... $ 9,332 1.00% 4.65% $203,430 1.23% 41.17%
Securities sold under
repurchase agreements....... 12,635 1.15 6.29 39,757 1.47 8.05
Revolving lines of credit..... 30,848 3.75 15.37 36,685 3.09 7.43
Federal Home Loan
Bank -- short term.......... -- -- -- 100,500 2.20 20.34
Commercial paper.............. -- -- -- 4,436 2.04 0.90
Treasury, tax and loan note... 13,099 0.73 6.53 2,137 0.99 0.43
Mortgage note payable(1)...... 26,687 10.00 13.29 -- -- --
-------- ----- ------ -------- ----- ------
Total Short-Term
Borrowings................ 92,601 4.49 46.13 386,945 1.69 78.32
-------- ----- ------ -------- ----- ------
<Caption>
AS OF DECEMBER 31,
--------------------------------
2001
--------------------------------
% OF TOTAL
BALANCE AVG RATE BORROWINGS
-------- -------- ----------
(DOLLARS IN THOUSANDS)
SHORT-TERM BORROWINGS
Fed funds purchased........... $232,119 1.51% 55.02%
Securities sold under
repurchase agreements....... 29,649 1.77 7.03
Revolving lines of credit..... 24,985 3.62 5.92
Federal Home Loan
Bank -- short term.......... 27,325 2.04 6.48
Commercial paper.............. 4,677 2.26 1.11
Treasury, tax and loan note... 1,128 1.51 0.27
Mortgage note payable(1)...... -- -- --
-------- ----- ------
Total Short-Term
Borrowings................ 319,883 1.75 75.83
-------- ----- ------
</Table>
65
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
% OF TOTAL % OF TOTAL
BALANCE AVG RATE BORROWINGS BALANCE AVG RATE BORROWINGS
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
LONG-TERM BORROWINGS
Federal Home Loan
Bank -- long-term........... 42,247 6.20 21.04 42,060 6.19 8.51
Fair value adjustment related
to hedge accounting......... 4,029 (3.63) 2.01 5,081 (3.33) 1.03
-------- ----- ------ -------- ----- ------
Total Long-Term FHLB
Borrowings................ 46,276 2.57 23.05 47,141 2.86 9.54
Junior subordinated
debentures/ guaranteed trust
preferred securities........ 61,857 8.58 30.82 60,000 8.74 12.14
-------- ----- ------ -------- ----- ------
Total Long-Term
Borrowings................ 108,133 6.01 53.87 107,141 6.15 21.68
-------- ----- ------ -------- ----- ------
TOTAL BORROWINGS.............. $200,734 5.31% 100.00% $494,086 2.66% 100.00%
======== ===== ====== ======== ===== ======
<Caption>
AS OF DECEMBER 31,
--------------------------------
2001
--------------------------------
% OF TOTAL
BALANCE AVG RATE BORROWINGS
-------- -------- ----------
(DOLLARS IN THOUSANDS)
LONG-TERM BORROWINGS
Federal Home Loan
Bank -- long-term........... 59,452 5.98 14.09
Fair value adjustment related
to hedge accounting......... 2,535 (2.05) 0.60
-------- ----- ------
Total Long-Term FHLB
Borrowings................ 61,987 3.93 14.69
Junior subordinated
debentures/ guaranteed trust
preferred securities........ 40,000 10.52 9.48
-------- ----- ------
Total Long-Term
Borrowings................ 101,987 6.51 24.17
-------- ----- ------
TOTAL BORROWINGS.............. $421,870 2.90% 100.00%
======== ===== ======
</Table>
- ---------------
(1) Mortgage note assumed on foreclosed property.
Total borrowings decreased $293.4 million in 2003 to $200.7 million at
December 31, 2003 from $494.1 million at December 31, 2002, representing 6.5%
and 14.2% of earning assets, respectively. The majority of the decrease was due
to a $194.1 million reduction in fed funds purchased and a $100.5 million
reduction in short-term Federal Home Loan Bank borrowings. These reductions were
driven by liquidity management activity and reduced funding needs of the
subsidiary banks. Total borrowings were $494.1 million and $421.9 million at
December 31, 2002 and 2001, respectively, representing 14.2% and 14.7% of
earning assets. CIB Marine increased its utilization of short and long-term
borrowings during 2002 in order to meet its funding needs when the terms on
these products were as, or more favorable than, other types of funding.
At December 31, 2003, CIB Marine had two revolving lines of credit with a
total outstanding balance of $30.8 million. CIB Marine had a $28.0 million
revolving line of credit at December 31, 2003 with a nonaffiliated commercial
bank collateralized by the common stock of all of its banking subsidiaries. As
of December 31, 2003, 2002 and 2001 outstanding balances on this line of credit
were $23.6 million, $32.4 million and $25.0 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, 2003, CIB Marine was
not in compliance with the capital requirement debt covenant of this revolving
line of credit agreement. In the fourth quarter of 2004, CIB Marine repaid this
loan in full from proceeds on the sale of its bank subsidiary, CIB -- Chicago.
From September 10, 2004 through December 31, 2004, CIB Marine also had an
additional $5.0 million demand revolving line of credit with this same
nonaffiliated commercial bank. This line was never drawn on and was allowed to
expire per the terms of the credit agreement on its original maturity date. 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 had a
$12.0 million revolving line of credit to support its operating needs. At
December 31, 2003 and 2002, the outstanding balances on this line were $7.2
million and $4.3 million, respectively. In 2004, the net assets of this
subsidiary were sold, and the line of credit was assumed by the purchaser with
no recourse to CIB Marine.
JUNIOR SUBORDINATED DEBENTURES AND GUARANTEED TRUST PREFERRED SECURITIES
CIB Marine has formed four statutory business trusts ("Trusts") for the
purpose of issuing trust preferred securities and investing the proceeds thereof
in junior subordinated debentures of CIB Marine. The trust preferred securities
are fully and unconditionally guaranteed by CIB Marine. The Trusts used the
proceeds from issuing trust preferred securities and the issuance of its common
securities to CIB Marine to purchase the junior subordinated debentures.
Interest on the junior subordinated debentures and distributions on the trust
preferred securities are payable either quarterly or semi-annually in arrears.
Pursuant to its 2004 Written Agreement with the Federal Reserve Bank, CIB Marine
is not permitted to pay any interest on the trust preferred securities without
prior approval of the Federal Reserve Board. See "Regulatory Matters" for
66
further discussion. CIB Marine has the right, at any time, as long as there are
no continuing events of default, to defer payments of interest on the junior
subordinated debentures for consecutive periods not exceeding 20 consecutive
quarters; but not beyond the stated maturity of the junior subordinated
debentures. CIB Marine has elected to defer all interest payments starting in
2004. Throughout the deferral period, interest on the debentures continues to
accrue. In addition, interest also accrues on all interest that was not paid
when due, compounded quarterly or semi-annually. During the deferral period, CIB
Marine may not pay any dividends or distributions on, or redeem, purchase, or
acquire or make liquidation payment on its stock, or make any payment on
principal, interest or premium, or redeem any similar debt securities of CIB
Marine, subject to limitations. At December 31, 2004 and September 30, 2005,
approximately $5.5 million and $11.2 million, respectively, in interest payments
were deferred, though the amounts payable continue to accrue as interest
expense. The trust preferred securities are subject to mandatory redemption, in
whole or in part, upon repayment of the junior subordinated debentures at
maturity or their earlier redemption. The trust preferred securities qualify as
regulatory capital for CIB Marine subject to regulatory limitations. At December
31, 2003, approximately $35 million of the $60 million trust preferred
securities qualified as Tier 1 capital and the remaining $25 million qualified
as Tier 2 capital. In connection with the sale of CIB -- Chicago, CIB Marine
pledged the stock of Central Illinois Bank to the purchaser to secure certain
indemnification obligations with respect to CIB Marine's trust preferred
securities. No claims have been made by the purchaser related to this
indemnification obligation.
Prior to December 31, 2003, the Trusts were consolidated in CIB Marine's
financial statements, with the trust preferred securities issued by the Trusts
reflected on CIB Marine's balance sheet. The balances of these trust preferred
securities were $60.0 million and $40.0 million at December 31, 2002 and 2001,
respectively. Upon the implementation of FASB Interpretation Number 46 ("FIN No.
46"), as revised in December 2003, the Trusts are no longer consolidated in CIB
Marine's financial statements. As a consequence, in 2003, CIB Marine reports its
junior subordinated debentures issued to the Trusts as liabilities and reports
its investment in the Trusts as investment in unconsolidated subsidiaries. The
effect of the implementation of FIN No. 46 on CIB Marine's consolidated
statement of financial condition was to increase investment in unconsolidated
subsidiaries, net of amounts due to unconsolidated subsidiaries by $1.9 million,
decrease trust preferred securities by $60.0 million and increase junior
subordinated debentures by $61.9 million. See Note 13 -- Long-Term Borrowing to
the consolidated financial statements in Item 8 of this Form 10-K for further
information on junior subordinated debentures and guaranteed trust preferred
securities.
In September 2002, CIB Marine issued $20.0 million in guaranteed trust
preferred securities at a variable rate of interest based upon the three-month
LIBOR plus 3.40%. The interest rate was 5.19% at December 31, 2003. 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 for general corporate purposes.
In February 2001, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.20% per annum. The securities are
mandatorily redeemable upon their maturity on February 22, 2031, and are
callable 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 for general corporate purposes.
In September 2000, CIB Marine issued $15.0 million in guaranteed trust
preferred securities at a fixed rate of 10.60% per annum. The securities are
mandatorily redeemable upon their maturity on September 7, 2030, and are
callable 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 for general corporate purposes.
In March 2000, CIB Marine issued $10.0 million in guaranteed trust
preferred securities at a fixed rate of 10.88% per annum. The securities are
mandatorily redeemable upon their maturity on March 8, 2030, and are callable
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 for general
corporate purposes.
67
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 -- Summary of Significant Accounting Policies to the
consolidated financial statements 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, loan repayments and investment maturities. CIB
Marine also makes use of noncore funding sources in a manner consistent with its
liquidity, funding and market risk policies. Noncore funding sources are used to
meet funding needs and/or when the pricing and continued availability of these
sources presents lower funding cost opportunities. Short-term noncore 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 nonaffiliated 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.
During the second half of 2003 and during 2004, some of the borrowing
sources customarily utilized by CIB Marine were restricted or unavailable due to
noncompliance with certain asset quality, earnings and capital maintenance debt
covenants and the inability to provide audited consolidated financial
statements. Federal funds borrowings by certain CIB Marine subsidiary banks were
discontinued or were contingent on subsidiary bank pledges of fixed income
investment securities, the Federal Home Loan Bank of Chicago restricted lending
terms, and derivative counterparties increased collateral requirements. Brokered
deposits became available only after a waiver was obtained from the FDIC for
some of the subsidiary banks and were restricted from use at CIB -- Chicago.
Brokered deposits were restricted by FDIC rules and regulations at the
subsidiary banks which were defined as less than well capitalized due to either
lower levels of capital or due to the regulatory issuance of Cease and Desist
Orders or formal written agreements. Where eligible, the FDIC granted
permissible waivers at the subsidiary banks, making the banks eligible to
accept, renew or roll over brokered deposits. See Note 15 -- Stockholders'
Equity in Item 8 of this Form 10-K. All of CIB Marine's subsidiary banks were
moved from Primary to Secondary credit status and restricted from daylight
overdraft activity at their respective Federal Reserve banks. Additionally,
pursuant to a Written Agreement between CIB Marine and the Federal Reserve Bank,
CIB Marine must obtain Federal Reserve Bank approval before incurring additional
borrowings or debt. Pursuant to regulatory agreements consented to by certain
CIB Marine bank subsidiaries, the subsidiaries must obtain regulatory approval
before paying cash dividends. These restrictions could potentially impact
liquidity. In the fourth quarter of 2004, CIB Marine sold its bank subsidiary,
CIB -- Chicago, and used a portion of the proceeds to payoff its revolving line
of credit with a nonaffiliated bank. This line of credit is no longer available.
Further, it is expected that the proceeds from this sale will allow CIB Marine
to meet its short-term liquidity needs.
The following discussion should be read in conjunction with the statements
of cash flows for 2003, 2002 and 2001 contained in Item 8 of this Form 10-K.
Net cash provided by operating activities was $270.3 million in 2003,
compared to net cash used in operating activities of $155.0 million in 2002, and
net cash provided by operating activities of $21.1 million in 2001. Loans held
for sale activity drove the changes in cash related to operating activity from
2002 to 2003 and from 2001 to 2002. In 2003, net operating funds provided by
loans held for sale was $210.8 million, while net operating funds used in this
activity was $191.9 million in 2002.
68
Net cash provided by investing activities was $102.7 million in 2003,
compared to net cash used in investing activities of $466.0 million and $464.5
million in 2002 and 2001, respectively. The increase in cash provided by
investing activities in 2003 was primarily due to a reduction of the overall
loan portfolio, partially offset by an increase in cash used to fund securities
activity. This was a result of management repositioning the Company in order to
strengthen its liquidity, capital and asset quality. The cash provided by net
lending activities was $192.9 million and was primarily due to CIB Marine's
reallocation of resources during the last half of 2003 from building new client
relationships to improving the quality of its lending portfolio. The decrease in
cash used for investing activities in 2002 compared to 2001 was due to lower
loan growth partially offset by increased net securities funding. The net
increase in loans represented the largest portion of cash used in investing
activities for the periods 2002 and 2001. The net increase in loans was $338.0
million and $552.4 million, in 2002 and 2001, respectively.
Net cash used in financing activities was $346.6 million in 2003, as
compared to net cash provided by financing activities of $655.9 million and
$449.7 million in 2002 and 2001, respectively. The decrease in short-term
borrowings was the primary source of net cash used in financing activities in
2003. To reduce the liquidity risk exposure at CIB Marine, and with the decline
of the balance of loans held for sale, the level of short-term borrowings was
reduced and a greater reliance was placed on the deposit base for funding.
Deposit growth was the primary source of net cash provided by financing
activities in both 2002 and 2001, comprising 88.1% and 51.6% of funds provided
in each of the respective years. During 2001, short-term borrowed funds were
used to supplement cash provided by deposit funds.
During 2005, it is expected CIB Marine will have adequate funding capacity
to meet its obligations. The primary sources of funding are expected to be cash
on hand from the sale of CIB -- Chicago, operating cash flows from the sale of
services to subsidiary banks and the sale of other assets owned by the parent.
CIB Marine subsidiary banks have higher levels of liquid assets to meet
potentially high levels of liquidity needs.
The following table summarizes long-term minimum cash payment commitments
other than deposit liabilities presented elsewhere in this section under
Liquidity. CIB Marine has met its liquidity needs in 2003 and in 2004 and
expects to meet these needs in 2005.
<Table>
<Caption>
REVOLVING JUNIOR
LINES OF LONG-TERM SUBORDINATED OPERATING
CREDIT(1) DEBT DEBENTURES LEASES TOTAL
--------- --------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
MATURITY
1 Year or less.................. $30,848 $ 8,500 $ -- $ 2,064 $ 41,412
1 to 2 Years.................... -- -- -- 1,908 1,908
2 to 3 Years.................... -- -- -- 1,758 1,758
3 to 4 Years.................... -- -- -- 1,505 1,505
4 to 5 Years.................... -- 37,776 -- 1,155 38,931
Beyond 5 Years.................. -- -- 61,857 4,365 66,222
------- ------- ------- ------- --------
$30,848 $46,276 $61,857 $12,755 $151,736
======= ======= ======= ======= ========
</Table>
- ---------------
(1) Balance represents two separate lines of credit. In 2004, one line was paid
in full from proceeds of the sale of CIB -- Chicago and the other was
assumed, without recourse, by the purchaser of CIB Marine's factoring
subsidiary. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Borrowings" for further discussion.
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
69
percentage of risk-weighted assets. The risk-based capital information for CIB
Marine is contained in the following table:
<Table>
<Caption>
DECEMBER 31,
------------------------------------------
2003 2002 2001
---------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
RISK-WEIGHTED ASSETS............................ $2,737,049 $3,305,510 $2,785,080
========== ========== ==========
AVERAGE ASSETS(1)............................... $3,252,625 $3,485,498 $2,818,562
========== ========== ==========
CAPITAL COMPONENTS
Stockholders' equity.......................... $ 108,523 $ 247,563 $ 229,825
Guaranteed trust preferred securities and
minority interests/Minority interest in
Consolidated Subsidiaries.................. 36,219 61,051 40,133
Nonfinancial Equity Items..................... (55) (149) (149)
Less: disallowed intangibles.................. (4,945) (14,822) (11,434)
Add/less: Unrealized loss/(gain) on
securities................................. (2,184) (4,516) (4,331)
---------- ---------- ----------
TIER 1 CAPITAL.................................. 137,558 289,127 254,044
Allowable allowance for loan losses............. 35,342 41,625 34,849
Allowable subordinated debt................... 23,914 -- --
---------- ---------- ----------
TOTAL RISK-BASED CAPITAL........................ $ 196,814 $ 330,752 $ 288,893
========== ========== ==========
</Table>
<Table>
<Caption>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- ------------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2003
Total Capital to risk-weighted assets............ $196,814 7.19% $218,964 8.00%
Tier 1 Capital to risk-weighted assets........... 137,558 5.03 109,482 4.00
Tier 1 Leverage to average assets................ 137,558 4.23 130,105 4.00
DECEMBER 31, 2002
Total Capital to risk-weighted assets............ $330,752 10.01% $264,441 8.00%
Tier 1 Capital to risk-weighted assets........... 289,127 8.75 132,220 4.00
Tier 1 Leverage to average assets................ 289,127 8.30 139,420 4.00
DECEMBER 31, 2001
Total Capital to risk-weighted assets............ $288,893 10.37% $222,806 8.00%
Tier 1 Capital to risk-weighted assets........... 254,044 9.12 111,403 4.00
Tier 1 Leverage to average assets................ 254,044 9.01 112,742 4.00
</Table>
- ---------------
(1) Average assets as calculated in accordance with 12 C.F.R. Part 325 of the
FDIC rules and regulations which requires a quarter to date average and
allows for current period adjustments of goodwill and other intangible
assets.
In the second quarter of 2004, CIB -- Chicago, Central Illinois Bank,
Marine Bank and CIB -- Indiana, subsidiary banks of CIB Marine, each consented
to the issuance of a Cease and Desist Order ("Order") with banking regulatory
authorities. Among other items, the Order restricted payment of cash dividends
without prior written consent from the regulators and ordered the banks to
maintain a Tier 1 Capital level equal to or exceeding 8% of the bank's total
assets. These restrictions are in force during the life of the Order. In the
event such ratio is less than 8% at any given calendar quarter end, the bank is
required within 90 days to increase its capital ratio to not less than 8%,
calculated as of the end of that preceding quarterly period. Failure to comply
70
with the Order could have a material adverse effect on CIB Marine and its
operations. As of December 31, 2003, CIB -- Chicago had capital below the 8%
minimum, and during 2004, the call reports filed by Central Illinois Bank showed
that they also fell below the 8% minimum. However, in the fourth quarter of
2004, CIB Marine sold its bank subsidiary, CIB -- Chicago, and a portion of the
proceeds was used by CIB Marine to infuse capital into Central Illinois Bank,
allowing it to meet its regulatory requirement. As of December 31, 2003, CIB
Marine's total capital to risk-weighted assets ratio was below the 8% minimum
required to be adequately capitalized. As a result of the sale of CIB -- Chicago
and further reductions in assets, this ratio was 17.6% at December 31, 2004 and
19.6% at June 30, 2005. Additionally, in the third quarter of 2004, Citrus Bank
entered into a Written Agreement with the Office of the Comptroller of the
Currency. As part of the Written Agreement, Citrus Bank must maintain total
capital of not less than 14% and Tier 1 Capital of not less than 8%. The call
report filed for December 31, 2004 showed that Citrus' capital level exceeded
these requirements.
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 $0.4 million, $9.2
million and $6.3 million in additional capital in 2003, 2002, and 2001,
respectively. CIB Marine's capital decreased $139.0 million, or 56.2%, from
$247.6 million in 2002 to $108.5 million in 2003. The decrease was primarily due
to a net loss of $137.6 million in 2003. Retained earnings provided $8.8 million
and $25.7 million of additional capital in 2002 and 2001, respectively.
Receivables from sale of stock (a decrease in equity) was $5.2 million in 2003
compared to $7.9 million in 2002 and $7.4 million in 2001. Treasury stock was
$2.2 million in 2003. There was no treasury stock in 2002 or 2001. See Note
15 -- Stockholders' Equity in Item 8 of the Form 10K for further information on
receivables from sale of stock and treasury stock.
CIB Marine issued $20.0 million and $15.0 million in guaranteed trust
preferred securities in 2002 and 2001, respectively. There were no guaranteed
trust preferred securities issued in 2003. With some significant limitations
which applied to CIB Marine in 2003, these securities qualify as Tier 1 equity
capital for regulatory capital purposes. A discussion of these securities is
included in "Guaranteed Trust Preferred Securities". On March 1, 2005, the
Federal Reserve Board adopted a final rule allowing the continued limited
inclusion of trust preferred securities in Tier 1 equity capital. The ruling
restricted the core capital elements, including trust preferred securities, to
25% of all core capital elements, net of goodwill less any associated deferred
tax liability.
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 increased cost of CIB Marine's operations.
Unlike most industrial companies, nearly all of CIB Marine's assets and
liabilities are monetary in nature. As a result, interest rates and changes
therein have a greater impact on CIB Marine's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
SUBSEQUENT EVENTS
SALE OF CIB -- CHICAGO
In November 2004, CIB Marine sold CIB -- Chicago to an unrelated banking
organization. The final sale price was $67.4 million in cash, of which $5.4
million was used by CIB Marine to repay a short-term loan from the purchaser.
The purpose of the loan was to fund the purchase by CIB Marine of
CIB -- Chicago's interest in MICR, CIB Construction, including Canron, and the
loans and related claims against the borrowers in a Chicago condominium
development loan. In connection with the sale of CIB -- Chicago, CIB Marine
pledged the stock of Central Illinois Bank to the purchaser to secure certain
indemnification obligations with respect to CIB Marine's trust preferred
securities. CIB Marine also represented to the
71
purchaser that for the 2004 tax year, the sum of certain tax benefits, such as
gross built-in losses, and Federal net operating loss carry forwards, would not
be less than $60 million for CIB -- Chicago. CIB Marine agreed to indemnify the
purchaser for any losses arising out of a breach of this representation and
certain other customary representations and warranties. No claims have been made
by the purchaser related to this indemnification obligation. At the time of
sale, CIB -- Chicago operated 16 banking facilities in the Chicago metropolitan
area and had approximately $1.2 billion in assets and $1.1 billion in deposits.
The sale of CIB -- Chicago reduced consolidated loan totals by $682.8 million,
nonaccrual loans by $60.3 million and the allowance for loan loss by $38.1
million.
CIB Marine used $23.6 million of the proceeds to repay all indebtedness
under CIB Marine's revolving line of credit and injected $15.0 million of new
capital into Central Illinois Bank. The balance of the proceeds is being
utilized to help fund ongoing operations. The sale resulted in a pre-tax gain
for financial statement purposes of approximately $15.2 million. The total
consolidated assets of CIB Marine immediately after the sale were approximately
$1.4 billion. The Grand Cayman Islands branch banking facility of
CIB -- Chicago, which was established to accept Eurodollar deposits, was closed
in conjunction with the sale of the bank.
72
The following table summarizes CIB Marine's pro forma consolidated balance
sheet as of December 31, 2003, with pro forma adjustments as if the sale of
CIB-Chicago had occurred on December 31, 2003. CIB-Chicago was sold on November
30, 2004 for an amount equal to its net book value, excluding assets and
liabilities of its MICR, CIB Marine Commercial Finance, and CIB
Construction/Canron subsidiaries, plus $15.2 million. The pro forma adjustments
assume a sale price for an amount equal to CIB-Chicago net book value at
December 31, 2003 of $57.5 million plus $15.2 million or a total of $72.7
million. The pro forma adjustments do not take into account the decrease in
CIB-Chicago's stockholder's equity between December 31, 2003 and November 30,
2004 and does not take into account how CIB Marine actually used the proceeds
from the sale.
<Table>
<Caption>
CIB MARINE PRO FORMA
CONSOLIDATED CIB-CHICAGO(A) ADJUSTMENTS PRO FORMA
------------ -------------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash and due from banks.................. $ 60,149 $ 18,232 $ 201(b) $ 42,118
Federal funds sold....................... 59,655 2,470 2,864(b) 60,049
---------- ---------- ------- ----------
Total cash and cash equivalents..... 119,804 20,702 3,065 102,167
Loans held for sale........................ 16,735 -- -- 16,735
Securities................................. 637,356 289,694 72,729(c) 420,391
Loans...................................... 2,360,041 1,134,013 3,678(d) 1,229,706
Allowance for loan losses................ (109,872) (55,146) -- (54,726)
---------- ---------- ------- ----------
Net loans............................. 2,250,169 1,078,867 3,678 1,174,980
Premises and equipment, net................ 29,138 12,026 -- 17,112
Goodwill & other intangible assets......... 2,789 982 -- 1,807
Foreclosed properties...................... 40,715 37,688 -- 3,027
Assets of companies held for disposal...... 29,056 -- -- 29,056
607(b)
461(d)
-------
Other assets............................... 60,475 31,190(e) 1,068 30,353
---------- ---------- ------- ----------
Total Assets........................ $3,186,237 $1,471,149 $80,540 $1,795,628
========== ========== ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................... 2,821,218 1,314,067 201(b) 1,507,352
Borrowings................................. 138,877 72,893 2,864(b) 68,848
Junior subordinated debentures............. 61,857 -- -- 61,857
Liabilities of companies held for
disposal................................. 17,381 -- -- 17,381
Other liabilities.......................... 38,381 26,676 607(b) 12,312
---------- ---------- ------- ----------
Total Liabilities................... 3,077,714 1,413,636 3,672 1,667,750
---------- ---------- ------- ----------
72,729(c)
4,139(d)
-------
Stockholders' Equity....................... 108,523 57,513 76,868 127,878
---------- ---------- ------- ----------
Total Liabilities and Stockholders'
Equity........................... $3,186,237 $1,471,149 $80,540 $1,795,628
========== ========== ======= ==========
</Table>
- ---------------
(a) Includes assets and liabilities of CIB -- Chicago as of December 31, 2003,
excluding assets and liabilities of MICR, CIB Marine Commercial Finance,
and CIB Construction LLC/Canron. MICR and CIB Construction LLC were
purchased by CIB Marine at net book value as of the date of the sale of
CIB -- Chicago. The assets of CIB Marine Commercial Finance were sold in
the second quarter of 2004.
(b) Reversal of eliminating entries for intercompany accounts of CIB -- Chicago
and other affiliates of CIB Marine.
73
(c) Assumed proceeds of $72.7 million received in cash and reinvested in
securities. The gain of $15.2 million, representing the difference between
CIB-Chicago's stockholder's equity as of December 31, 2003 of $57.5 million
and the assumed proceeds, increases CIB Marine's pro forma stockholders'
equity.
(d) Elimination from contra-equity accounts and adding back to loans $3.6
million in receivables from sale of stock and $0.5 million in treasury
stock which were sold along with CIB -- Chicago.
(e) Included in other assets of CIB -- Chicago are net deferred tax assets of
$23.9 million, which are offset by a valuation allowance of $23.9 million.
SALE AND WIND DOWN OF NONBANK SUBSIDIARIES
During 2004, CIB Marine divested itself of certain nonbank subsidiaries and
commenced the wind down of certain other nonbank subsidiaries in order to more
narrowly focus its resources on its core commercial and retail banking
strategies.
CIB Marine Commercial Finance, LLC. In June 2004, CIB -- Chicago sold to
an unrelated party substantially all of the business assets and the business of
its factoring subsidiary, CIB Marine Commercial Finance, LLC. The pre-tax gain
on the sale of this operation was $0.2 million. Total assets were $10.9 million
at the time of sale. This company was fully dissolved in November 2004.
Mortgage Services, Inc. During the third quarter of 2004, CIB Marine sold
to unrelated parties substantially all of the assets and operations of Mortgage
Services, Inc. The sale of the operations was accomplished through two separate
transactions and resulted in a combined net pre-tax loss of $0.7 million on the
sales. CIB Marine is in the process of winding down the remaining affairs of
this company and has incurred certain liabilities with respect to the operations
of the mortgage company. These liabilities, totaling $1.8 million and $1.7
million as of December 31, 2004 and September 30, 2005, respectively, include
repurchase obligations relative to certain mortgage loans as a result of
external fraud and/or documentation issues, and certain reporting penalties.
CIB Marine Capital, LLC. During 2004, CIB Marine continued the wind down
of its mezzanine lending company, CIB Marine Capital, LLC. At December 31, 2004,
total loans outstanding were $3.4 million as compared to $19.0 million at
December 31, 2003. At September 30, 2005, total loans outstanding were $0.9
million.
Canron. During 2004, Canron sold certain of its properties and
substantially all of its equipment for $7.6 million. Substantially all of the
proceeds were used to reduce secured debt to CIB Marine. In April 2005, Canron
sold its Rexdale, Ontario facility for $8.2 million, and a portion of the
proceeds was used to pay off the remaining balance of its debt to CIB Marine.
Canron no longer owns any real estate. Canron is continuing to collect both on
and off-balance sheet receivables and settle and resolve payables and claims
through the voluntary liquidation process. In August 2005, Canron authorized and
began liquidation distributions to its shareholders. CIB Marine received $0.8
million and recorded the amount as a reduction of its investment in Canron. As
of September 30, 2005, CIB Marine's net investment in CIB Construction was
approximately $0.3 million.
MICR, Inc. In January 2005, CIB Marine retained the services of an
investment banker to assist in the marketing and sale of MICR. In 2005, MICR met
the accounting criteria as an asset held for sale. Based upon new valuation
information received in the third quarter of 2005, an impairment loss was
recognized in the amount of $1.3 million to record MICR at fair value less costs
to sell.
FORECLOSED PROPERTIES
In December 2003, CIB -- Chicago acquired the title to a commercial office
building that was being converted into residential condominiums. The property
was acquired through a Deed in Lieu of Foreclosure Settlement Agreement ("DIL
Agreement") from a borrower who was in default on its obligation. The property
is included in foreclosed properties at December 31, 2003. Pursuant to the DIL
Agreement, CIB -- Chicago acquired the property subject to the first lien held
by an outside financial institution and assumed the
74
borrower's financial obligation relating to that first lien. At December 31,
2003, the assumed financial obligation is reported as an outstanding
non-recourse mortgage note payable.
During the second quarter of 2004, CIB -- Chicago transferred all of its
rights, title and interest in the property, along with the borrower's obligation
under the related mortgage note, to the first lien holder. CIB -- Chicago
transferred the property based upon its evaluation that the amount of additional
funds necessary to complete the project was greater than the financial benefits
and risks associated therewith. The property was transferred without any further
liability or obligation to the first lien position holder and CIB -- Chicago
reserved its legal rights to pursue the borrower and guarantors. The transfer to
the first lien holder resulted in no additional gain or loss to CIB Marine. CIB
Marine charged-off $41.7 million of the loan to its allowance for loan loss with
respect to this borrowing relationship and also recorded a $1.5 million market
value write down on the property. In July 2004, CIB -- Chicago commenced Federal
Court litigation against the borrower, guarantors and their related interests
for collection of the losses incurred by CIB Marine based upon state law claims
of breach of agreements, fraud, conversion and other theories of recovery,
including Federal RICO violations. In November 2004, CIB -- Chicago assigned the
loans and claims related to this development to CIB Marine in conjunction with
the sale of CIB -- Chicago. In April 2005, the Federal Court dismissed the RICO
claim and, as a result, lacks jurisdiction over the state law claims. In April
2005, CIB Marine commenced a state court action against the defendants on the
state law claims. In the event that there are any recoveries with respect to
these loans and claims, CIB Marine has agreed to pay the purchaser of CIB --
Chicago ten percent of any recovery after collection costs. To date, CIB Marine
has not made any recoveries with respect to such loans and claims.
REGULATORY ORDERS AND AGREEMENTS
In May 2004, CIB -- Chicago, Central Illinois Bank, Marine -- Wisconsin and
CIB -- Indiana entered into Cease and Desist Orders with their respective
banking regulators. The Memorandum entered into by CIB -- Chicago in January
2003 was released as a result of entering into the Cease and Desist Order. CIB
Marine subsequently sold CIB -- Chicago in November 2004. In May 2004, CIB
Marine entered into a Written Agreement with the Federal Reserve Bank of
Chicago. In August 2004, Citrus Bank entered into a Written Agreement with the
OCC. The Orders and Agreements impose certain restrictions and reporting
requirements on CIB Marine and such subsidiaries, and require various actions to
be taken. The items include, among others:
- Maintenance of minimum capital levels;
- Restrictions on dividend payments and redemption of shares without
regulatory approval;
- Limitations on asset and loan growth;
- Adoption of a comprehensive plan to improve earnings;
- Development of a plan to reduce concentrations of credit and loan
relationships classified as substandard or doubtful;
- Development of a system to correct loan administration deficiencies; and
- Development of a plan to correct and prevent violations of banking laws
and regulations related to affiliate transactions.
These regulatory Orders and Agreements were filed with the SEC during 2004.
In April 2005, the Cease and Desist Orders at Marine -- Wisconsin and
CIB -- Indiana were each released and replaced with a Memorandum of
Understanding, which were entered into in March 2005, as a result of
improvements at such banks. Pursuant to the Memoranda, the banks agreed to
maintain minimum capital levels, correct loan administration deficiencies,
reduce concentrations and problem credits and not declare or pay cash dividends
without regulatory approval. In April 2005, Central Illinois Bank,
Marine -- Wisconsin and CIB -- Indiana each entered into a Memorandum of
Understanding with the FDIC and its applicable state banking regulators as a
result of deficiencies in information technology. The banks agreed to take
certain actions to document and fully implement its information security
program, exercise appropriate diligence in overseeing service
75
providers arrangements, and assess, develop and implement security standards and
procedures. Management believes that CIB Marine, Central Illinois Bank,
Marine -- Wisconsin, CIB -- Indiana and Citrus Bank have complied with the
majority of the provisions of the respective Orders and Agreements and are in
the process of complying with the remaining provisions.
INDEPENDENT REVIEW AND INVESTIGATION
In the fourth quarter of 2003, a special review committee of the Board of
Directors was formed to review certain credit quality issues and related
matters. During 2004, the Board engaged independent outside consultants and
legal counsel to conduct an investigation into certain of these matters. The
independent investigations are complete and the results have been reviewed with
our Board of Directors, the banking regulators and CIB Marine's outside audit
firm, KPMG LLP. KPMG LLP had full and complete access to the outside law firms
conducting the investigations throughout the period of their work. The
investigations, while targeted, involved the review of thousands of documents,
hundreds of transactions and involved interviews with various current officers,
employees and Board members, and former officers and employees to the extent
they agreed to be interviewed. Management has taken appropriate actions to
address issues raised by the investigations. As a result of the investigations
and its own analysis, management has adopted new policies and procedures and has
strengthened internal reporting and controls.
The investigation facilitated the completion of the audit of CIB Marine's
2003 consolidated financial statements. During 2004, as a result of this review
and investigation, CIB Marine incurred legal, accounting and other professional
expenses directly related to the investigation of approximately $3.2 million.
MANAGEMENT CHANGES
Stanley J. Calderon was appointed President and CEO of CIB Marine in April
2004 and joined the Board of CIB Marine in November 2004. Mr. Calderon replaced
J. Michael Straka, who retired as President and CEO and was appointed as Vice
Chairman of the Board in February 2004. In April 2004, Mr. Straka retired from
all positions and the Board of CIB Marine.
In February 2004, CIB Marine named Margaret A. Incandela, as Chief Credit
Officer. Ms. Incandela, who previously served as Loan Review Manager, replaced
Stephen C. Bonnell who was assigned new responsibilities in the Credit
Administration Department. Mr. Bonnell resigned from CIB Marine in March 2004.
CIB Marine retained an external consultant to perform loan reviews at its
subsidiary banks during 2004 and 2005.
In March 2004, CIB -- Chicago's President and CEO, and the Senior Lender
resigned from their positions. Michael L. Rechkemmer, Executive Vice President
of CIB Marine and a board member of CIB -- Chicago was named Interim President
of CIB -- Chicago and served in such capacity until the sale of the Bank.
In July 2004, the President and CEO of Marine -- Wisconsin resigned and was
replaced by Michael J. Miller, Executive Vice President and Chief Lending
Officer of CIB Marine, as Interim President. In March 2005, Mr. Miller was
appointed President and CEO of Marine -- Wisconsin. In July 2004, the President
and CEO of Central Illinois Bank resigned. In July 2005, Joseph T. Henderson was
hired as President and CEO of Central Illinois Bank. In September 2004, the
President and CEO of Marine FSB resigned. In March 2005, Jerry L. Schwallier was
hired as the President and CEO of Marine FSB. In January 2005, CIB Marine hired
G. Richard Nisbeth to become CEO of Citrus Bank. Mr. Nisbeth was also appointed
Chairman of this bank. Jack E. Schall continues to serve as its President.
In April 2005, Daniel J. Rasmussen was named Senior Vice President and
General Counsel of CIB Marine. Mr. Rasmussen previously served as Vice President
and Senior Attorney, and succeeded Donald J. Straka who was assigned other
duties in April 2005 and resigned his employment with CIB Marine in June 2005.
Mr. Straka remains a director of CIB Construction and Canron.
76
BOARD OF DIRECTOR CHANGES
In February 2004, W. Scott Blake was appointed Chairman of the Board of CIB
Marine to succeed Donald M. Trilling. Mr. Trilling resigned as Chairman, but
continues to serve on the Board.
During 2004, CIB Marine added Stanley J. Calderon, Steven C. Hillard, and
Gary L. Longman, to its Board of Directors. Mr. Longman also serves as Chairman
of CIB Marine's Audit Committee. The Board has determined that Mr. Longman is an
Audit Committee Financial Expert. In March 2004, John T. Bean resigned from CIB
Marine's Board. During April 2004, J. Michael Straka and C. Todd Atkins resigned
from CIB Marine's Board. In November 2004, Dean M. Katsaros resigned from CIB
Marine's Board.
LIQUIDITY
During 2004, some of the borrowing sources customarily utilized by CIB
Marine were restricted or were contingent on subsidiary bank pledges of fixed
income investment securities. See Note 12 -- Short-term Borrowings for further
information.
COST CONTROLS AND REDUCTION IN FORCE PROGRAM
In June 2004, CIB Marine began an overall cost savings program which
included a reduction in force program, restrictions on salaries and hiring,
tight expense controls, and some executive management salary reductions.
Eligible employees impacted by the reduction in force program were paid
severance using a consistent formula based upon employee status and years of
service. Under the program, CIB Marine reduced its work force during 2004 by 33
full-time equivalent employees with an annual base pay of $1.8 million and
incurred approximately $0.2 million in severance expenses. In April 2005, the
company formally adopted its company-wide severance pay plan. During the first
nine months of 2005, CIB Marine further reduced its work force by 69 full-time
equivalent employees with an annual base pay of $3.1 million and incurred $0.6
million in severance expense. These work force reductions represented
approximately 3.7% and 14.2% of the total full-time equivalent employees,
excluding MICR, at the end of the previous calendar year ends for 2004 and 2005,
respectively. These cost savings programs were in addition to overhead expenses
saved as a result of the sales of certain subsidiaries including CIB
-- Chicago, Mortgage Services Inc. and CIB Marine Commercial Finance. Full-time
equivalent employees, excluding MICR, as of December 31, 2003, December 31, 2004
and September 30, 2005 were 898, 482 and 398, respectively.
BRANCH ACTIVITIES
CIB Marine had 57 branches as of December 31, 2003 holding $2.8 billion in
deposits. In the first quarter of 2004, Marine FSB opened a new branch in Sun
City, Arizona and in the third quarter of 2004, Central Illinois Bank closed a
branch in Morton, Illinois which had held $9.9 million in deposits as of
December 31, 2003. On November 30, 2004, 16 branches of CIB -- Chicago were sold
in connection with the sale of that bank. At June 30, 2005, CIB Marine had 41
branches holding $1.0 billion in deposits. CIB Marine's subsidiary banks are in
the process of evaluating the effectiveness of their respective branch networks.
Currently CIB Marine has twelve branches planned to be offered for sale in the
second half of 2005 and the first half of 2006 with total June 30, 2005 deposits
of $131.8 million. No new branches are currently scheduled to be opened in 2005.
Although these are all currently planned activities, it is possible some of
these transactions may not be consummated as anticipated in the proposed time
frames, or at all, if pricing is not acceptable or market conditions change.
CHARTER CONSOLIDATION
During the third and fourth quarters of 2005, CIB Marine filed applications
with the appropriate state and federal regulators to merge Marine FSB into
Marine -- Wisconsin. Prior to the merger, CIB Marine plans to sell the Omaha and
Sun City branch facilities of Marine FSB to an unrelated third party. CIB Marine
may also consider the consolidation of additional charters in the future as part
of its strategy to become more efficient.
77
FDIC DEPOSIT INSURANCE PREMIUMS
FDIC deposit insurance premiums represented $0.5 million of the $0.9
million in FDIC and state assessments in 2003. Due to the increase in the risk
profile of CIB Marine's subsidiary banks, deposit insurance premiums
significantly increased to $4.7 million in 2004. Excluding CIB -- Chicago,
deposit insurance premiums were $0.3 million, $1.4 million, and $1.2 million in
2003, 2004 and for the nine months ended September 30, 2005, respectively.
CREDIT CONCENTRATIONS
At December 31, 2003, CIB Marine had fifteen secured borrowing
relationships (loans to one borrower or a related group of borrowers) and loans
to ten industries or industry groups that exceeded 25% of stockholders' equity.
As of December 31, 2004, CIB Marine had one secured borrowing relationship and
loans to seven industries or industry groups that exceeded 25% of stockholders'
equity. The decreases were due to the sale of CIB -- Chicago, management's
strategy to reduce these types of exposures and, to a lesser extent, the
increase in stockholders' equity from the $15.2 million pre-tax gain on the sale
of CIB -- Chicago on November 30, 2004. At September 30, 2005, there were loans
to seven industries or industry groups that exceeded 25% of CIB Marine's
stockholders' equity, and there was one loan to one borrower or a related group
of borrowers that exceeded 25% of stockholders' equity.
STOCK OPTIONS
As a result of retirements, resignations and other management and Board of
Directors changes, the volume of lapsed and surrendered stock options increased
substantially in 2004 and the first nine months of 2005. During this period,
873,513 shares previously granted pursuant to stock options lapsed and/or were
surrendered and became available for future grants under CIB Marine's 1999 Stock
Option and Incentive Plan. In September 2005, 523,750 options were granted to
various employees of the company at an exercise price of $4.10 each. As of
September 30, 2005, there were 1,090,087 options outstanding with a weighted
average exercise price of $10.69.
TREASURY STOCK AND RECEIVABLES FROM SALE OF STOCK
As a result of the sale of CIB -- Chicago, receipt of additional collateral
and other actions, the balance of loans classified as receivables from sale of
stock has been reduced to $0.3 million as of September 30, 2005.
During 2004, CIB Marine reduced its treasury stock by $2.6 million, or
210,950 shares, as a result of the sale of CIB -- Chicago. In the third quarter
of 2004, a subsidiary bank of CIB Marine acquired 7,452 shares of CIB Marine
stock through loan collection efforts. At September 30, 2005, treasury stock
held by CIB Marine was $0.2 million and included 12,663 shares.
LATE FILING OF TAX RETURNS
CIB Marine did not file its Federal and State tax returns for calendar year
2004 by the required due date of September 15, 2005. Although CIB Marine does
not expect to have taxable income for 2004, penalties may still be assessed by
the Internal Revenue Service and/or applicable state departments of revenue.
INVESTMENT SECURITIES
During the nine months ended September 30, 2005, CIB Marine sold $9.3
million in tax-exempt securities at a gain of approximately $0.4 million.
ALLOWANCE FOR LOAN LOSSES
During 2004, CIB Marine sold CIB -- Chicago and implemented actions to
improve the quality of its credit portfolio, including aggressive work-out
strategies and enhancing its credit functions, policies and procedures. These
activities resulted in a reduction of nonperforming assets from $195.7 million
at December 31, 2003 to $57.2 million as of December 31, 2004 and $29.9 million
at September 30, 2005, including nonaccrual loans of $152.1 million, $52.5
million and $25.5 million, respectively. Furthermore, due
78
to the improved quality of its credit portfolio, including the reduction in
nonperforming assets and a decline in net charge-offs from $101.1 million in
2003 to $41.1 million in 2004, and net recoveries of $2.4 million for the nine
months of 2005, CIB Marine recognized a lower provision for credit losses during
2004 and a credit in 2005. During 2004, CIB Marine recognized a $24.7 million
provision for credit loss expense ($6.2 million of which related to CIB-Chicago)
as compared to the $160.6 million expense in 2003. Additionally, for the nine
months ended September 30, 2005, CIB Marine recognized a $10.6 million credit in
its provision for credit losses.
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.
79
The gap analysis as of December 31, 2003, 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-
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, 2003(1)
---------------------------------------------------------------------
0-3 4-6 7-12 2-5 OVER
MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
---------- --------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning Assets:
Loans................................. $1,779,374 $ 74,313 $ 137,061 $343,192 $ 26,101 $2,360,041
Securities............................ 56,416 50,040 118,393 375,068 37,439 637,356
Loans held for sale................... 16,735 -- -- -- -- 16,735
Federal funds sold.................... 59,655 -- -- -- -- 59,655
---------- --------- --------- -------- -------- ----------
TOTAL INTEREST-EARNING ASSETS........... 1,912,180 124,353 255,454 718,260 63,540 3,073,787
---------- --------- --------- -------- -------- ----------
Interest-bearing Liabilities:
Time deposits......................... 425,929 345,105 400,228 591,236 72,567 1,835,065
Savings and interest-bearing demand
deposits............................ 766,248 -- -- -- -- 766,248
Short-term borrowings................. 89,096 1,800 1,705 -- -- 92,601
Long-term borrowings.................. -- 8,500 -- 37,776 -- 46,276
Junior subordinated debentures...... 21,857 -- -- -- 40,000 61,857
---------- --------- --------- -------- -------- ----------
TOTAL INTEREST-BEARING LIABILITIES...... 1,303,130 355,405 401,933 629,012 112,567 2,802,047
---------- --------- --------- -------- -------- ----------
Interest sensitivity gap (by period).... $ 609,050 $(231,052) $(146,479) $ 89,248 $(49,027) $ 271,740
Interest sensitivity gap (cumulative)... 609,050 377,998 231,519 320,767 271,740 271,740
ADJUSTED FOR DERIVATIVES
Derivatives (notional, by period)..... (65,756) -- -- 35,756 30,000 --
Derivatives (notional, cumulative).... (65,756) (65,756) (65,756) (30,000) -- --
---------- --------- --------- -------- -------- ----------
Interest sensitivity gap (by period).... 543,294 (231,052) (146,479) 125,004 (19,027) 271,740
Interest sensitivity gap (cumulative)... 543,294 312,242 165,763 290,767 271,740 271,740
CUMULATIVE GAP AS A % OF TOTAL ASSETS... 17.05% 9.80% 5.20% 9.13% 8.53%
</Table>
- ---------------
(1) Includes CIB -- Chicago which was sold in November 2004. See Note
27 -- Subsequent Events for further information.
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,
nonmaturing 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.
80
While this repricing interest rate sensitivity analysis is a widely used
measure of interest rate risk and may be used as an indication of interest
margin direction, it does not fully reflect the effects given to interest rate
risks other than reprice risk, such as option, basis and yield curve risks. For
these reasons, CIB Marine also performs interest rate sensitivity analyses using
earnings simulation models. These analyses measure the estimated percentage
change in net interest income due to changes in interest rates. CIB Marine
derives results for selected hypothetical changes in interest rates over a
selected period of time, usually one year.
The following table illustrates the expected percentage change in net
interest income over a one year period due to an immediate change in the
short-term U.S. prime rate of interest as of December 31, 2003 and 2002.
<Table>
<Caption>
BASIS POINT CHANGES
----------------------------------
+200 +100 -100 -200
------ ----- ------- -------
NET INTEREST INCOME CHANGE OVER ONE YEAR
December 31, 2003............................... 4.83% 3.58% (4.33)% (7.69)%
December 31, 2002............................... 12.01% 7.20% (3.36)% (9.13)%
</Table>
The analysis reveals an asset sensitive interest rate risk position for the
one year horizon at both December 31, 2003 and December 31, 2002. CIB Marine has
held a short average life investment portfolio of less than two years and used
longer term certificates of deposit to maintain an asset sensitive interest rate
risk position in both years.
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, 2003, the notional value of receive fixed/pay floating interest
rate swaps was $70.0 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, 2003, the notional value of interest rate swaps to hedge borrowings
and fixed rate callable Certificates of Deposit was $25.0 million and $45.0
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, 2003 the notional amount of pay fixed/receive floating amortizing interest
rate swaps was $6.1 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 $82.9 million at December 31, 2003 and $507.8 million at December
31, 2002.
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;
81
- Spreads to the benchmark interest rates for pricing new volume to replace
maturing or paying older volumes were similar to spreads currently
inherent in those financial instruments, except for marketable securities
which reflects current market spreads;
- The interest rates of financial instruments with like terms were assumed
to change by the same number of basis points except that the timing,
magnitude, and direction of change of interest rates paid on nonmaturing
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 nonmaturing 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 at December 31,
2003 includes $3.9 million of private and public nonaffiliated firms, $5.7
million in low income housing tax credit limited partnerships, $0.6 million of
Federal Reserve Bank Stock, and $10.5 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, 2003 there were no contracts outstanding. Foreign
currency exchange risk also arises through transactions denominated in foreign
currencies at Canron. CIB Marine does not hedge this activity. At December 31,
2003, Canron had $7.8 million of Canadian denominated net assets as measured in
U.S. dollars.
82
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
CIB Marine Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of CIB Marine
Bancshares, Inc. and its subsidiaries (the "Company") as of December 31, 2003,
2002 and 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CIB Marine
Bancshares, Inc. and its subsidiaries as of December 31, 2003, 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, 2003 in conformity with U.S.
generally accepted accounting principles.
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.
As discussed in Note 2, the consolidated financial statements as of and for
the years ended December 31, 2002 and 2001 have been restated.
KPMG LLP
Milwaukee, Wisconsin
October 28, 2005
83
CIB MARINE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
------------------------------------------
2003 2002 2001
---------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 60,149 $ 68,366 $ 29,686
Federal funds sold........................................ 59,655 25,625 29,314
---------- ---------- ----------
Total cash and cash equivalents...................... 119,804 93,991 59,000
Loans held for sale......................................... 16,735 229,554 34,473
Securities available for sale, at fair value................ 637,356 516,744 420,507
Loans....................................................... 2,360,041 2,704,006 2,382,045
Allowance for loan losses................................. (109,872) (65,122) (35,855)
---------- ---------- ----------
Net loans.............................................. 2,250,169 2,638,884 2,346,190
Premises and equipment, net................................. 29,138 28,087 27,807
Accrued interest receivable................................. 12,762 16,669 16,993
Goodwill.................................................... 982 13,122 9,639
Other intangible assets..................................... 1,807 1,700 1,795
Foreclosed properties....................................... 40,715 3,678 3,168
Assets of companies held for disposal....................... 29,056 73,274 7,311
Other assets................................................ 47,713 35,002 15,135
---------- ---------- ----------
Total Assets......................................... $3,186,237 $3,650,705 $2,942,018
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................ $ 219,905 $ 204,267 $ 148,709
Interest-bearing demand................................... 78,641 58,889 60,671
Savings................................................... 687,607 574,083 300,318
Time...................................................... 1,835,065 2,011,165 1,760,012
---------- ---------- ----------
Total deposits....................................... 2,821,218 2,848,404 2,269,710
Short-term borrowings....................................... 92,601 386,945 319,883
Long-term borrowings........................................ 46,276 47,141 61,987
Guaranteed trust preferred securities....................... -- 60,000 40,000
Junior subordinated debentures.............................. 61,857 -- --
Accrued interest payable.................................... 9,399 11,113 11,334
Liabilities of companies held for disposal.................. 17,381 36,603 683
Other liabilities........................................... 28,982 12,936 8,596
---------- ---------- ----------
Total Liabilities.................................... 3,077,714 3,403,142 2,712,193
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 5,000,000 shares authorized,
none issued............................................... -- -- --
Common stock, $1 par value; 50,000,000 shares authorized,
18,346,442, 18,312,242 and 17,876,752 issued and
outstanding, respectively................................. 18,346 18,312 17,877
Capital surplus............................................. 158,163 157,783 148,972
Retained earnings (deficit)................................. (62,759) 74,889 66,082
Accumulated other comprehensive income, net................. 2,184 4,516 4,331
Receivables from sale of stock.............................. (5,208) (7,937) (7,437)
Treasury stock at cost, 86,611 shares acquired.............. (2,203) -- --
---------- ---------- ----------
Total Stockholders' Equity........................... 108,523 247,563 229,825
---------- ---------- ----------
Total Liabilities and Stockholders' Equity........... $3,186,237 $3,650,705 $2,942,018
========== ========== ==========
</Table>
See Accompanying Notes to Consolidated Financial Statements
84
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
INTEREST AND DIVIDEND INCOME
Loans....................................................... $ 166,971 $ 178,500 $ 174,097
Loans held for sale......................................... 6,281 4,137 1,919
Securities:
Taxable................................................... 12,950 17,897 22,722
Tax-exempt................................................ 2,217 2,541 2,842
Dividends................................................. 672 387 304
Federal funds sold.......................................... 466 539 1,121
----------- ----------- -----------
Total interest and dividend income...................... 189,557 204,001 203,005
----------- ----------- -----------
INTEREST EXPENSE
Deposits.................................................... 76,377 85,484 100,604
Short-term borrowings....................................... 3,449 5,958 8,462
Long-term borrowings........................................ 1,161 1,370 2,633
Junior subordinated debentures/guaranteed trust preferred
securities................................................ 5,198 4,523 4,024
----------- ----------- -----------
Total interest expense.................................. 86,185 97,335 115,723
----------- ----------- -----------
Net interest income..................................... 103,372 106,666 87,282
Provision for credit losses................................. 160,593 46,510 14,395
----------- ----------- -----------
Net interest income (loss) after provision for credit
losses................................................ (57,221) 60,156 72,887
----------- ----------- -----------
NONINTEREST INCOME
Loan fees................................................... 2,602 3,330 3,749
Mortgage banking revenue, net............................... 9,507 4,983 5,205
Deposit service charges..................................... 3,575 3,209 2,750
Other service fees.......................................... 373 326 339
Other income................................................ 2,874 1,558 1,548
Gain on investment securities, net.......................... -- 3,127 4,028
----------- ----------- -----------
Total noninterest income................................ 18,931 16,533 17,619
----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits.......................... 45,691 38,543 31,112
Equipment................................................... 5,438 4,840 4,245
Occupancy and premises...................................... 5,055 4,540 3,992
Professional services....................................... 4,042 2,947 1,916
Litigation settlements...................................... 50 1,753 145
Merger-related charges...................................... -- -- 477
Write down and losses on assets............................. 5,365 78 7
Goodwill and other intangible assets impairment loss........ 14,359 -- --
Other expense............................................... 15,551 11,783 9,483
----------- ----------- -----------
Total noninterest expense............................... 95,551 64,484 51,377
----------- ----------- -----------
Income (loss) from continuing operations before income
taxes..................................................... (133,841) 12,205 39,129
Income tax expense (benefit)................................ (3,148) 2,596 13,400
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS................ (130,693) 9,609 25,729
Discontinued operations
Pre-tax loss from discontinued operations................. (5,937) (650) --
Income tax expense........................................ 1,018 152 --
----------- ----------- -----------
Loss from discontinued operations....................... (6,955) (802) --
----------- ----------- -----------
NET INCOME (LOSS)....................................... $ (137,648) $ 8,807 $ 25,729
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
Basic
Income (loss) from continuing operations.................. $ (7.15) $ 0.53 $ 1.45
Discontinued operations................................... (0.38) (0.05) --
----------- ----------- -----------
Net income (loss)......................................... $ (7.53) $ 0.48 $ 1.45
=========== =========== ===========
Diluted
Income (loss) from continuing operations.................. $ (7.15) $ 0.52 $ 1.42
Discontinued operations................................... (0.38) (0.05) --
----------- ----------- -----------
Net income (loss)......................................... $ (7.53) $ 0.47 $ 1.42
=========== =========== ===========
Weighted average shares -- basic............................ 18,286,550 18,167,379 17,751,752
Weighted average shares -- diluted.......................... 18,286,550 18,547,515 18,083,013
</Table>
See Accompanying Notes to Consolidated Financial Statements
85
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
STOCK
COMMON STOCK ACCUMULATED RECEIVABLES
-------------------- RETAINED OTHER AND
PAR CAPITAL EARNINGS COMPREHENSIVE TREASURY
SHARES VALUE SURPLUS (DEFICIT) INCOME (LOSS) STOCK TOTAL
---------- ------- -------- --------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 31, 2000, AS
PREVIOUSLY REPORTED................ 17,578,135 $17,578 $143,194 $ 40,353 $ 2,242 $ -- $ 203,367
========== ======= ======== ========= ======= ======= =========
Restatement adjustments (Note 2)..... -- -- -- -- 443 (5,096) (4,653)
---------- ------- -------- --------- ------- ------- ---------
BALANCE, DECEMBER 31, 2000, AS
RESTATED........................... 17,578,135 $17,578 $143,194 $ 40,353 $ 2,685 $(5,096) $ 198,714
========== ======= ======== ========= ======= ======= =========
Comprehensive income:
Net income, as restated.............. -- -- -- 25,729 -- -- 25,729
Other comprehensive income:
Unrealized securities holding gains
arising during the period.......... -- -- -- -- 6,687 -- 6,687
Reclassification adjustment for
gains included in net income..... -- -- -- -- (4,028) -- (4,028)
Income tax effect.................. -- -- -- -- (1,013) -- (1,013)
---------
Total comprehensive income....... 27,375
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
Receivables from sale of stock, as
restated........................... -- -- -- -- -- (2,341) (2,341)
---------- ------- -------- --------- ------- ------- ---------
BALANCE, DECEMBER 31, 2001, AS
RESTATED........................... 17,876,752 $17,877 $148,972 $ 66,082 $ 4,331 $(7,437) $ 229,825
========== ======= ======== ========= ======= ======= =========
Comprehensive income:
Net income, as restated.............. -- -- -- 8,807 -- -- 8,807
Other comprehensive income:
Unrealized securities holding gains
arising during the period........ -- -- -- -- 3,475 -- 3,475
Reclassification adjustment for
gains included in net income..... -- -- -- -- (3,127) -- (3,127)
Income tax effect.................. -- -- -- -- (72) -- (72)
Foreign currency translation
adjustment....................... -- -- -- -- (91) -- (91)
---------
Total comprehensive income....... 8,992
Common stock issuance................ 341,772 342 7,594 -- -- -- 7,936
Exercise of stock options............ 93,718 93 1,217 -- -- -- 1,310
Receivables from sale of stock, as
restated........................... -- -- -- -- -- (500) (500)
---------- ------- -------- --------- ------- ------- ---------
BALANCE, DECEMBER 31, 2002, AS
RESTATED........................... 18,312,242 $18,312 $157,783 $ 74,889 $ 4,516 $(7,937) $ 247,563
========== ======= ======== ========= ======= ======= =========
Comprehensive income:
Net loss............................. -- -- -- (137,648) -- -- (137,648)
Other comprehensive income (loss):
Unrealized securities holding
losses arising during the
period........................... -- -- -- -- (5,272) -- (5,272)
Income tax effect.................. -- -- -- -- 2,849 -- 2,849
Foreign currency translation
adjustment....................... -- -- -- -- 91 -- 91
---------
Total comprehensive loss......... -- -- -- -- -- -- (139,980)
Exercise of stock options............ 34,200 34 380 -- -- -- 414
Reduction of receivables from sale of
stock.............................. -- -- -- -- -- 2,729 2,729
Acquisition of treasury stock (86,611
shares)............................ -- -- -- -- -- (2,203) (2,203)
---------- ------- -------- --------- ------- ------- ---------
BALANCE, DECEMBER 31, 2003........... 18,346,442 $18,346 $158,163 $ (62,759) $ 2,184 $(7,411) $ 108,523
========== ======= ======== ========= ======= ======= =========
</Table>
See Accompanying Notes to Consolidated Financial Statements
86
CIB MARINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations............ $ (130,693) $ 9,609 $ 25,729
Loss from discontinued operations, net of tax........... (6,955) (802) --
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred loan fee amortization........................ (11,000) (10,212) (9,722)
Depreciation and other amortization................... 10,437 7,600 3,821
Provision for credit losses........................... 160,593 46,510 14,395
Originations of loans held for sale................... (472,356) (356,832) (254,414)
Purchases of loans held for sale...................... (1,617,344) (900,956) (695,137)
Proceeds from sale of loans held for sale............. 2,300,504 1,065,877 931,456
Deferred tax expense (benefit)........................ 11,343 (10,344) 8,235
Impairment of goodwill and other intangible assets.... 14,359 -- --
Write downs and losses on assets...................... 5,365 78 7
Gain on investment securities, net.................... -- (3,127) (4,028)
(Increase) decrease in interest receivable and other
assets............................................. (23,283) 1,704 2,766
Increase (decrease) in interest payable and other
liabilities........................................ 32,384 (4,070) (2,028)
----------- ---------- ---------
Net cash provided by (used in) operating
activities....................................... 273,354 (154,965) 21,080
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of securities available for sale........... 296,545 324,425 1,018,389
Purchase of securities available for sale............. (438,102) (454,372) (879,040)
Proceeds from sales of securities available for
sale............................................... 999 127,522 86,663
Repayments of mortgage-backed securities available for
sale............................................... 203,136 103,614 40,207
Purchase of mortgage-backed securities available for
sale............................................... (193,919) (196,880) (170,294)
Net increase in other investments..................... (1,150) (1,767) (3,213)
Net decrease (increase) in loans...................... 192,925 (337,977) (552,435)
Decrease (increase) in net assets of companies held
for disposal....................................... 25,087 (30,043) 41
Proceeds from sale of foreclosed properties........... 18,515 3,404 2,052
Capital expenditures.................................. (4,968) (3,913) (6,853)
----------- ---------- ---------
Net cash provided by (used in) investing
activities....................................... 99,068 (465,987) (464,483)
----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits....................... (25,992) 578,151 232,058
Proceeds from long-term borrowings.................... -- -- 25,949
Proceeds from issuance of guaranteed trust preferred
securities......................................... -- 19,550 14,550
Proceeds from issuance of common stock, net........... -- 7,436 3,650
Proceeds from stock options exercised................. 414 1,310 307
Cash paid to dissenters and for fractional shares..... -- -- (238)
Net (decrease) increase in short-term borrowings...... (321,031) 49,496 173,444
----------- ---------- ---------
Net cash (used in) provided by financing
activities....................................... (346,609) 655,943 449,720
----------- ---------- ---------
Net increase in cash and cash equivalents............... 25,813 34,991 6,317
Cash and cash equivalents, beginning of year............ 93,991 59,000 52,683
----------- ---------- ---------
Cash and cash equivalents, end of year.................. $ 119,804 $ 93,991 $ 59,000
=========== ========== =========
</Table>
87
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 87,899 $ 97,556 $ 117,361
Income taxes.......................................... 7,732 16,008 5,172
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Transfers of loans to foreclosed properties........... $ 32,387 $ 3,949 $ 3,867
Increase in foreclosed properties and short-term
borrowings from first mortgage assumed............. 26,687 -- --
Net assets of businesses acquired through loan
collection activities................................. -- 9,695 --
Treasury shares acquired in loan collections.......... 2,203 -- --
Increase in investments in unconsolidated subsidiaries
related to deconsolidation of trusts formed to
issue trust preferred securities................... 1,857 -- --
Increase in junior subordinated debentures related to
trust deconsolidation.............................. 1,857 -- --
Transfer of guaranteed preferred beneficial interest
in Company's Junior Subordinated Debentures to
junior subordinated debentures..................... 60,000 -- --
</Table>
See Accompanying Notes to Consolidated Financial Statements.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
CIB Marine Bancshares, Inc. ("CIB Marine") is a bank holding company.
References to "CIB Marine" include CIB Marine's subsidiaries unless otherwise
specified. The primary sources of revenue are providing loans to small and
middle-market business customers and 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. Canron Corporation ("Canron"), an 84% owned
subsidiary of CIB Construction, is a steel fabrication and erection company with
operations in the United States and Canada, which was acquired in 2002 as a
result of collection activities. At December 31, 2003, Canron was in a voluntary
liquidation.
The accounting and reporting policies of CIB Marine conform to U.S.
generally accepted accounting principles.
CONSOLIDATION
The consolidated financial statements include the accounts of CIB Marine
and its wholly-owned and majority-owned subsidiaries, including companies which
are held for disposal. All significant intercompany balances and transactions
have been eliminated. Minority interest in Canron is immaterial to the
consolidated financial statements and is included in liabilities of companies
held for disposal.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Estimates used in the
preparation of the consolidated financial statements are based on various
factors, including the current interest rate environment 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
The consolidated CIB Construction operating results for 2002 were
reclassified from noninterest income, noninterest expense and income tax expense
on income in continuing operations to discontinued operations to conform to the
2003 presentation of discontinued operations. The net impact of this
reclassification, including $0.2 million in related tax expense, on the 2002
consolidated statement of operations was an $0.8 million increase in net loss
from discontinued operations and an $0.8 million increase in net income from
continuing operations. See Note 9 -- Companies Held for Disposal for further
information on CIB Construction.
Reclassifications have been made to certain other balances as of and for
the years ended December 31, 2002 and 2001 to be consistent with classifications
adopted for 2003.
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.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INVESTMENTS
Investments in limited partnerships and other equity investments which are
not readily marketable are accounted for using the equity method when CIB
Marine's ownership is at least 3% in a limited partnership and 20% in a
corporation, but less than 51%. Investments not accounted for under the equity
method are accounted for using the cost method. All other investments are
periodically evaluated for impairments. If an investment is impaired, a loss is
recognized. To determine whether an investment is impaired CIB Marine looks to
previous transactions, if any, and the investee's financial condition. During
2003, CIB Marine recognized $2.0 million of impairment losses on other
investments. If different assumptions or conditions were to prevail, the
carrying value of these investments may need to be further reduced and a loss
recorded. All other investments are illiquid.
The equity method of accounting requires CIB Marine to record its
proportionate share of income or loss as an increase or decrease in its
investment and a corresponding gain or loss in noninterest income. Cash
dividends or other distributions received by CIB Marine are recorded as
reductions in the carrying amount of the investment.
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 an unrealized
loss through operations.
Held to maturity securities were reclassified to available for sale
securities in 2003 for all years presented herein as a result of a material
contradiction in management's previous assertion regarding its intent and
ability to hold securities to maturity. In the foreseeable future, CIB Marine
expects to classify all securities as available for sale.
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 an unrealized loss through operations.
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, ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR CREDIT LOSSES
Loans that management has the intent and ability to hold to maturity for
the foreseeable future are carried at the amount of unpaid principal, increased
by costs to originate and reduced by net deferred fees and an allowance for loan
losses. The accrual of interest on loans is generally discontinued when a loan
becomes ninety days or more delinquent 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
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest method on daily balances of the principal amount outstanding. Interest
payments received on loans which are on nonaccrual are generally applied to
reduce the loan principal. Loans are returned to accrual status once a borrower
has demonstrated repayment performance on the contractual schedule for a period
of six consecutive months and the expectation is that contractual payments will
continue to be made during the remaining term of the loan.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal amount is unlikely
and where loans are sold at less than their outstanding principal balances.
Recoveries of amounts previously charged-off are credited to the allowance.
The provision for loan losses is included in the provision for credit
losses in the statements of operations. Also included in the provision for
credit losses is the expense for probable losses on unfunded loan commitments
and standby letters of credit. Estimated losses on unfunded loan commitments and
standby letters of credit are accrued and included in other liabilities.
Management periodically reviews the loan portfolio in order to establish an
allowance for loan losses that are probable at the reporting date. The allowance
for loan losses is based on management's evaluation of individual loans and the
entire loan portfolio, including such factors as the volume and character of
loans outstanding, the relationship of the allowance for loan losses to
outstanding loans, past loan loss experience, the expected loan repayments,
estimated value of any underlying collateral on individual loans and general
economic conditions.
Management believes that the allowance for loan losses contained in these
financial statements was adequate at December 31, 2003, 2002 and 2001. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in the loan
portfolio and/or in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
CIB Marine's allowance for loan losses. Such agencies may require CIB Marine to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
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 amortized over the estimated life of the loans as an
adjustment of the yield of the related loan. Amortization of deferred loan fees
and costs ceases when a loan is placed on nonaccrual. Fees for loans sold and
other loan fees are included in loan fee income as realized.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Goodwill and core deposit intangibles have arisen as a result of the
acquisition of companies or assets. Fair values have been determined by
examining stock prices of publicly traded financial institutions with similar
performance characteristics as the reporting units and discounted cash flow
models. Where market prices are not available and the reporting unit is held for
disposal, third party valuations or anticipated offer values are used.
Intangible assets with definite lives are amortized over the estimated remaining
benefit periods. Core deposit intangibles are amortized over approximately ten
years on an accelerated basis. Prior to 2002, goodwill was amortized on a
straight-line basis over 15 years. Intangible assets with indefinite lives and
goodwill are not amortized, but are evaluated for impairment at least annually.
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 8 -- Intangible Assets 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 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. Rent expense on noncancellable leases is accrued on
the straight-line basis over the term of the lease based upon minimum rents.
FORECLOSED PROPERTIES
Foreclosed properties includes other real estate (ORE) assets that have
been received in satisfaction of debt. ORE is initially recorded and
subsequently carried at the lower of cost or fair value less estimated selling
costs. Any valuation adjustments required at the date of transfer to ORE are
charged to the allowance for loan losses. Subsequently, operating results from
ORE, reductions in value of the foreclosed property and realized gains and
losses on sale are recorded in noninterest income or noninterest expense as
appropriate.
ASSETS OF COMPANIES HELD FOR DISPOSAL
Assets held for disposal include companies acquired in full or partial
satisfaction of loans, primarily through foreclosure. CIB Marine's regulators
generally limit the holding period for such assets to not more than five years.
These assets are initially recorded at the lower of cost or current fair value,
less estimated selling costs. Thereafter, the aggregate assets and liabilities
are shown as separate categories on the consolidated balance sheets. When these
assets are acquired in full or partial satisfaction of a loan, any excess of the
related loan balance over the fair value, less estimated selling cost, is
charged as a loan loss against the allowance for loan losses. Net operating
income or loss of the companies held for disposal which meet the criteria as
discontinued operations are included in gain or loss from discontinued
operations unless a decision is made to cease operations and liquidate the
assets and liabilities of the company. Once a decision is made to liquidate the
company, CIB Marine ceases recording any future operating results of the company
in continuing operations and records an impairment loss, if any, based on the
estimated liquidation value of the company's net assets less costs to sell. The
impairment loss is recorded as loss from discontinued operations.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised), Share-Based Payment (SFAS 123(R)). The objective of the revised
statement No. 123 is to recognize in an entity's financial statements the cost
of employee services received in exchange for valuable equity instruments issued
to employees in share-based payment transactions. A key provision of the
statement requires public companies to adopt Statement 123's fair value-based
method of accounting. Under this method, the cost of employee services received
in exchange for equity instruments would be measured based on the grant date
fair value of these instruments. The cost would be recognized over the requisite
service period. The proposed Statement is expected to be applied by CIB Marine
prospectively as of January 1, 2006 and is not expected to result in a
significant adjustment to the consolidated financial statements.
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 (loss) and earnings (loss) per
share would have been the pro forma amounts indicated below:
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net income (loss)
As reported................................ $(137,648) $ 8,807 $25,729
Assumed compensation cost, net of tax (1,247) (1,291) (1,000)
--------- ------- -------
Pro forma.................................. $(138,895) $ 7,516 $24,729
========= ======= =======
Basic earnings per share
As reported................................ $ (7.53) $ 0.48 $ 1.45
Pro forma.................................. (7.60) 0.41 1.39
Diluted earnings per share
As reported................................ $ (7.53) $ 0.47 $ 1.42
Pro forma.................................. (7.60) 0.41 1.37
</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% and 5.22%, respectively, for 2002 and 2001. No options were
granted in 2003. The per share weighted average fair value of stock options
granted during 2002 and 2001 were $9.56 and $9.27, 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. If stock options had an exercise price less than the market price at
the measurement date, compensation expense associated with those options would
be included in salaries and employee benefits expense with a corresponding
increase in capital surplus.
CIB Marine records amounts received upon the exercise of options by
crediting common stock and capital surplus. Income tax benefits from the
exercise of stock options result in a decrease in current income
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxes payable and, to the extent not previously recognized as a reduction in
income tax expense, result in an additional increase in capital surplus.
ADVERTISING EXPENSE
Advertising costs are charged to expense as incurred. Advertising expenses,
included in noninterest expense, totaled $1.2 million in both 2003 and 2002, and
$1.0 million in 2001.
RECEIVABLES FROM SALE OF STOCK
Loans originated by CIB Marine's subsidiary banks to purchase CIB Marine
stock are accounted for as a reduction in Stockholders' Equity and are reported
in a contra-equity account entitled "Receivables from sale of stock", unless the
loan has been repaid prior to the issuance of the financial statements or the
loan has been adequately collateralized, exclusive of the value of CIB Marine
stock pledged as collateral, if any.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
amounts reported for assets and liabilities for financial statement purposes and
their tax basis. Deferred tax assets are recognized for temporary differences
that are expected to be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by
a valuation allowance by way of a charge to income tax expense when, in the
opinion of management, it is deemed more likely than not that some or all of the
deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.
CIB Marine and its subsidiaries file unitary, combined and separate state
tax returns where required. Canron files its own Canadian and provincial income
tax returns. Canron's Canadian, U.S. federal, state and provincial income taxes
are included in discontinued operations. CIB Marine has entered into tax
allocation agreements with its subsidiary entities included in the consolidated
US Federal and unitary and combined state income tax returns, including US
operations of companies held for sale or disposal. These agreements govern the
timing and amount of income tax payments required by the various entities.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
income tax expense (benefit).
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
evaluated separately and are presented as a separate segment as its assets and
results of operations meet the required disclosure criteria. Accordingly, CIB
Marine's operations are reported in its financial statements in two reportable
operating segments.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income (loss)
by the weighted average number of shares outstanding during the periods. Diluted
earnings per common share is computed by dividing net income or loss by the
weighted average number of common shares adjusted for the dilutive effect of
outstanding stock options. The dilutive effect of outstanding stock options, if
any, is computed using the treasury stock method.
FOREIGN CURRENCY TRANSLATION
In January 2000, CIB -- Chicago established a foreign office in the Cayman
Islands. The office, which accepted Eurodollar deposits, was closed in the
fourth quarter of 2004 in connection with the sale of the bank. See Note
27 -- Subsequent Events.
CIB -- Chicago's nonbank subsidiary, Canron, had operations in the United
States, Canada and Mexico at the time of acquisition. As of December 31, 2003,
operations in western United States, western Canada and Mexico had been sold.
The remaining assets in the United States and eastern Canada are in the process
of liquidation. See Note 3 -- Business Combinations and Note 9 -- Companies Held
for Disposal for further information.
Canron uses the local currency, primarily Canadian dollars, 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 accumulated other comprehensive income within
stockholders' equity. The effect of foreign currency remeasurement 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 adopted SFAS
133, as amended by SFAS 138 and SFAS 149, 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, is recorded in the cumulative translation adjustment account within
equity. Changes in the fair value of derivative trading instruments are reported
in current period earnings.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the time the hedging instrument is entered into, CIB Marine formally
documents all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated
as Fair-Value Hedges, Cash-Flow Hedges, or Foreign-Currency Hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. CIB Marine formally assesses, for all hedges, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions will be or have been highly effective in offsetting
changes in fair values or cash flows of hedged items and whether they are
expected to continue to be highly effective in the future. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, CIB Marine discontinues hedge accounting
prospectively.
CIB Marine discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is designated as a hedge instrument because it is
unlikely that a forecasted transaction will occur; (4) 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 it is determined that a derivative is not highly
effective as a hedge or when hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings.
CIB Marine uses interest rate swaps to hedge changes in the fair value of
fixed rate borrowings and specified 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 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
counterparties 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.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, CIB Marine has various agreements arising out of certain
credit relationships under which it may earn other forms of contingent loan fees
in addition to interest. The contingent loan fee is typically based upon, or
determined by, the financial performance of the borrower. At December 31, 2003,
CIB Marine determined these agreements did not have any significant 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 COSTS OF EXIT OR DISPOSAL ACTIVITIES
In July 2002, the FASB 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, must be recorded
when such costs are incurred and can be measured at fair value. Any recorded
liability is then adjusted for future changes in estimated cash flows. The
adoption in 2003 had no effect on CIB Marine's financial position or results of
operations.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS No. 149) to amend and
clarify financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. In addition, SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003 (with certain
exceptions) and for hedging relationships designated after June 30, 2003.
Adoption of SFAS No. 149 did not materially affect the consolidated results of
operations or financial position of CIB Marine.
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards regarding the manner in which an issuer classifies and
measures certain types of financial instruments having characteristics of both
liabilities and equity. Pursuant to SFAS No. 150, such freestanding financial
instruments (i.e., those entered into separately from an entity's other
financial instruments or equity transactions or that are legally detachable and
separately exercisable) must be classified as liabilities or, in some cases,
assets. In addition, SFAS No. 150 requires that financial instruments containing
obligations to repurchase the issuing entity's equity shares and, under certain
circumstances, obligations that are settled by delivery of the issuer's shares
be classified as liabilities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and for contracts in
existence at the start of the first interim period beginning after June 15,
2003. CIB Marine does not have any outstanding financial instruments at December
31, 2003 that would require reclassification as a result of SFAS No. 150.
CHANGES IN ACCOUNTING PRINCIPLE
On May 5, 2005, the FASB issued SFAS No. 154 Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS No. 154). SFAS No. 154, which is effective for accounting changes made in
fiscal years beginning after December 15, 2005, requires retrospective
application for voluntary changes in accounting principle unless it is
impracticable to do so. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not include specific transition provisions. The adoption of SFAS No. 154 is not
expected to impact CIB Marine's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 (Revised) (FIN 46R),
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 46R,
consolidation generally occurred when an enterprise controlled another entity
through voting interests. Adoption of the accounting provisions of FIN 46R in
2003 did not have a material affect on the consolidated results of operations.
The effect of the implementation of FIN 46R on CIB Marine's consolidated
statement of financial condition was to increase investment in unconsolidated
subsidiaries by $1.9 million, net of the amounts due to unconsolidated
subsidiaries, decrease trust preferred securities by $60.0 million and increase
junior subordinated debentures by $61.9 million. Trust preferred securities
underwriting fees are amortized on a straight-line basis over a thirty year
life.
INVESTMENTS
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" (EITF 03-01). EITF 03-01 provides guidance
on the other than temporary impairment models for marketable debt and equity
securities accounted for under SFAS No 115, "Accounting for Certain Investments
in Debt and Equity Securities," and SFAS No. 124, "Accounting for Certain
Investments Held by Not-for Profit Organizations," and nonmarketable equity
securities accounted for under the cost method. The EITF developed a basic
three-step model to evaluate whether an investment is other than temporarily
impaired. The effective date of the recognition and measurement provisions as
included in paragraphs 10-20 of EITF 03-01 has been delayed. CIB Marine adopted
the disclosure requirements in the 2003 consolidated financial statements.
LOAN COMMITMENTS
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No. 105,
Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105
provides guidance regarding loan commitments accounted for as derivative
instruments. Specifically, SAB 105 requires servicing assets to be recognized
only once the servicing assets have been contractually separated from the
underlying loan by sale or securitization of the loan with servicing retained.
As such, consideration for the expected future cash flows related to the
associated servicing of the loan may not be recognized in valuing the loan
commitment. This will result in a lower fair value of loan commitments and
recognition of the value of the servicing asset later upon sale or
securitization of the underlying loan. The provisions of SAB 105 were effective
for loan commitments accounted for as derivatives entered into after March 31,
2004. The adoption of SAB 105 did not have a material effect on CIB Marine's
consolidated financial statements.
NOTE 2 -- RESTATEMENT OF 2002 AND 2001 CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 2002 and December
31, 2001 have been restated to reflect the following restatement adjustments:
LOAN AND OTHER CREDIT LOSSES
In the third quarter of 2003, CIB Marine began a comprehensive review of
the adequacy of its allowance for loan losses in response to deterioration in
the credit quality of the Company's loan portfolio, including a
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significant increase in nonperforming loans, which was noted by the Company's
banking regulators at certain subsidiary banks. A Special Review Committee of
the Board was formed to further review these items and engaged outside advisors
to conduct an independent review of loan related matters. As a result of this
comprehensive review, the Company identified errors in the timing of loan
downgrades. The consolidated financial statements for 2002 and 2001 have been
restated to reflect loan downgrades in the appropriate periods. The impact of
these restatement adjustments was an increase in provision for credit losses of
$10.8 million and $1.7 million in 2002 and 2001, respectively, and an increase
in the allowance for loan losses of $12.8 million and $1.8 million in 2002 and
2001, respectively.
INTEREST INCOME -- LOANS
In addition, errors were also identified in the timing of when loans were
classified as nonperforming which resulted in loans not being placed on
nonaccrual status in the correct reporting period. The consolidated financial
statements for 2002 and 2001 have been restated to reflect loans being placed on
nonaccrual status in the appropriate periods. The impact of these restatement
adjustments was a reduction in interest income -- loans of $0.2 million and $0.1
million in 2002 and 2001, respectively, and a corresponding reduction in net
loans.
INCOME TAX EXPENSE
The consolidated financial statements for 2002 and 2001 have also been
restated to reflect the income tax effect of the above restatement adjustments.
The effect of these restatement adjustments was a reduction in income tax
expense on income from continuing operations of $4.2 million and $0.6 million in
2002 and 2001, respectively.
RECEIVABLES FROM SALE OF STOCK
During the regular 2003 regulatory examination, it was noted that certain
of the Company's subsidiary banks had originated loans, the proceeds of which
were used to purchase stock of the Company. Loans originated by CIB Marine's
subsidiary banks to purchase CIB Marine stock should have been accounted for as
a reduction in Stockholders' Equity unless the loan had been repaid prior to the
issuance of the financial statements or the loan had been adequately
collateralized, exclusive of the value of CIB Marine stock pledged as
collateral, if any. The consolidated financial statements for 2002 and 2001 have
been restated to reduce loans to purchase CIB Marine stock (as described above)
and report those loans as a contra-equity account entitled "Receivables from
sale of stock". The effect of these restatement adjustments was a reduction of
loans and a corresponding reduction of stockholders' equity of $7.9 million and
$7.4 million as of December 31, 2002 and 2001, respectively, and a reduction of
stockholders' equity of $5.1 million as of December 31, 2000. See Note
15 -- Stockholders' Equity -- Receivables from Sale of Stock for further
information.
RECLASSIFICATION OF SECURITIES AND ADJUSTMENT TO ACCUMULATED OTHER
COMPREHENSIVE INCOME
In the first nine months of 2005, CIB Marine sold $9.3 million of tax
exempt held to maturity securities at a gain of $0.4 million. As a result of
this material contradiction related to management's previous assertion regarding
its intent and ability to hold securities to maturity, CIB Marine determined the
consolidated financial statements should be restated for all years presented to
reclassify all held to maturity securities to available for sale. The effect of
this restatement is to increase available for sale securities by $72.8 million
and $98.7 million, and decrease held to maturity securities by $70.1 million and
$96.6 million, at December 31, 2002 and 2001, respectively. The effect of this
restatement also resulted in an increase in accumulated other comprehensive
income and total stockholders' equity of $1.7 million, $1.3 million and $0.4
million as of December 31, 2002, 2001 and 2000, respectively, for the net
unrealized gains on the reclassified securities. The difference in the increase
in available for sale securities and the increase in accumulated other
comprehensive income as of December 31, 2002 and 2001, is the deferred income
tax effect on the net unrealized gain on securities of $1.0 million and $0.8
million, at December 31, 2002 and 2001, respectively,
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which resulted in a decrease in net deferred tax assets included in other assets
at December 31, 2002 and an increase in deferred tax liabilities included in
other liabilities at December 31, 2001.
The cumulative impact of the above restatements is a decrease of net income
of $6.8 million and $1.2 million for the years ended December 31, 2002 and 2001,
respectively, and a decrease in stockholders' equity of $14.2 million and $7.3
million as of December 31, 2002 and 2001, respectively.
The following table presents the consolidated balance sheets and statements
of operations as previously reported and restated for the years prior to 2003,
and the major captions in the statements of cash flows which were affected by
the restatement.
<Table>
<Caption>
DECEMBER 31, 2002
--------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT AS
REPORTED ADJUSTMENTS ADJUSTMENTS RESTATED
---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
ASSETS
Cash and cash equivalents:
Cash and due from banks............................... $ 72,771 $(4,405) $ -- $ 68,366
Federal funds sold.................................... 25,625 -- -- 25,625
---------- ------- -------- ----------
Total cash and cash equivalents..................... 98,396 (4,405) -- 93,991
Loans held for sale..................................... 228,114 1,440 -- 229,554
Securities:
Available for sale, at fair value....................... 443,871 -- 72,873 516,744
Held to maturity........................................ 70,132 -- (70,132) --
---------- ------- -------- ----------
Total securities...................................... 514,003 -- 2,741 516,744
Loans................................................... 2,707,538 4,405 (7,937) 2,704,006
Allowance for loan losses............................. (52,369) -- (12,753) (65,122)
---------- ------- -------- ----------
Net loans............................................. 2,655,169 4,405 (20,690) 2,638,884
Premises and equipment, net............................. 28,087 -- -- 28,087
Accrued interest receivable............................. 16,669 -- -- 16,669
Goodwill................................................ 13,122 -- -- 13,122
Other intangible assets................................. 1,700 -- -- 1,700
Foreclosed properties................................... 3,678 -- -- 3,678
Assets of companies held for disposal................... 73,874 (600) -- 73,274
Other assets............................................ 32,749 (1,458) 3,711 35,002
---------- ------- -------- ----------
TOTAL ASSETS............................................ $3,665,561 $ (618) $(14,238) $3,650,705
========== ======= ======== ==========
Deposits:
Noninterest-bearing demand............................ $ 204,267 $ -- $ -- $ 204,267
Interest-bearing demand............................... 58,889 -- -- 58,889
Savings............................................... 574,083 -- -- 574,083
Time.................................................. 2,011,165 -- -- 2,011,165
---------- ------- -------- ----------
Total deposits...................................... 2,848,404 -- -- 2,848,404
Short-term borrowings................................... 386,945 -- -- 386,945
Long-term borrowings.................................... 47,141 -- -- 47,141
Guaranteed trust preferred securities................... 60,000 -- -- 60,000
Accrued interest payable................................ 11,108 5 -- 11,113
Liabilities of companies held for disposal.............. 37,171 (568) -- 36,603
Other liabilities....................................... 12,991 (55) -- 12,936
---------- ------- -------- ----------
Total Liabilities................................... 3,403,760 (618) -- 3,403,142
---------- ------- -------- ----------
STOCKHOLDERS' EQUITY
Preferred stock......................................... -- -- -- --
Common stock............................................ 18,312 -- -- 18,312
Capital surplus......................................... 157,783 -- -- 157,783
Retained earnings....................................... 82,901 -- (8,012) 74,889
Accumulated other comprehensive income, net............. 2,805 -- 1,711 4,516
Receivables from sale of stock.......................... -- -- (7,937) (7,937)
---------- ------- -------- ----------
Total Stockholders' Equity.......................... 261,801 -- (14,238) 247,563
---------- ------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $3,665,561 $ (618) $(14,238) $3,650,705
========== ======= ======== ==========
</Table>
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT AS
REPORTED ADJUSTMENTS ADJUSTMENTS RESTATED
----------- ----------------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
INTEREST AND DIVIDEND INCOME
Loans.............................................. $178,569 $ 122 $ (191) $178,500
Loans held for sale................................ 4,137 -- -- 4,137
Securities:
Taxable.......................................... 17,897 -- -- 17,897
Tax-exempt....................................... 2,541 -- -- 2,541
Dividends........................................ 387 -- -- 387
Federal funds sold................................. 539 -- -- 539
-------- ------- -------- --------
Total interest and dividend income............... 204,070 122 (191) 204,001
-------- ------- -------- --------
INTEREST EXPENSE
Deposits........................................... 85,478 6 -- 85,484
Short-term borrowings.............................. 5,964 (6) -- 5,958
Long-term borrowings............................... 1,370 -- -- 1,370
Guaranteed trust preferred securities.............. 4,523 -- -- 4,523
-------- ------- -------- --------
Total interest expense........................... 97,335 -- -- 97,335
-------- ------- -------- --------
Net interest income................................ 106,735 122 (191) 106,666
Provision for credit losses........................ 34,725 1,000 10,785 46,510
-------- ------- -------- --------
Net interest income after provision for credit
losses........................................... 72,010 (878) (10,976) 60,156
-------- ------- -------- --------
NONINTEREST INCOME
Loan fees.......................................... 3,456 (126) -- 3,330
Mortgage banking revenue, net...................... 10,602 (5,619) -- 4,983
Deposit service charges............................ 3,209 -- -- 3,209
Other service fees................................. 326 -- -- 326
Write down and losses on assets.................... (19) 19 -- --
Other income (loss)................................ 899 659 -- 1,558
Gain on investment securities, net................. 3,127 -- -- 3,127
-------- ------- -------- --------
Total noninterest income......................... 21,600 (5,067) -- 16,533
-------- ------- -------- --------
NONINTEREST EXPENSE
Compensation and employee benefits................. 41,462 (2,919) -- 38,543
Equipment.......................................... 4,840 -- -- 4,840
Occupancy and premises............................. 4,539 1 -- 4,540
Professional services.............................. 2,997 (50) -- 2,947
Litigation settlements............................. 1,753 -- -- 1,753
Write down and losses on assets.................... -- 78 -- 78
Other expense...................................... 15,488 (3,705) -- 11,783
-------- ------- -------- --------
Total noninterest expense........................ 71,079 (6,595) -- 64,484
-------- ------- -------- --------
Income (loss) from continuing operations before
income taxes..................................... 22,531 650 (10,976) 12,205
Income tax expense (benefit)....................... 6,900 (152) (4,152) 2,596
-------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS........... 15,631 802 (6,824) 9,609
Discontinued Operations:
Pre-tax loss from discontinued operations.......... -- (650) -- (650)
Income tax expense................................. -- 152 -- 152
-------- ------- -------- --------
Loss from discontinued operations.................. -- (802) -- (802)
-------- ------- -------- --------
NET INCOME (LOSS).................................. $ 15,631 $ -- $ (6,824) $ 8,807
======== ======= ======== ========
</Table>
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT AS
REPORTED ADJUSTMENTS ADJUSTMENTS RESTATED
----------- ----------------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EARNINGS PER SHARE:
Basic
Income (loss) from continuing operations......... $0.86 $ 0.05 $(0.38) $ 0.53
Discontinued operations.......................... -- (0.05) -- (0.05)
----- ------ ------ ------
NET INCOME (LOSS)................................ $0.86 $ -- $(0.38) $ 0.48
===== ====== ====== ======
Diluted
Income (loss) from continuing operations......... $0.84 $ 0.05 $(0.37) $ 0.52
Discontinued operations.......................... -- (0.05) -- (0.05)
----- ------ ------ ------
NET INCOME (LOSS)................................ $0.84 $ -- $(0.37) $ 0.47
===== ====== ====== ======
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT
REPORTED ADJUSTMENTS ADJUSTMENTS AS RESTATED
---------- ---------------- ----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOW STATEMENT
Net cash provided by (used in) operating
activities................................ $(154,291) $ (674) $ -- $(154,965)
Net cash provided by (used in) investing
activities................................ (462,756) (3,731) 500 (465,987)
Net cash (used in) provided by financing
activities................................ 656,443 -- (500) 655,943
--------- ------- ----- ---------
Net increase (decrease) in cash and cash
equivalents............................... 39,396 (4,405) -- 34,991
Cash and cash equivalents, beginning of
year...................................... 59,000 -- -- 59,000
--------- ------- ----- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 98,396 $(4,405) $ -- $ 93,991
========= ======= ===== =========
</Table>
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2001
--------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT AS
REPORTED ADJUSTMENTS ADJUSTMENTS RESTATED
---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
ASSETS
Cash and cash equivalents:
Cash and due from banks.................. $ 29,686 $ -- $ -- $ 29,686
Federal funds sold......................... 29,314 -- -- 29,314
---------- ----- -------- ----------
Total cash and cash equivalents....... 59,000 -- -- 59,000
Loans held for sale........................ 34,295 178 -- 34,473
Securities:
Available for sale, at fair value.......... 321,748 -- 98,759 420,507
Held to maturity........................... 96,609 -- (96,609) --
---------- ----- -------- ----------
Total securities......................... 418,357 -- 2,150 420,507
---------- ----- -------- ----------
Loans...................................... 2,389,482 -- (7,437) 2,382,045
Allowance for loan losses................ (34,078) -- (1,777) (35,855)
---------- ----- -------- ----------
Net loans................................ 2,355,404 -- (9,214) 2,346,190
Premises and equipment, net................ 27,807 -- -- 27,807
Accrued interest receivable................ 16,993 -- -- 16,993
Goodwill................................... 9,639 -- -- 9,639
Other intangible assets.................... 1,795 -- -- 1,795
Foreclosed properties...................... 3,168 -- -- 3,168
Assets of companies held for disposal...... 7,311 -- -- 7,311
Other assets............................... 15,400 (265) -- 15,135
---------- ----- -------- ----------
TOTAL ASSETS............................... $2,949,169 $ (87) $ (7,064) $2,942,018
========== ===== ======== ==========
Deposits:
Noninterest-bearing demand............... $ 148,709 $ -- $ -- $ 148,709
Interest-bearing demand.................. 60,671 -- -- 60,671
Savings.................................. 300,318 -- -- 300,318
Time..................................... 1,760,012 -- -- 1,760,012
---------- ----- -------- ----------
Total deposits........................ 2,269,710 -- -- 2,269,710
Short-term borrowings...................... 319,883 -- -- 319,883
Long-term borrowings....................... 61,987 -- -- 61,987
Guaranteed trust preferred securities...... 40,000 -- -- 40,000
Accrued interest payable................... 11,335 (1) -- 11,334
Liabilities of companies held for
disposal................................. 683 -- -- 683
Other liabilities.......................... 8,429 (86) 253 8,596
---------- ----- -------- ----------
Total Liabilities.......................... 2,712,027 (87) 253 2,712,193
---------- ----- -------- ----------
STOCKHOLDERS' EQUITY
Preferred stock............................ -- -- -- --
Common stock............................... 17,877 -- -- 17,877
Capital surplus............................ 148,972 -- -- 148,972
Retained earnings.......................... 67,270 -- (1,188) 66,082
Accumulated other comprehensive income,
net...................................... 3,023 -- 1,308 4,331
Receivables from sale of stock............. -- -- (7,437) (7,437)
---------- ----- -------- ----------
Total Stockholders' Equity............... 237,142 -- (7,317) 229,825
---------- ----- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................... $2,949,169 $ (87) $ (7,064) $2,942,018
========== ===== ======== ==========
</Table>
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------
AS
PREVIOUSLY RECLASSIFICATION RESTATEMENT AS
REPORTED ADJUSTMENTS ADJUSTMENTS RESTATED
---------- ---------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
INTEREST AND DIVIDEND INCOME
Loans............................................... $ 174,222 $ -- $ (125) $ 174,097
Loans held for sale................................. 1,919 -- -- 1,919
Securities:
Taxable........................................... 22,722 -- -- 22,722
Tax-exempt........................................ 2,842 -- -- 2,842
Dividends......................................... 304 -- -- 304
Federal funds sold.................................. 1,121 -- -- 1,121
--------- ------- ------- ---------
Total interest and dividend income................ 203,130 -- (125) 203,005
--------- ------- ------- ---------
INTEREST EXPENSE
Deposits............................................ 100,585 19 -- 100,604
Short-term borrowings............................... 8,481 (19) -- 8,462
Long-term borrowings................................ 2,633 -- -- 2,633
Guaranteed trust preferred securities............... 4,024 -- -- 4,024
--------- ------- ------- ---------
Total interest expense............................ 115,723 -- -- 115,723
--------- ------- ------- ---------
Net interest income................................. 87,407 -- (125) 87,282
Provision for credit losses......................... 12,743 -- 1,652 14,395
--------- ------- ------- ---------
Net interest income after provision for credit
losses............................................ 74,664 -- (1,777) 72,887
--------- ------- ------- ---------
NONINTEREST INCOME
Loan fees........................................... 3,732 17 -- 3,749
Mortgage banking revenue, net....................... 8,397 (3,192) -- 5,205
Deposit service charges............................. 2,750 -- -- 2,750
Other service fees.................................. 348 (9) -- 339
Write down and losses on assets..................... 101 (101) -- --
Other income (loss)................................. 1,439 109 -- 1,548
Gain on investment securities, net.................. 4,028 -- -- 4,028
--------- ------- ------- ---------
Total noninterest income.......................... 20,795 (3,176) -- 17,619
--------- ------- ------- ---------
NONINTEREST EXPENSE
Compensation and employee benefits.................. 33,150 (2,038) -- 31,112
Equipment........................................... 4,434 (189) -- 4,245
Occupancy and premises.............................. 3,801 191 -- 3,992
Professional services............................... 1,916 -- -- 1,916
Litigation settlements.............................. 145 -- -- 145
Merger-related charges.............................. 477 477
Write down and losses on assets..................... -- 7 -- 7
Other expense....................................... 10,630 (1,147) -- 9,483
--------- ------- ------- ---------
Total noninterest expense......................... 54,553 (3,176) -- 51,377
--------- ------- ------- ---------
Income (loss) before taxes.......................... 40,906 -- (1,777) 39,129
Income tax expense (benefit)........................ 13,989 -- (589) 13,400
--------- ------- ------- ---------
NET INCOME.......................................... $ 26,917 $ -- $(1,188) $ 25,729
========= ======= ======= =========
EARNINGS PER SHARE:
BASIC............................................... $ 1.52 $ -- $ (0.07) $ 1.45
========= ======= ======= =========
DILUTED............................................. $ 1.49 $ -- $ (0.07) $ 1.42
========= ======= ======= =========
CASH FLOW STATEMENT
Net cash provided by (used in) operating
activities........................................ $ 21,121 $ (41) $ -- $ 21,080
Net cash provided by (used in) investing
activities........................................ (466,865) 42 2,340 (464,483)
Net cash (used in) provided by financing
activities........................................ 452,061 (1) (2,340) 449,720
--------- ------- ------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........... $ 6,317 $ -- $ -- $ 6,317
========= ======= ======= =========
</Table>
All Notes to the Consolidated Financial Statements have been Adjusted to Reflect
the Effects of the Restatement Adjustments.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- 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. 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.
On October 31, 2002, CIB Marine became the owner of the Borrower's 84%
interest in Canron through a newly formed and wholly-owned subsidiary of
CIB -- Chicago, CIB Construction, LLC. The loans secured by this stock totaled
$13.3 million as of October 31, 2002.
The acquisition was accounted for under the purchase method of accounting.
CIB Marine's ownership interest in Canron was recorded at its estimated fair
value of $5.9 million as determined by an independent appraisal. As a result,
CIB Marine recognized a charge-off during the fourth quarter of 2002 relative to
the loans secured by the Canron stock in the amount of $7.4 million.
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
----------------------
(DOLLARS IN
THOUSANDS)
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........................................ 5,355
Property and equipment, net............................... 17,231
-------
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 nonaffiliated banks...................... 1,814
-------
Total liabilities assumed.............................. 72,600
-------
Net assets acquired......................................... $ 5,895
=======
</Table>
OTHER ACQUISITIONS
In August 2002, CIB Marine acquired through a wholly-owned subsidiary,
Commercial Finance, certain of the assets of Oxford Capital Illinois, LLC and
Oxford Holdings, LLC, companies engaged in the factoring
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of receivables. These assets were acquired from a borrower who was in default of
its obligations to CIB Marine. The aggregate cost of the business was the
forgiveness of indebtedness of $3.8 million, which approximated the fair value
of the business as determined by an independent valuation. Additionally, $2.1
million of loans to the borrower were charged-off. The approximately $3.8
million cost was principally assigned to goodwill and other intangible assets.
At December 31, 2003, this goodwill and other intangible assets were deemed
impaired and the remaining unamortized balance of $3.7 million was written off.
In the second quarter of 2004, substantially all of the tangible assets of
Commercial Finance were sold at a gain of $0.2 million. In the fourth quarter of
2004, the company was dissolved.
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 were conducted as a division of CIB Marine's mortgage
subsidiary, Mortgage Services. Approximately $0.6 million of the purchase price
was paid in cash and $1.2 million of the purchase price was contingent upon
achievement of certain earnings goals of the acquired entity. Such payments have
resulted in additions to identifiable intangible assets and goodwill. Payments
of $0.8 million were accrued in 2003 and $24 thousand in 2002 against the
contingent price.
In the first quarter of 2001, CIB Marine initiated the acquisition of
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 0.4634
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 consummated in September
2001 was accounted for as a pooling-of-interests. Consolidated financial
statements of CIB Marine for 2001 and prior years were restated to include the
financial information of Citrus Financial as if CIB Marine and Citrus Financial
had always been combined.
NOTE 4 -- CASH AND DUE FROM BANKS
Reserves in the form of deposits with the Federal Reserve Bank and vault
cash totaling $14.6 million, $11.0 million, and $8.4 million were maintained to
satisfy federal regulatory requirements as of December 31, 2003, 2002 and 2001,
respectively. These amounts are included in cash and due from banks in the
consolidated balance sheet.
NOTE 5 -- SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and approximate fair
values of securities at December 31, 2003, 2002 and 2001 are as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2003
U.S. Treasuries............................ $ 20,070 $ 17 $ -- $ 20,087
U.S. government agencies................... 291,000 1,122 122 292,000
Obligations of states and political
subdivisions............................. 56,816 2,256 81 58,991
Other notes and bonds...................... 1,050 -- 1 1,049
Commercial paper........................... 7,369 4 -- 7,373
Mortgage-backed securities................. 247,736 1,332 2,343 246,725
Federal Home Loan Bank and Federal Reserve
Bank stock............................... 11,131 -- -- 11,131
-------- ------ ------ --------
$635,172 $4,731 $2,547 $637,356
======== ====== ====== ========
</Table>
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
U.S. Treasuries............................ $ 10,024 $ 26 $ -- $ 10,050
U.S. government agencies................... 145,185 1,456 -- 146,641
Obligations of states and political
subdivisions............................. 62,585 2,364 25 64,924
Other notes and bonds...................... 1,050 -- -- 1,050
Commercial paper........................... 8,300 4 -- 8,304
Mortgage-backed securities................. 271,750 3,745 114 275,381
Federal Home Loan Bank and Federal Reserve
Bank stock............................... 10,394 -- -- 10,394
-------- ------ ------ --------
$509,288 $7,595 $ 139 $516,744
======== ====== ====== ========
DECEMBER 31, 2001
U.S. Treasuries............................ $ 15,013 $ 354 $ -- $ 15,367
U.S. government agencies................... 111,072 3,441 -- 114,513
Obligations of states and political
subdivisions............................. 62,156 1,443 191 63,408
Other notes and bonds...................... 1,050 -- -- 1,050
Commercial paper........................... 6,999 8 -- 7,007
Mortgage-backed securities................. 210,534 2,698 645 212,587
Federal Home Loan Bank and Federal Reserve
Bank stock............................... 6,575 -- -- 6,575
-------- ------ ------ --------
$413,399 $7,944 $ 836 $420,507
======== ====== ====== ========
</Table>
Securities with a carrying value and fair value of $176.7 million, $203.3
million and $273.1 million at December 31, 2003, 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 amortized cost and fair value of securities as of December 31, 2003, 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>
AMORTIZED FAIR
COST VALUE
---------- ---------
(DOLLARS IN THOUSANDS)
Due in one year or less..................................... $126,067 $126,473
Due after one year through five years....................... 223,861 225,473
Due after five years through ten years...................... 13,918 14,682
Due after ten years......................................... 12,459 12,872
-------- --------
376,305 379,500
Federal Home Loan Bank and Federal Reserve Bank stock....... 11,131 11,131
Mortgage-backed securities.................................. 247,736 246,725
-------- --------
$635,172 $637,356
======== ========
</Table>
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table discloses the age of gross unrealized losses in our
portfolio as of December 31, 2003:
<Table>
<Caption>
AT DECEMBER 31, 2003
---------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. government agencies...... $ 58,009 $ 122 $ -- $ -- $ 58,009 $ 122
Obligations of states and
political subdivisions...... 20,063 78 332 3 20,395 81
Other notes and bonds......... 249 1 -- -- 249 1
Mortgage-backed securities.... 183,335 2,342 81 1 183,416 2,343
-------- ------ ---- ----- -------- ------
Total securities with
unrealized losses........... $261,656 $2,543 $413 $ 4 $262,069 $2,547
--------
Securities without unrealized
losses...................... 375,287
--------
Total securities.............. $637,356
========
</Table>
As of December 31, 2003, management has concluded that the unrealized
losses above are temporary in nature since they are primarily related to market
interest rates and are not related to the underlying credit quality of the
issuers of securities in our investment portfolio. Additionally, CIB Marine has
the intent and ability to hold these investments for the time necessary to
recover the amortized cost.
Proceeds from the sale of securities available for sale during 2003, 2002
and 2001, were $1.0 million, $127.5 million and $86.7 million, respectively.
There were no realized gains or losses on these sales during 2003, and there
were net realized gains of $3.1 million and $4.0 million in 2002 and 2001,
respectively.
NOTE 6 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
LOANS
The components of loans were as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Commercial....................... $ 708,252 29.9% $ 928,992 34.3% $ 913,962 38.2%
Factored receivables............. 11,447 0.5 6,780 0.2 N/A N/A
Commercial real estate........... 1,184,542 50.1 1,157,136 42.7 975,904 40.8
Commercial real estate
construction................... 363,822 15.4 513,804 18.9 394,081 16.5
Residential real estate.......... 85,893 3.6 91,577 3.4 92,022 3.9
Home equity loans................ 12,272 0.5 15,100 0.6 12,728 0.5
Consumer loans................... 3,554 0.2 6,032 0.2 8,469 0.4
Receivables from sale of stock... (5,208) (0.2) (7,937) (0.3) (7,437) (0.3)
---------- ----- ---------- ----- ---------- -----
Gross loans.................... 2,364,574 100.0% 2,711,484 100.0% 2,389,729 100.0%
===== ===== =====
Deferred loan fees............... (4,533) (7,478) (7,684)
---------- ---------- ----------
Loans.......................... 2,360,041 2,704,006 2,382,045
Allowance for loan losses........ (109,872) (65,122) (35,855)
---------- ---------- ----------
Loans, net..................... $2,250,169 $2,638,884 $2,346,190
========== ========== ==========
</Table>
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table lists information on nonperforming and certain past due
loans:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Nonaccrual loans.................................. $152,064 $38,958 $36,644
Restructured loans................................ 2,946 3,210 309
Loans 90 days or more past due and still
accruing........................................ 359 6,396 1,535
</Table>
Information on impaired loans is as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Impaired loans without a specific allowance....... $ 59,581 $ 3,054 $ 5,723
Impaired loans with a specific allowance.......... 143,923 38,321 31,859
-------- ------- -------
Total impaired loans............................ $203,504 $41,375 $37,582
======== ======= =======
Specific allowance related to impaired loans...... $ 42,768 $10,434 $ 5,870
Average balance of impaired loans................. 119,395 39,582 20,021
Interest income recognized on impaired loans...... $ 7,292 $ 528 $ 1,050
</Table>
During 2003, CIB Marine recognized net losses on sale of foreclosed
property and impairment losses of $3.3 million. These amounts are included in
write down and losses on assets.
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 $5.2 million, $9.1 million and $15.0 million as of
December 31, 2003, 2002 and 2001, respectively. Included in intangible assets
are mortgage servicing rights for loans serviced for others of $7 thousand and
$16 thousand at December 31, 2002 and 2001, respectively. There were no
servicing rights at December 31, 2003. Moreover, there was no valuation
allowance for this asset in either 2002 or 2001.
At December 31, 2003, CIB Marine had $22.7 million in outstanding principal
balances on loans secured or partially secured by CIB Marine stock. Specific
reserves on these loans were $0.1 million. Loans made specifically to enable the
borrower to purchase CIB Marine stock and not adequately secured by collateral
other than the stock which have been classified as receivables from sale of
stock and recorded as contra-equity have not been included in this balance.
CREDIT CONCENTRATIONS
At December 31, 2003, CIB Marine had fifteen secured borrowing
relationships (loans to one borrower or a related group of borrowers) that
exceeded 25% of stockholders' equity as compared to four at December 31, 2002.
The total outstanding commitments at December 31, 2003, including lines of
credit not fully drawn, on these loans ranged from 26% to 83% of equity and from
1% to 4% of total loans. The principal drawn and outstanding on these loans
ranged from $27.8 million to $85.1 million and the aggregate balance outstanding
on these fifteen loans was $584.2 million. Five of these relationships included
loans that were on nonaccrual status and/or impaired at December 31, 2003. The
outstanding balance on the nonaccrual and/or impaired loans within these five
relationships at December 31, 2003 was $74.9 million and the specific loss
allowance provided on these loans was $16.9 million.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2003, CIB Marine also had credit relationships within seven
industries or industry groups with loans outstanding in that industry or
industry group exceeding $100 million as follows:
<Table>
<Caption>
% OF
OUTSTANDING % OF STOCKHOLDERS'
INDUSTRY BALANCE LOANS EQUITY
- -------- ----------- ----- -------------
(DOLLARS IN
MILLIONS)
Commercial Real Estate Developers..................... $527.3 22% 486%
Residential Real Estate Developers.................... 465.7 20 429
Motel and Hotel....................................... 217.1 9 200
Manufacturing......................................... 184.8 8 170
Nursing/Convalescent Home............................. 133.2 6 123
Health Care Facility.................................. 120.6 5 111
Retail Trade.......................................... 100.6 4 93
</Table>
Changes in the allowance for loan losses were as follows:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Balance at beginning of year..................... $ 65,122 $ 35,855 $23,988
Charge-offs...................................... (103,139) (17,499) (2,999)
Recoveries....................................... 2,043 1,134 471
--------- -------- -------
Net loan charge-offs........................... (101,096) (16,365) (2,528)
Allowance acquired............................... -- 122 --
Provision for loan losses........................ 145,846 45,510 14,395
--------- -------- -------
Balance at end of year........................... $ 109,872 $ 65,122 $35,855
========= ======== =======
Allowance for loan losses as a percentage of
loans.......................................... 4.66% 2.41% 1.51%
========= ======== =======
</Table>
PROVISION FOR CREDIT LOSSES
The provision for credit losses consisted of the following components.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Provision for loan losses......................... $145,846 $45,510 $14,395
Provision for losses on unfunded loan commitments
and standby letters of credit(1)................ 14,747 1,000 --
-------- ------- -------
Total provision for credit losses............... $160,593 $46,510 $14,395
======== ======= =======
</Table>
- ---------------
(1) For additional information related to provision for losses on unfunded loan
commitments and standby letters of credit, see Note 14 -- Other Liabilities.
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
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateral, as those prevailing at the time for comparable transactions with
unrelated persons. The activity in these loans during 2003, 2002 and 2001 is as
follows:
<Table>
<Caption>
2003 2002 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year......................... $ 63,506 $ 73,118 $ 51,772
Balance adjustments(1)............................... 12,919 5,925 (1,877)
New loans............................................ 48,772 37,490 41,325
Repayments........................................... (64,708) (53,027) (18,102)
-------- -------- --------
Balance at end of year............................... $ 60,489 $ 63,506 $ 73,118
======== ======== ========
</Table>
- ---------------
(1) Balance adjustments are primarily due to director and officer status changes
in these reporting periods.
NOTE 7 -- PREMISES AND EQUIPMENT, NET
The major classes of premises and equipment and accumulated depreciation
are summarized as follows:
<Table>
<Caption>
DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Land................................................. $ 4,828 $ 4,872 $ 4,898
Buildings and improvements........................... 18,989 18,077 17,621
Furniture and equipment.............................. 13,089 15,940 15,480
Computer equipment and software...................... 14,585 7,527 4,842
Construction in progress............................. 8 287 77
-------- -------- --------
51,499 46,703 42,918
Less: Accumulated depreciation....................... (22,361) (18,616) (15,111)
-------- -------- --------
$ 29,138 $ 28,087 $ 27,807
======== ======== ========
</Table>
Depreciation expense totaled $3.9 million, $3.6 million and $3.4 million
for 2003, 2002 and 2001, respectively. Total rental expense was $2.2 million,
$1.8 million and $1.6 million for 2003, 2002 and 2001, respectively.
CIB Marine leases certain premises and equipment under noncancellable
operating leases, which expire at various dates through 2014 and land under a
noncancellable operating lease which expires in 2040. 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, 2003.
<Table>
<Caption>
AMOUNT
------
(DOLLARS IN
THOUSANDS)
2004........................................................ $ 2,064
2005........................................................ 1,908
2006........................................................ 1,758
2007........................................................ 1,505
2008........................................................ 1,155
Thereafter.................................................. 4,365
-------
$12,755
=======
</Table>
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and other intangibles for
the years ended December 31, 2003 and 2002 are as follows:
<Table>
<Caption>
OTHER INTANGIBLE ASSETS
-------------------------------------
CORE DEPOSIT CUSTOMER BASE
GOODWILL INTANGIBLES INTANGIBLES TOTAL
-------- ------------ ------------- ------
(DOLLARS IN THOUSANDS)
Balance, December 31, 2001.............. $ 9,639 $1,779 $ 16 $1,795
Recorded during the year................ 3,483 -- 390 390
Amortization expense.................... -- (425) (60) (485)
-------- ------ ----- ------
Balance, December 31, 2002.............. $ 13,122 $1,354 $ 346 $1,700
Recorded during year.................... -- -- 831 831
Impairment loss......................... (12,140) -- (219) (219)
Amortization expense.................... -- (372) (133) (505)
-------- ------ ----- ------
Balance, December 31, 2003.............. $ 982 $ 982 $ 825 $1,807
======== ====== ===== ======
</Table>
There is goodwill of $2.2 million, $4.2 million and $4.2 million at
December 31, 2003, 2002 and 2001, respectively, related to MICR included in
assets of companies held for disposal. Goodwill impairment loss of $2.0 million
related to MICR was recognized in 2003 and is included in goodwill and other
intangible assets impairment loss in the statement of operations.
As of December 31, 2003, the estimated future amortization expense for
amortizable intangible assets is as follows:
<Table>
<Caption>
OTHER INTANGIBLE ASSETS
-------------------------------------
CORE DEPOSIT CUSTOMER BASE
INTANGIBLES INTANGIBLES TOTAL
------------ ------------- ------
(DOLLARS IN THOUSANDS)
Estimated annual amortization expense:
2004............................................. $241 $276 $ 517
2005............................................. 170 220 390
2006............................................. 170 165 335
2007............................................. 170 110 280
2008............................................. 170 54 224
Thereafter....................................... 61 -- 61
---- ---- ------
$982 $825 $1,807
==== ==== ======
</Table>
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The gross carrying amount of intangible assets and accumulated amortization
are as follows:
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------
2003 2002
--------------------------------- -------------------------------
GROSS GROSS NET
CARRY ACCUMULATED NET CARRY CARRY ACCUMULATED CARRY
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------ ------------ --------- ------ ------------ -------
(DOLLARS IN THOUSANDS)
Amortizing Intangible Assets:
Core deposit intangibles..... $3,959 $2,977 $ 982 $3,959 $2,605 $ 1,354
Goodwill..................... -- -- -- -- -- --
Other identifiable
intangibles................ 1,221 396 825 390 51 339
Mortgage servicing rights.... 19 19 -- 19 12 7
------ ------ ------ ------ ------ -------
Total amortizing intangible
assets..................... $5,199 $3,392 1,807 $4,368 $2,668 1,700
Non-Amortizing Goodwill.... 982 13,122
------ -------
Total intangible assets,
net........................ $2,789 $14,822
====== =======
<Caption>
DECEMBER 31,
--------------------------------
2001
--------------------------------
GROSS NET
CARRY ACCUMULATED CARRY
AMOUNT AMORTIZATION AMOUNT
------- ------------ -------
(DOLLARS IN THOUSANDS)
Amortizing Intangible Assets:
Core deposit intangibles..... $ 3,959 $2,180 $ 1,779
Goodwill..................... 12,645 3,006 9,639
Other identifiable
intangibles................ -- -- --
Mortgage servicing rights.... 19 3 16
------- ------ -------
Total amortizing intangible
assets..................... $16,623 $5,189 11,434
Non-Amortizing Goodwill.... --
-------
Total intangible assets,
net........................ $11,434
=======
</Table>
CIB Marine's aggregate amortization expense was $0.5 million for both the
years ended December 31, 2003 and 2002, and $1.3 million for the year ended
December 31, 2001. As a result of the annual impairment testing of goodwill, CIB
Marine determined that certain goodwill and other intangible assets became
impaired in 2003. Impairment losses totaling $14.4 million, including the MICR
impairment of $2.0 million, were recorded in 2003. During 2003, goodwill of $3.5
million associated with the acquisition of Commercial Finance, was considered
impaired and written off based upon disposition plans and the estimated fair
value of that subsidiary. An additional $0.2 million of customer base intangible
assets associated with Commercial Finance was considered impaired and written
off. The entire amount of goodwill related to CIB -- Chicago totaling $8.7
million was considered impaired due to its substantial operating losses in 2003
and was written off in full.
In accordance with SFAS 142 and 147, CIB Marine discontinued the
amortization of goodwill in 2002 and continues to amortize core deposit
intangibles and other identifiable intangibles with definite lives. A
reconciliation of net income adjusted for the discontinuance of the amortization
of goodwill is as follows:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
----------- -------- ---------
(DOLLARS IN THOUSANDS)
Net income (loss):
Net income (loss) as reported.......................... $(137,648) $8,807 $25,729
Add back: discontinued goodwill amortization........... N/A N/A 621
--------- ------ -------
Adjusted net income.................................. $(137,648) $8,807 $26,350
========= ====== =======
Basic earnings per share:
Reported basic earnings per share...................... $ (7.53) $ 0.48 $ 1.45
Add back: discontinued goodwill amortization per
share................................................ -- -- 0.03
--------- ------ -------
Adjusted basic earnings per share.................... $ (7.53) $ 0.48 $ 1.48
========= ====== =======
Diluted earnings per share:
Reported diluted earnings per share.................... $ (7.53) $ 0.47 $ 1.42
Add back: discontinued goodwill amortization per
share................................................ -- -- 0.03
--------- ------ -------
Adjusted diluted earnings per share.................. $ (7.53) $ 0.47 $ 1.45
========= ====== =======
</Table>
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- COMPANIES HELD FOR DISPOSAL
Assets and liabilities of companies held for disposal, as shown on the
consolidated balance sheets, comprise CIB Construction (including Canron) and
MICR at December 31, 2003 and 2002, and MICR at December 31, 2001. CIB
Construction also met the accounting criteria for held for sale at December 31,
2003.
Loss from discontinued operations, as shown on the consolidated statement
of operations, is comprised of CIB Construction for the years ended 2003 and
2002.
Because both MICR and Canron were acquired in loan collection activities,
and because they are not considered permissible banking activities, CIB Marine's
regulators generally limit the holding period for such assets to not more than
five years.
CIB CONSTRUCTION
CIB Marine acquired 84% of the outstanding stock of Canron through loan
collection activities in 2002 and subsequently transferred its interest in
Canron to CIB Construction. See Note 3 -- Business Combinations. At the time
Canron was acquired in 2002 it was CIB Marine's intention to operate the
business with plans to sell the business within the five year holding period
permitted by regulators. At December 31, 2002, the accounting requirements for
classifications as held for sale and discontinued operations were not met.
During the third quarter of 2003, the Boards of Directors of CIB Marine and of
Canron authorized management to cease operating Canron and commence a wind down
of its affairs and a voluntary liquidation of its assets. The gross assets and
liabilities of CIB Construction and its subsidiaries are reported separately on
the consolidated balance sheets at their estimated liquidation values less costs
to sell. Intercompany loan and cash balances and interest income and expense
between consolidated CIB Construction and CIB Marine have been eliminated from
the totals shown on the consolidated financial statements. The net loss
associated with CIB Construction has been reclassified in 2002 to discontinued
operations to conform to the 2003 presentation.
During the fourth quarter of 2003, Canron sold a major division of the
company and sold or closed certain of its facilities and reduced its work force
from 874 to 8 FTE's during 2003. In conjunction with the liquidation, Canron
established an accrual for employee severance and retention costs. Under
Canadian law, employees are generally entitled to one week's salary for every
year of service with the company, up to a maximum of twenty-six years. During
2003, Canron provided $6.4 million for employee severance and retention costs
which is included in loss from discontinued operations. At December 31, 2003,
Canron had an accrued severance liability of $2.3 million and, in accordance
with Canadian law, had $0.5 million in a cash trust account for unpaid severance
to hourly union employees.
The net after-tax loss from discontinued operations for 2003 was $7.0
million, including $4.7 million of net impairment losses recorded to reflect
their estimated liquidation values less costs to sell.
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the composition of CIB Construction's
balance sheets. The December 31, 2003 balance sheet reflects their estimated
liquidation values less costs to sell.
<Table>
<Caption>
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit at CIB Marine............................. $ 2,407 $ 332
Accounts receivable....................................... 12,807 33,610
Inventories and contracts in progress..................... 1,438 7,629
Other current assets...................................... -- 4,195
------- -------
Current assets......................................... 16,652 45,766
Deferred tax asset........................................ -- 4,269
Property and equipment, net............................... 12,312 17,026
------- -------
Total assets......................................... $28,964 $67,061
======= =======
Liabilities and stockholder's equity:
Current portion of loans payable to CIB Marine and its
affiliates............................................. $11,625 $ 3,921
Income tax payable........................................ 1,074 3,104
Other liabilities......................................... 13,623 31,127
------- -------
Current liabilities.................................... 26,322 38,152
Loans payable to CIB Marine and its affiliates............ -- 22,272
Loans payable to nonaffiliated banks...................... 2,137 1,814
------- -------
Total liabilities.................................... 28,459 62,238
Stockholder's equity...................................... 505 4,823
------- -------
Total liabilities and stockholder's equity........... $28,964 $67,061
======= =======
</Table>
The amounts reported in the consolidated balance sheets for assets and
liabilities of companies held for disposal for CIB Construction reflect the
elimination of intercompany loan and deposit balances.
MICR, INC.
At December 31, 2003, 2002 and 2001, MICR had assets of $4.6 million, $6.5
million and $7.3 million, respectively, and liabilities of $0.6 million for 2003
and 2002, and $0.7 million for 2001. During 2003, an impairment loss of $2.0
million related to goodwill on MICR was recognized and included within
noninterest expense. MICR had income before income tax expense of $1.1 million,
$1.2 million and $.2 million for the years ended December 31, 2003, 2002 and
2001, respectively. In January 2005, CIB Marine retained the services of an
investment bank to assist in the marketing and sale of MICR.
See Note 27 -- Subsequent Events -- for additional information relative to
Canron and MICR.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF ASSETS/LIABILITIES OF COMPANIES HELD FOR DISPOSAL
<Table>
<Caption>
DECEMBER 31,
----------------------------
2003 2002 2001
-------- -------- ------
(DOLLARS IN THOUSANDS)
Assets of companies held for disposal:
MICR................................................. $ 4,555 $ 6,545 $7,311
CIB Construction..................................... 28,964 67,061 --
Intercompany eliminations............................ (4,463) (332) --
-------- -------- ------
Total Assets of companies held for disposal....... $ 29,056 $ 73,274 $7,311
======== ======== ======
Liabilities of companies held for disposal:
MICR................................................. $ 590 $ 558 $ 683
CIB Construction..................................... 28,459 62,238 --
Intercompany eliminations............................ (11,668) (26,193) --
-------- -------- ------
Total Liabilities of companies held for
disposal........................................ $ 17,381 $ 36,603 $ 683
======== ======== ======
</Table>
NOTE 10 -- OTHER ASSETS
The following table summarizes the composition of CIB Marine's other
assets:
<Table>
<Caption>
DECEMBER 31,
---------------------------------------
2003 2002 2001
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Prepaid expenses................................... $ 1,616 $ 1,293 $ 1,179
Accounts receivable................................ 1,531 551 1,247
Fair value of derivatives.......................... 3,945 8,022 4,870
Trust preferred securities underwriting fee, net of
amortization..................................... 1,500 1,555 1,150
Investment in trust preferred securities........... 2,310 -- --
Other investments.................................. 9,572 9,999 6,376
Deferred taxes..................................... 911 9,405 --
Income tax receivable.............................. 25,926 3,853 --
Other.............................................. 402 324 313
------- ------- -------
$47,713 $35,002 $15,135
======= ======= =======
</Table>
Other investments include investments in limited partnership interests in
various affordable housing partnerships. The carrying value of these investments
was $5.7 million at December 31, 2003, $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 Community Reinvestment Act
and to receive related income tax credits. The partnerships provide affordable
housing to low-income residents within CIB Marine's markets and other locations.
Other investments also include interests in three limited partnerships. The
carrying value of these investments was $2.2 million, $3.0 million and $2.6
million at December 31, 2003, 2002, and 2001 respectively. Certain of these
investments were deemed impaired at December 31, 2003 and an impairment loss of
$0.7 million was recorded in write down and losses on assets. Equity income
recorded on the limited partnerships was $1.0 million in 2003, $0.3 million in
2002, and $0.1 million in 2001. In the first quarter of 2004, these investments
were sold and a $0.2 million loss was realized.
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other investments further include 240,770 shares of the common stock of a
closely held information services company, which represents less than a 5%
interest in the company. The amount of this investment is carried at cost less
other than temporary impairment, which was estimated to be $0.5 million at
December 31, 2003 and $1.7 million at December 31, 2002 and 2001. During 2003,
the asset was deemed impaired, and an impairment loss of $1.2 million was
recorded in "write down and losses on assets". There were no impairment losses
in 2002 or 2001.
Other investments also includes interest in two companies operating as
small business investment companies under the Small Business Investment Act of
1958, as amended. CIB Marine committed to a $1.1 million investment in these
companies and as of December 31, 2003 has invested $0.9 million. The carrying
value of these investments was cost less other than temporary impairment which
was estimated to be $0.8 million, $0.6 million and $0.5 million at December 31,
2003, 2002 and 2001, respectively. An impairment loss of $0.1 million was
recorded in 2002. There were no impairment losses in 2003 or 2001.
Included in other investments were 5,167 shares at December 31, 2003 and
12,500 shares at
December 31, 2002 and 2001 of common stock in a non-publicly traded bank holding
company. During 2003, CIB Marine sold 7,333 shares for an amount equal to its
book value. The investment represents less than a 5% interest in the company,
and the amount of this investment is carried at cost less other than temporary
impairment, which was estimated to be $0.1 million at December 31, 2003 and $0.2
million at December 31, 2002 and 2001. In the third quarter of 2004, the 5,167
remaining shares were sold for a gain of $13 thousand.
NOTE 11 -- DEPOSITS
The aggregate amount of time deposits of $100,000 or more at December 31,
2003, 2002 and 2001, were $617.2 million, $724.2 million and $629.4 million,
respectively. Included in time deposits are brokered deposits of $183.0 million,
or 6.5%, of total deposits at December 31, 2003, $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.
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
<Table>
<Caption>
DECEMBER 31,
2003
------------
(DOLLARS IN
THOUSANDS)
2004........................................................ $1,167,361
2005........................................................ 272,219
2006........................................................ 132,136
2007........................................................ 126,768
2008........................................................ 56,984
Thereafter.................................................. 79,597
----------
Total....................................................... $1,835,065
==========
</Table>
NOTE 12 -- 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 $21.1 million, $42.7 million, and $35.6 million at December 31,
2003, 2002, and 2001, respectively.
CIB Marine had a $28 million revolving line of credit at December 31, 2003
with a nonaffiliated commercial bank collateralized by the common stock of all
of its subsidiaries. As of December 31, 2003, the outstanding balance on this
line of credit was $23.6 million. CIB Marine's factoring subsidiary has a
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$12.0 million revolving line of credit to support its operating needs, and as of
December 31, 2003 the outstanding balance on this line was $7.2 million.
In December 2003, CIB Marine, through one of its subsidiaries, acquired
title to a commercial office building that was being converted into residential
condominiums and was subject to a $26.7 million first mortgage held by a
nonaffiliated financial institution. CIB Marine held the second position on the
property. The asset was acquired through a Deed in Lieu of Foreclosure
Settlement Agreement ("DIL Agreement") from a borrower who was in default on its
obligation. During 2003, CIB Marine charged-off $41.7 million of loans secured
by the second position and recognized a $1.5 million impairment loss on the
foreclosed property. The asset acquired is included in foreclosed properties and
had a balance of $25.2 million at December 31, 2003. Pursuant to the DIL
Agreement, CIB Marine acquired the property subject to the first lien held by an
outside financial institution (Lender) and assumed the borrower's financial
obligation relating to that first lien. The assumed financial obligation is
reported as an outstanding non-recourse mortgage note payable and had a balance
of $26.7 million at December 31, 2003. Under the terms of the assumption, CIB
Marine's liability to the Lender for payment of the assumed obligation was
limited to monies received through the liquidation of the acquired collateral.
The amended mortgage note payable bears an interest rate of 10% and a maturity
date of October 1, 2004, unless there is a default under the DIL Agreement. The
mortgage note payable was secured by the acquired property and any related
leases and rents. In the second quarter of 2004, CIB Marine transferred its
interest in the acquired property to the Lender in return for the forgiveness of
the assumed mortgage note. The transfer of interest in the acquired property to
the Lender in return for the forgiveness of the assumed mortgage note resulted
in no gain or further loss.
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
-------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
2003
Federal funds purchased and
securities sold under
repurchase agreements......... $ 21,967 1.09% $163,228 1.22% $225,663
Federal Home Loan Bank notes.... -- -- 9,974 1.91 75,000
Revolving lines of credit....... 30,848 3.75 32,773 3.59 36,576
Commercial paper................ -- -- 2,985 1.88 5,843
Treasury, tax and loan note..... 13,099 0.73 3,330 0.69 14,296
Mortgage note payable........... 26,687 10.00 73 10.00 26,687
-------- ----- -------- -----
Total short-term borrowings... $ 92,601 4.49% $212,363 1.62%
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 36,686
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%
</Table>
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AT YEAR END FOR THE YEAR
-------------------- ------------------------------------
HIGHEST
WEIGHTED- DAILY WEIGHTED- BALANCES AT
AVERAGE AVERAGE AVERAGE MONTH
BALANCE RATE BALANCES RATE END
-------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
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 3.79%
</Table>
At December 31, 2003, CIB Marine was not in compliance with certain asset
quality, earnings and capital maintenance debt covenants of certain financial
standby letters of credit it participated in with other banks. CIB Marine
pledged securities to collateralize its obligation for these participated
standby letters of credit. The total value of securities pledged to other
parties related to those participated standby letters of credit was $25.0
million at December 31, 2003. CIB Marine recorded a loss of $4.5 million and
$1.0 million on these certain letters of credit in 2003 and 2002, respectively.
At December 31, 2003, CIB Marine was not in compliance with the capital
requirement debt covenant of its revolving lines of credit. In the fourth
quarter of 2004, the line of credit was paid in full and the line is no longer
available. The $12.0 million line of credit for the factoring subsidiary was
assumed by the purchaser of the factoring subsidiary upon acquisition in June
2004.
During the second half of 2003 and during 2004, some of the borrowing
sources customarily utilized by CIB Marine were restricted or unavailable due to
noncompliance with certain asset quality, earnings and capital maintenance debt
covenants and the inability to provide audited consolidated financial
statements. Federal funds borrowings by certain CIB Marine subsidiary banks were
discontinued or were contingent on subsidiary bank pledges of fixed income
investment securities, the Federal Home Loan Bank of Chicago restricted lending
terms, and derivative counterparties increased collateral requirements. Brokered
deposits became available only after a waiver was obtained from the FDIC for
some of the subsidiary banks and were restricted from use at CIB -- Chicago.
Brokered deposits were restricted by FDIC rules and regulations at the
subsidiary banks which were defined as less than well capitalized due to either
lower levels of capital or due to the regulatory issuance of Cease and Desist
Orders or formal written agreements. Where eligible, the FDIC granted
permissible waivers at the subsidiary banks, making the banks eligible to
accept, renew or roll over brokered deposits. See Note 15 -- Stockholders'
Equity. All of CIB Marine's subsidiary banks were moved from Primary to
Secondary credit status and restricted from daylight overdraft activity at their
respective Federal Reserve banks. Additionally, pursuant to a Written Agreement
between CIB Marine and the Federal Reserve Bank, CIB Marine must obtain Federal
Reserve Bank approval before incurring additional borrowings or debt. Pursuant
to regulatory agreements consented to by certain CIB Marine bank subsidiaries,
the subsidiaries must obtain regulatory approval before paying cash dividends.
These restrictions could potentially impact liquidity of the CIB Marine parent
company. In the fourth quarter of 2004, CIB Marine sold its bank subsidiary,
CIB -- Chicago, and used a portion of the proceeds to payoff its revolving line
of credit with a nonaffiliated bank. This line of credit is no longer available.
Further, it is expected that the proceeds from this sale will allow CIB Marine
to meet its short-term liquidity needs in the foreseeable future.
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- LONG-TERM BORROWINGS
Long-term borrowings consist of borrowings having an original maturity of
greater than one year.
FHLB
The following table presents information regarding amounts payable to the
Federal Home Loan Bank of Chicago. All of the FHLB borrowings shown in the
following table are fixed rate borrowings.
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- -------------- SCHEDULED CALLABLE QUARTERLY
BALANCE RATE BALANCE RATE BALANCE RATE MATURITY @ PAR AFTER
------- ---- ------- ---- ------- ---- --------- ------------------
(DOLLARS IN THOUSANDS)
$ -- --% $ -- --% $ 7,500 5.45% 01/16/03 N/A
-- -- -- -- 2,500 5.45 01/16/03 N/A
-- -- -- -- 7,500 5.51 02/08/03 N/A
-- -- -- -- 67 5.76 04/26/03 N/A
3,500 5.12 $ 3,500 5.12 3,500 5.12 05/01/04 N/A
5,000 5.12 5,000 5.12 5,000 5.12 05/01/04 N/A
3,250 4.95 3,250 4.95 3,250 4.95 01/16/08 01/16/01
2,500 4.95 2,500 4.95 2,500 4.95 01/16/08 01/16/01
2,000 4.95 2,000 4.95 2,000 4.95 01/16/08 01/16/01
2,000 5.09 2,000 5.09 2,000 5.09 02/20/08 02/20/01
23,997 7.07 23,810 7.07 23,635 7.07 06/30/08 N/A
------- ---- ------- ---- ------- ----
$42,247 6.20% $42,060 6.19% $59,452 5.98%
==== ==== ====
Hedged fair value
adjustment............... 4,029 5,081 2,535
------- ------- -------
Total.................... $46,276 $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 is
dependent upon the type of collateral pledged. At December 31, 2003, 2002 and
2001 CIB Marine had assets pledged with a collateral value of $59.9 million,
$241.2 million and $112.3 million, respectively. These assets consisted of
securities with a market value of $53.8 million, $83.3 million, and $116.4
million, and 1-4 family residential mortgages with balances outstanding of $17.7
million, $275.6 million, and $10.4 million at December 31, 2003, 2002 and 2001,
respectively.
On February 25, 2000, CIB Marine's bank subsidiary, CIB -- Chicago, 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 $1.0 million and $1.2 million as
of December 31, 2003 and 2002, respectively. Simultaneously with this advance,
CIB -- Chicago 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 -- Chicago pays a variable rate of interest at the 1-month
LIBOR rate and earns a fixed rate of interest at 7.08% in order to hedge the
interest rate risk on the related debt. As of December 31, 2003 and 2002, the
fair market value of the swap was approximately $4.0 million and $5.1 million,
respectively. The net cash received from the hedging relationship for the years
ended December 31, 2003 and 2002, was approximately $1.5 million and $1.3
million, respectively. On November 30, 2004, CIB Marine sold CIB -- Chicago and
this borrowing and the interest rate swap was assumed by the purchaser.
In 2004, the Federal Reserve Bank began requiring three of CIB Marine's
bank subsidiaries to pledge securities in order to have access to the Fed
Discount window as a result of the deterioration in the financial condition of
CIB Marine and these subsidiary banks.
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNIOR SUBORDINATED DEBENTURES AND GUARANTEED TRUST PREFERRED SECURITIES
CIB Marine had the following junior subordinated debentures/guaranteed
trust preferred securities outstanding at December 31, 2003, 2002 and 2001,
respectively. (Dollars in thousands):
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------------------- ------- -------
JUNIOR SUBORDINATED TRUST PREFERRED INTEREST MATURITY CALLABLE
DEBENTURES DUE TO TRUST SECURITIES ISSUE DATE RATE DATE AFTER
----------------------- ----------------- ---------- -------- -------- --------
CIB Marine Capital Trust
I...................... $10,310 $10,000 $10,000 03/23/00 10.88% 03/08/30 03/08/10
CIB Statutory Trust
III.................... 15,464 15,000 15,000 09/07/00 10.60 09/07/30 09/07/10
CIB Statutory Trust IV... 15,464 15,000 15,000 02/22/01 10.20 02/22/31 02/22/11
CIB Statutory Trust V.... 20,619 20,000 -- 09/27/02 variable(1) 09/27/32 09/30/07
------- ------- -------
Total Junior
Subordinated
Debentures/Guaranteed
Trust Preferred
Securities........... $61,857 $60,000 $40,000
======= ======= =======
</Table>
- ---------------
(1) Three-month LIBOR + 3.40% adjusted quarterly.
CIB Marine has formed four statutory business trusts ("Trusts") for the
purpose of issuing trust preferred securities and investing the proceeds thereof
in junior subordinated debentures of CIB Marine. The trust preferred securities
are fully and unconditionally guaranteed by CIB Marine. The Trusts used the
proceeds from issuing trust preferred securities and the issuance of its common
securities to CIB Marine to purchase the junior subordinated debentures.
Interest on the debentures and distributions on the trust preferred securities
are payable either quarterly or semi-annually in arrears. CIB Marine has the
right, at any time, as long as there are no continuing events of default, to
defer payments of interest on the debentures for consecutive periods not
exceeding five years; but not beyond the stated maturity of the debentures. As a
result of the agreement entered into with its regulator, CIB Marine has elected
to defer all such interest payments subsequent to December 31, 2003. Throughout
the deferral period, interest on the debentures continues to accrue. In
addition, interest also accrues on all interest that was not paid when due,
compounded quarterly or semi-annually. During the deferral period, CIB Marine
may not pay any dividends or distributions on, or redeem, purchase, acquire or
make a liquidation payment on its stock, or make any payment of principal,
interest or premium, or redeem any similar debt securities of CIB Marine,
subject to certain limitations. The trust preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
maturity or their earlier redemption. The trust preferred securities qualify as
regulatory capital, subject to regulatory limitations. On March 1, 2005, the
Federal Reserve Board adopted a final rule allowing the continued limited
inclusion of trust preferred securities in the Tier 1 equity capital. The ruling
restricted the total Tier 1 capital elements, including trust preferred
securities, to 25% of total Tier 1 capital elements, net of goodwill less any
associated deferred tax liability. At December 31, 2003, CIB Marine included
approximately $35 million of trust preferred securities in total Tier 1 capital.
In connection with the sale of CIB -- Chicago, CIB Marine pledged the stock of
Central Illinois Bank to the purchaser to secure certain indemnification
obligations with respect to CIB Marine's trust preferred securities.
Prior to December 31, 2003, the Trusts were consolidated in CIB Marine's
financial statements, with the trust preferred securities issued by the Trusts
reflected on CIB Marine's balance sheet. Upon the implementation of FIN No. 46,
as revised in December 2003, the Trusts are no longer consolidated in CIB
Marine's financial statements. As a consequence, CIB Marine reports its junior
subordinated debentures issued to the Trusts as liabilities and reports its
investment in the Trusts as investments in unconsolidated subsidiaries. The
effect of the implementation of FIN No. 46 on CIB Marine's consolidated
statement of financial condition was to increase investment in unconsolidated
subsidiaries, net of amounts due to unconsolidated subsidiaries, by $1.9
million, decrease trust preferred securities by $60.0 million and increase
junior subordinated debentures by $61.9 million.
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OTHER LIABILITIES
<Table>
<Caption>
DECEMBER 31,
--------------------------
2003 2002 2001
------- ------- ------
(DOLLARS IN THOUSANDS)
Accounts payable......................................... $ 4,328 $ 3,357 $1,321
Accrual for unfunded commitments and standby letters of
credit................................................. 15,747 1,000 --
Accrued real estate taxes................................ 2,680 841 625
Accrued compensation and employee benefits............... 2,483 1,665 1,730
Accrued professional fees................................ 1,449 365 268
Accrued other expenses................................... 850 409 339
Fair value of derivatives................................ 294 4,264 2,920
Deferred taxes........................................... -- -- 915
Accrued income taxes..................................... -- -- 79
Other liabilities........................................ 1,151 1,035 399
------- ------- ------
$28,982 $12,936 $8,596
======= ======= ======
</Table>
Changes in the accrual for unfunded standby letters of credit are as
follows:
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2003 2002 2001
------- ------ ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 1,000 $ -- $--
Provision for losses on unfunded commitments and standby
letters of credit......................................... 14,747 1,000 --
------- ------ --
Balance at end of year...................................... $15,747 $1,000 $--
======= ====== ==
</Table>
NOTE 15 -- STOCKHOLDERS' EQUITY
RECEIVABLES FROM SALE OF STOCK (RESTATED)
Loans not sufficiently collateralized by assets other than CIB Marine stock
and made by CIB Marine's subsidiary banks to borrowers who used the proceeds to
acquire CIB Marine stock are accounted for as a reduction of Stockholders'
Equity and recorded as Receivables from sale of stock, unless the loan had been
repaid prior to the issuance of the financial statements. The amount of such
repaid loans was $1.0 million in 2001, $0.5 million in 2002, $1.5 million in
2003, and $0.6 million in 2004 prior to the issuance of these consolidated
financial statements. The balances of loans classified as "Receivables from sale
of stock" totaled $5.2 million, $7.9 million, $7.4 million and $5.1 million as
of December 31, 2003, 2002, 2001 and 2000, respectively. The 2002 and earlier
amounts were restatement adjustments of balances as previously reported.
Interest earned on these loans was $0.3 million in 2003 and $0.5 million in 2002
and 2001 and is included in "Interest and Dividend Income-Loans".
TREASURY STOCK
In 2003, certain subsidiary banks of the Company acquired 86,611 shares of
CIB Marine stock through collection efforts when the borrowers defaulted on
loans. These shares are included in Treasury Stock at the lower of the loan
balance or the estimated fair market value of CIB Marine's stock at time of
acquisition. Any loan balance in excess of the estimate fair market value of the
stock and other collateral received was charged to the allowance for loan
losses. Treasury Stock was $2.2 million in 2003. There was no Treasury Stock in
2002 or 2001.
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REGULATORY CAPITAL
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 three ratios that are calculated in accordance with
specific instructions included in the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the bank subsidiaries
must meet specific capital guidelines that involve quantitative measures of the
bank's assets and certain off-balance sheet items as calculated under regulatory
accounting practices. The banks' capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. To be categorized as well capitalized, the bank
subsidiaries must maintain total risk adjusted capital, Tier 1 capital, and Tier
1 leverage ratios of 10.0%, 6.0% and 5.0%, respectively.
There are five capital categories defined in the regulations: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Classification of a subsidiary
bank in any of the undercapitalized categories can result in certain mandatory
and possible additional discretionary actions by regulators that could have a
direct material effect on the consolidated financial statements.
At December 31, 2003, pursuant to FDIC guidelines in 12 C.F.R. Part 325
CIB -- Indiana, Marine FSB and Citrus Bank were categorized as well capitalized.
Central Illinois Bank and Marine -- Wisconsin were categorized as adequately
capitalized, and CIB -- Chicago was categorized as significantly
undercapitalized under the regulatory framework for prompt corrective action. In
the second quarter of 2004, CIB -- Chicago submitted to the FDIC a capital
restoration plan which was accepted by the FDIC on August 9, 2004, and
subsequently amended by CIB -- Chicago to provide for its sale to First Banks,
Inc. to restore its capital.
On January 30, 2003, CIB Marine's bank subsidiary, CIB -- Chicago, entered
into a Memorandum of Understanding (the "Memorandum") with the Division of Banks
and Real Estate of the Illinois Department of Financial and Professional
Regulation (the "DBRE") and the FDIC. 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 DBRE's regular examination of CIB -- Chicago, which
commenced on August 31, 2002.
Pursuant to the Memorandum, CIB -- Chicago agreed to take certain actions
to correct the deficiencies noted within the examination report. In addition,
during the period in which the Memorandum was in effect, CIB -- Chicago agreed
to maintain a Tier 1 leverage 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 was in effect, the bank was
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
was received from the regulators, CIB -- Chicago 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 was superseded by a
Cease and Desist Order.
In the second quarter of 2004, CIB Marine entered into a Written Agreement
with the Federal Reserve Bank and CIB -- Chicago, Central Illinois Bank, Marine
Bank and CIB -- Indiana, each consented to the issuance of Cease and Desist
Orders ("Orders") with banking regulatory authorities. See Note 27 -- Subsequent
Events for further information. Additionally, in the third quarter of 2004,
Citrus Bank entered into a Written Agreement with the Office of the Comptroller
of the Currency. Among other items, the Orders and Agreements restrict the
payment of cash dividends without prior written consent from the regulators and
require the banks to maintain a Tier 1 leverage Capital level equal to or
exceeding 8% of the bank's total assets. The Agreement with the OCC also
requires Citrus Bank to maintain a total capital ratio of not less than 14%.
These restrictions are in force until such Orders and Agreements are terminated.
In the event the capital ratio at any calendar quarter end with respect to each
such bank is less than required under the Orders
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Agreement, the bank is required within 90 days to increase its capital ratio
as of the end of that preceding quarterly period to the minimum stated in the
Orders and Agreement. Failure to comply with the Orders or Agreements could have
a material adverse effect on CIB Marine and its operations. As of December 31,
2003, CIB -- Chicago had capital below the 8% minimum, and during 2004, Central
Illinois Bank fell below the 8% minimum. In the fourth quarter of 2004,
CIB -- Chicago was sold and a portion of the proceeds were used by CIB Marine to
add capital into Central Illinois Bank, allowing it to meet the regulatory
requirement. As of December 31, 2003, CIB Marine's total capital to
risk-weighted assets ratio was below the 8% minimum required to be adequately
capitalized.
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
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2003
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $196,814 7.19% $218,964 8.00% $273,705
Central Illinois Bank.................. 68,880 9.50 58,033 8.00 72,542 10.00
CIB -- Chicago......................... 71,551 5.31 107,822 8.00 134,777 10.00
Marine Bank -- Wisconsin............... 28,039 8.90 25,212 8.00 31,515 10.00
CIB -- Indiana......................... 15,718 10.80 11,647 8.00 14,559 10.00
Marine FSB............................. 9,896 12.86 6,157 8.00 7,697 10.00
Citrus Bank*........................... 20,585 14.91 11,047 8.00 13,808 10.00
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $137,558 5.03% $109,482 4.00% $164,223
Central Illinois Bank.................. 59,565 8.21 29,017 4.00 43,525 6.00
CIB -- Chicago......................... 54,033 4.01 53,911 4.00 80,866 6.00
Marine Bank -- Wisconsin............... 24,022 7.62 12,606 4.00 18,909 6.00
CIB -- Indiana......................... 13,854 9.52 5,823 4.00 8,735 6.00
Marine FSB............................. 8,931 11.60 3,079 4.00 4,618 6.00
Citrus Bank............................ 18,839 13.64 5,523 4.00 8,285 6.00
TIER 1 LEVERAGE TO AVERAGE ASSETS
CIB MARINE BANCSHARES, INC. ........... $137,558 4.23% $130,105 4.00% $162,631
Central Illinois Bank.................. 59,565 6.48 36,741 4.00 45,926 5.00
CIB -- Chicago......................... 54,033 3.56 60,713 4.00 75,892 5.00
Marine Bank -- Wisconsin............... 24,022 6.31 15,233 4.00 19,041 5.00
CIB -- Indiana......................... 13,854 8.45 6,560 4.00 8,200 5.00
Marine FSB............................. 8,931 9.07 3,938 4.00 4,923 5.00
Citrus Bank............................ 18,839 9.25 8,148 4.00 10,185 5.00
DECEMBER 31, 2002 (AS RESTATED)
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $330,752 10.01% $264,441 8.00% $330,551
Central Illinois Bank.................. 100,423 10.45 76,881 8.00 96,102 10.00
CIB -- Chicago......................... 159,813 9.90 129,131 8.00 161,414 10.00
Marine Bank -- Wisconsin............... 38,135 10.29 29,657 8.00 37,071 10.00
CIB -- Indiana......................... 17,846 10.99 12,986 8.00 16,232 10.00
Marine FSB............................. 10,666 12.52 6,814 8.00 8,517 10.00
Citrus Bank............................ 21,395 16.94 10,105 8.00 12,631 10.00
</Table>
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $289,126 8.75% $132,220 4.00% $198,331
Central Illinois Bank.................. 88,374 9.20 38,441 4.00 57,661 6.00
CIB -- Chicago......................... 139,461 8.64 64,566 4.00 96,849 6.00
Marine Bank -- Wisconsin............... 33,454 9.02 14,829 4.00 22,243 6.00
CIB -- Indiana......................... 15,806 9.74 6,493 4.00 9,739 6.00
Marine FSB............................. 9,598 11.27 3,407 4.00 5,110 6.00
Citrus Bank............................ 19,808 15.68 5,052 4.00 7,579 6.00
TIER 1 LEVERAGE TO AVERAGE ASSETS
CIB MARINE BANCSHARES, INC. ........... $289,127 8.30% $139,420 4.00% $174,275
Central Illinois Bank.................. 88,374 8.23 42,928 4.00 53,660 5.00
CIB -- Chicago......................... 139,461 8.60 64,860 4.00 81,075 5.00
Marine Bank -- Wisconsin............... 33,454 8.19 16,329 4.00 20,412 5.00
CIB -- Indiana......................... 15,806 9.77 6,471 4.00 8,089 5.00
Marine FSB............................. 9,598 10.45 3,673 4.00 4,591 5.00
Citrus Bank............................ 19,808 11.07 7,157 4.00 8,946 5.00
DECEMBER 31, 2001 (AS RESTATED)
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $288,893 10.37% $222,806 8.00% $278,508
Central Illinois Bank.................. 82,401 10.18 64,786 8.00 80,982 10.00
CIB -- Chicago......................... 144,023 10.16 113,398 8.00 141,748 10.00
Marine Bank -- Wisconsin............... 34,998 11.24 24,913 8.00 31,141 10.00
CIB -- Indiana......................... 16,549 13.11 10,102 8.00 12,627 10.00
Marine FSB............................. 10,188 30.85 2,642 8.00 3,303 10.00
Citrus Bank............................ 10,473 14.32 5,853 8.00 7,316 10.00
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
CIB MARINE BANCSHARES, INC. ........... $254,044 9.12% $111,403 4.00% $167,105
Central Illinois Bank.................. 72,275 8.92 32,393 4.00 48,589 6.00
CIB -- Chicago......................... 126,304 8.91 56,699 4.00 85,049 6.00
Marine Bank -- Wisconsin............... 31,177 10.01 12,456 4.00 18,685 6.00
CIB -- Indiana......................... 14,969 11.85 5,051 4.00 7,576 6.00
Marine FSB............................. 9,774 29.59 1,321 4.00 1,982 6.00
Citrus Bank............................ 9,642 13.18 2,926 4.00 4,389 6.00
TIER 1 LEVERAGE TO AVERAGE ASSETS
CIB MARINE BANCSHARES, INC. ........... $254,044 9.01% $112,742 4.00% $140,928
Central Illinois Bank.................. 72,275 8.50 34,011 4.00 42,514 5.00
CIB -- Chicago......................... 126,304 9.15 55,228 4.00 69,035 5.00
Marine Bank -- Wisconsin............... 31,177 8.97 13,910 4.00 17,387 5.00
CIB -- Indiana......................... 14,969 11.51 5,202 4.00 6,503 5.00
Marine FSB............................. 9,774 25.80 1,515 4.00 1,894 5.00
Citrus Bank............................ 9,642 10.61 3,634 4.00 4,543 5.00
</Table>
- ---------------
* Subsequent to December 31, 2003, the OCC required Citrus Bank to maintain
total capital of at least 14%.
The payment of dividends by banking subsidiaries is subject to regulatory
restrictions by various federal and/or state regulatory authorities. At December
31, 2003, there were no retained earnings of the banking subsidiaries available
for the payment of dividends to CIB Marine. Pursuant to the Orders and
Agreements, and throughout such time as the Orders and Agreements remain in
effect, these subsidiary banks may not pay a dividend to CIB Marine and CIB
Marine cannot declare or pay dividends without first obtaining the consent of
the regulators. In addition, dividends paid by bank subsidiaries are further
limited if the effect would result
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in a bank subsidiary's capital being reduced below applicable minimum capital
amounts. CIB Marine, subject to its agreement with the Federal Reserve Board, is
also not permitted to pay a dividend without advance approval from the Federal
Reserve Board.
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 domestic deposits, depending on the capital category and
supervisory category to which it is assigned. The FDIC may increase or decrease
the assessment rate schedule on a semi-annual basis. The FDIC is also authorized
to terminate an institution's deposit insurance upon a finding by the FDIC that
the institution's financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices or has violated any
applicable rule, regulation, order or condition enacted or imposed by the
institution's regulatory agency. The termination of deposit insurance for CIB
Marine's banks would have a material adverse effect on CIB Marine. In addition
to its insurance assessment, each insured institution is subject to quarterly
debt service assessments in connection with bonds issued by the government
corporation that financed the federal savings and loan bailout. As of December
31, 2003, the banks' assessment rate was 0%, and the quarterly debt service
assessment rate was 0.0152%. During the first quarter of 2004, the assessment
rates for Central Illinois Bank, Marine -- Wisconsin and CIB -- Indiana were
increased to 0.10% and CIB -- Chicago was increased to 0.27%. Additionally, the
quarterly debt service assessment rate for all banks was increased to 0.0154%.
NOTE 16 -- OTHER EXPENSE
Other expense consisted of the following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2003 2002 2001
------- ------- ------
(DOLLARS IN THOUSANDS)
Payroll and other processing charges..................... $ 190 $ 126 $ 104
Correspondent bank charges............................... 580 576 385
Advertising/Marketing.................................... 1,176 1,199 1,035
Amortization of goodwill and other intangibles........... 505 485 1,325
Communications........................................... 2,168 1,925 1,508
Supplies and printing.................................... 718 707 617
Shipping and handling.................................... 1,289 1,105 989
Collection expense....................................... 2,757 1,135 102
FDIC and state assessment................................ 873 752 654
Recording and filing fees................................ 265 247 148
Foreclosed property...................................... 1,205 98 88
Other expense............................................ 3,825 3,428 2,528
------- ------- ------
TOTAL OTHER EXPENSE.................................... $15,551 $11,783 $9,483
======= ======= ======
</Table>
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- EARNINGS PER SHARE
The following provides a reconciliation of basic and diluted earnings per
share:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Income (loss) from continuing operations...... $ (130,693) $ 9,609 $ 25,729
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................... 18,286,550 18,167,379 17,751,752
Effect of dilutive stock options
outstanding............................ -- 380,136 331,261
----------- ----------- -----------
Diluted..................................... 18,286,550 18,547,515 18,083,013
=========== =========== ===========
PER SHARE INCOME (LOSS):
Basic......................................... $ (7.15) $ 0.53 $ 1.45
Effect of dilutive stock options
outstanding............................ -- (0.01) (0.03)
----------- ----------- -----------
Diluted....................................... $ (7.15) $ 0.52 $ 1.42
=========== =========== ===========
</Table>
NOTE 18 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The following table summarizes the contractual or notional amount of
off-balance sheet financial instruments with credit risk.
<Table>
<Caption>
DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Commitments to extend credit......................... $469,664 $623,921 $570,882
Commitments to extend mortgage loans to be held for
sale............................................... 67,697 275,656 102,746
Standby letters of credit............................ 98,733 108,584 95,078
Interest rate swaps.................................. 76,100 134,250 55,000
Forward loan sale agreements......................... 82,892 507,771 137,041
</Table>
CIB Marine is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. CIB
Marine has entered into commitments to extend credit, which involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheets.
Standby letters of credit are conditional commitments that CIB Marine
issues to guarantee the performance of a customer to a third-party. Fees
received to issue standby letters of credit are deferred and recognized as
noninterest income over the term of the commitment. The guarantees frequently
support public and private borrowing arrangements, including commercial paper
issuances, bond findings, and other similar transactions. CIB Marine issues
commercial letters of credit on behalf of customers to ensure payments or
collection in connection with trade transactions. In the event of a customer's
nonperformance, CIB Marine's credit loss exposure is the same as in any
extension of credit, up to the letter's contractual amount. Management assesses
the borrower's financial condition to determine the necessary collateral, which
may include marketable securities, real estate, accounts receivable and
inventory. Since the conditions requiring CIB Marine to fund letters of credit
may not occur, CIB Marine expects its future cash requirements to be less than
the total outstanding commitments. The maximum potential future payments
guaranteed by CIB Marine under standby letter of credit arrangements at December
31, 2003, is approximately $98.7 million with a weighted average term of
approximately 15 months. CIB Marine has accrued liabilities of $15.7 million
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $1.0 million for probable losses related to standby letters of credit at
December 31, 2003 and 2002, respectively. The standby letters of credit for
which reserves were established were participated to nonaffiliated banks. CIB
Marine has not defaulted on any payment obligations with the other banks.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. CIB Marine evaluates each
customer's creditworthiness and determines the amount of the collateral
necessary based on management's credit evaluation of the counterparty.
Collateral held varies, but may include marketable securities, accounts
receivable, inventories, property and equipment, and real estate.
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 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 counterparty's obligations under
the terms of the swap agreement. CIB Marine deals exclusively with
counterparties that have high credit ratings, and based on management's
assessments, all counterparties were expected to meet any outstanding
obligations as of December 31, 2003.
CIB Marine had $76.1 million notional value of interest rate swaps
outstanding as of December 31, 2003. Most of these interest rate swaps are used
to hedge the fair market value of various deposits and borrowings, including
$25.0 million notional to hedge borrowings, $45.0 million notional to hedge
fixed rate non-callable certificates of deposit, and $6.1 million notional to
hedge fixed rate commercial real estate loans at December 31,2003. The interest
rate swaps hedging liabilities are floating pay-fixed receive instruments and,
as such, effectively convert the fixed rate payments on the hedged liabilities
to a floating rate and hedge their fair value from changes in interest rates.
The interest rate swaps hedging fixed rate commercial real estate loans are
fixed pay-floating receive instruments and, as such, effectively convert the
fixed payments received on the hedged loans to a floating rate and hedge their
fair value from changes in interest rates. These swaps are accounted for as Fair
Value Hedges under SFAS 133 at December 31, 2003. Market value changes during
the period of the interest rate swaps and the hedged liabilities or assets are
reflected in other noninterest income in the statement of operations. For
additional information related to interest rate swaps, see Note 13 -- Long-term
Borrowings.
CIB Marine had $134.3 million notional value of interest rate swaps
outstanding as of December 31, 2002. Most of these interest rate swaps were used
to hedge the fair market value of various deposits and borrowings, including
$25.0 million notional to hedge borrowings, $65.0 million notional to hedge
fixed rate bullet certificates of deposit, and $40.0 million notional to hedge
fixed rate callable certificates of deposit. The interest rate swaps were
floating pay-fixed receive instruments and, as such, effectively converted the
fixed rate payments on the financial instruments to a floating rate and hedged
their fair value from changes in interest rates. CIB Marine also engaged in
interest rate swaps to hedge fixed rate lending activity. At December 31, 2002
this amounted to a $4.3 million notional pay fixed/receive floating amortizing
interest rate swap. This particular derivative was not designated as a hedge for
accounting purposes. Each of the other swaps were accounted for as Fair Value
Hedges under SFAS 133. During the period, market value changes of the interest
rate swaps accounted for as hedges and the hedged liabilities were reflected in
other noninterest income in the statement of operations.
CIB Marine had interest rate swaps outstanding as of December 31, 2001 with
a $55.0 million notional value, which were being utilized to hedge the fair
value of financial instruments in the consolidated balance sheet. The financial
instruments hedged included $30.0 million in negotiable certificates of deposit
and a
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$25.0 million FHLB advance. The interest rate swaps were floating pay-fixed
receive instruments and, as such, effectively converted the fixed rate payments
on the financial instruments to a floating rate and hedged their fair value from
changes in interest rates. 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 were reflected in other noninterest income in
the statement of operations.
At December 31, 2003, 2002 and 2001 respectively, CIB Marine had $82.9
million, $507.8 million and $137.0 million in forward sale agreements
outstanding with a fair market value of approximately ($0.2) million, ($4.2)
million and $3.0 million; and $67.7 million, $275.7 million and $102.7 million
outstanding in commitments to extend mortgage loans with interest rate locks,
with a fair market value of approximately $0.2 million, $2.3 million and $0.8
million. Market value changes during the period are reflected in noninterest
income in the statement of operations.
The fair value of derivatives that fail to qualify as a hedge and the
ineffective position of derivatives that do qualify as a hedge is charged to
other expense or credited to other income in the period of the change in fair
value. Such amounts realized as income (loss) in 2003, 2002 and 2001 were $0.05
million, $(0.07) million and $0.06 million, respectively.
NOTE 19 -- 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 the following:
In August 2003, Keith Burchett, a shareholder of CIB Marine and a borrower
of CIB -- Chicago, commenced an action in the Circuit Court of Cook County,
Illinois, against CIB Marine, Central Illinois Bank, CIB -- Chicago and two of
their now former directors and/or officers for damages arising out of alleged
fraudulent misrepresentations relative to the financial condition of Canron and
its principal shareholder by defendants to induce the plaintiff to borrow money
from CIB -- Chicago and make a $0.5 million investment in Canron. Plaintiff
asserts claims for fraud and shareholder remedies. The shareholder remedies
action alleges the defendants' violations of lending regulations caused a
decline in the plaintiff's investment in CIB Marine. Plaintiff seeks an
unspecified amount of compensatory and punitive damages, requests an order
requiring CIB Marine and the banks to repurchase his CIB Marine shares of stock
at fair value, and other forms of relief. While the outcome of these claims
cannot be determined at this time, CIB Marine intends to vigorously defend this
action. Central Illinois Bank has been removed as a defendant in subsequent
amended complaints filed by the plaintiff. On November 30, 2004, CIB Marine sold
CIB -- Chicago.
In June 2004, Central Illinois Bank ("CIB") commenced an action in the
Circuit Court of the Sixth Judicial Circuit, Champaign County, Illinois, against
John C. Hadley and Mary Lydia Hadley, CIB Marine's largest individual
shareholders, for damages arising out of the Hadleys' default in December 2003
of certain loan obligations (the "State Litigation") and subsequently obtained a
confession of judgment. The loans approximate $9.0 million and are secured by
CIB Marine stock and the accounts receivable, inventory, equipment and other
personal property of the borrowers and their restaurant supply and coin
businesses. In December 2004, the Hadleys consented to the entry of an order for
relief under Chapter 11 of the Bankruptcy Code pending in the United States
Bankruptcy Court for the Central District of Illinois (the "Bankruptcy Case").
In August 2004, and prior to the bankruptcy consent orders, the Hadleys filed a
motion to vacate the confession of judgment in the State Litigation and sought
leave to file a proposed counterclaim to recover $35.0 million in actual damages
and punitive damages for the alleged loss or substitution by CIB of certain rare
coins and collectibles which the Hadleys allege were pledged to CIB as
collateral. The Hadleys' motion remains pending in the State Litigation, which
has been stayed by the pendency of the Bankruptcy Case. CIB intends to
vigorously defend the counterclaim if it is pursued. The ultimate outcome of the
counterclaim cannot be determined at this time. CIB has filed a motion to modify
the automatic stay to permit CIB to proceed with the State Litigation and to
foreclose on its collateral if the Hadleys do not provide adequate protection.
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2004, John C. Ruedi, a former employee of CIB Marine, filed an
action against CIB Marine, "Central Illinois Bancorp, Inc." and KPMG LLP in the
Circuit Court of the Sixth Judicial District, Champaign County, Illinois for
rescission or damages, including punitive damages, in connection with
plaintiff's October 1, 2002 exercise of options issued by CIB Marine to acquire
36,688 shares of CIB Marine common stock at various exercise prices. Plaintiff
claims that but for CIB Marine's and Central Illinois Bancorp, Inc.'s alleged
fraudulent concealment of material facts regarding the financial condition of
CIB Marine and KPMG's alleged professional negligence he would not have
exercised his options. Plaintiff also seeks to recover from Central Illinois
Bancorp, Inc. and CIB Marine in excess of $40,000 allegedly due Plaintiff
pursuant to a purported memorandum providing for the payment of an incentive to
Plaintiff. The claim against KPMG LLP was subsequently dismissed and in March
2005 Plaintiff amended his complaint to add the former President and CEO of CIB
Marine, KPMG LLP and the KPMG LLP partner in charge of CIB Marine's audit as
defendants based upon claims of alleged fraudulent concealment (as to the former
President and CEO of CIB Marine) and professional negligence (as to KPMG and the
partner in charge of CIB Marine's audit). CIB Marine filed a motion to dismiss
several of Plaintiff's claims and answered the others denying liability. That
motion to dismiss was denied and CIB Marine answered the remaining counts
against it, denying liability. Plaintiff filed a motion for summary judgment
seeking recovery of $40,000 from CIB Marine on his incentive payment claim. This
motion has been denied. Plaintiff has voluntarily dismissed his claims against
both KPMG LLP and the partner in charge of CIB Marine's audit. All discovery has
been stayed in this action by an order of the federal court in the Dennis Lewis
case described later in this section. While the ultimate outcome of these claims
cannot be determined at this time, CIB Marine intends to vigorously defend the
action.
In November 2004, CIB -- Chicago and/or Marine -- Wisconsin commenced three
lawsuits in Illinois against Miss Mimi Corporation, Gerard Jacobs and T.
Benjamin Jennings for damages arising out of the defendants' default of certain
loan obligations. The bank claims damages of approximately $15.3 million. In
December 2004, the defendants filed a counterclaim against CIB -- Chicago, CIB
Marine and certain of its current and former directors and officers for damages
arising out of alleged fraudulent misrepresentations relative to defendants'
purchase of CIB Marine stock from one of CIB Marine's largest borrowers at the
time, and breach of fiduciary duties. Defendants seek compensatory damages in
excess of $0.5 million and punitive damages of $2.0 million on the fraud claim,
and compensatory damages of $2.5 million and punitive damages of $5.0 million on
the breach of fiduciary duties claim. CIB Marine intends to vigorously defend
this action. The ultimate outcome of this action cannot be determined at this
time. On November 30, 2004, CIB Marine sold CIB -- Chicago.
On June 3, 2005, a first consolidated complaint was filed by Dennis Lewis,
a shareholder, and various other alleged shareholders of CIB Marine in the
United States District Court for the Central District of Illinois, Urbana
Division, against CIB Marine, certain of its current and former officers and
directors, and KPMG LLP. The filing consolidated two actions that had been filed
in January 2005: one filed by Lewis in the United States District Court for the
Central District of Illinois, Urbana Division and another filed in the United
States District Court for the Central District of Illinois, Peoria Division by
Elaine Sollberger, a purported shareholder, whose claims were voluntarily
dismissed in connection with the consolidation, and have not been reasserted in
the consolidated complaint. Plaintiffs seek to maintain the action as a class
action on behalf of all persons who purchased common stock of CIB Marine between
April 12, 1999, and April 12, 2004, claiming violations of Section 10(b) of the
Securities Exchange Act and Rule 10b-5 thereunder by CIB Marine and other
defendants and liability of certain defendants other than CIB Marine and KPMG
under Section 20(a) of the Securities Exchange Act as controlling persons. The
gravamen of the complaint is that the financial condition of CIB Marine was
overstated with the result that members of the purported class acquired their
CIB Marine stock at inflated prices. All defendants have moved to dismiss the
action on various grounds. As a result of the filing of these motions, all
discovery in this action is automatically stayed. The court has granted the
motion of CIB Marine and several other defendants to transfer the action to the
United States District Court for the Eastern District of Wisconsin, sitting in
Milwaukee, Wisconsin. CIB Marine
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intends to vigorously contest class action certification and defend this action.
The ultimate outcome of this action cannot be determined at this time.
In April 2005, James Fasano and Thomas Arundel, shareholders of CIB Marine
and borrowers of CIB -- Chicago, commenced an action in the Circuit Court of
Cook County, Illinois, against CIB Marine, CIB -- Chicago and two of their now
former directors and/or officers for damages arising out of alleged fraudulent
misrepresentations relative to the financial condition of Canron and its
principal shareholder to induce the plaintiffs to borrow $0.5 million from CIB
-- Chicago and invest it in Canron. Plaintiffs assert claims for fraud and
shareholder remedies. The shareholder remedies action alleges the defendants'
violations of lending regulations caused a decline in the plaintiffs' investment
in CIB Marine. Plaintiffs seek an unspecified amount of compensatory and
punitive damages, request an order requiring CIB Marine and the bank to
repurchase their CIB Marine shares of stock at fair value, and other forms of
relief. While the outcome of these claims cannot be determined at this time, CIB
Marine intends to vigorously defend this action. On November 30, 2004, CIB
Marine sold CIB -- Chicago.
NOTE 20 -- STOCK OPTION PLANS
CIB Marine has a nonqualified stock option and incentive plan for its
employees and directors. At December 31, 2003, options to purchase 188,485
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 OF OPTION PRICES WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ------------- ----------------
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
========= ============ ======
Granted.................................... -- -- --
Lapsed or surrendered...................... (59,201) 13.07-23.22 17.78
Exercised.................................. (34,200) 4.95-13.07 5.89
--------- ------------ ------
Shares under option at December 31, 2003..... 1,439,850 $ 8.50-25.08 $16.45
========= ============ ======
Share exercisable at December 31, 2003....... 1,081,288 $ 8.50-25.08 $15.11
========= ============ ======
</Table>
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2003.
<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 12/31/03 LIFE (YEARS) PRICE 12/31/03 PRICE
- ------------- ----------- ------------ -------- ----------- --------
8.50-10.03.. 81,000 1.0 8.50 81,000 8.50
10.03-12.54.. 107,400 2.3 10.87 107,400 10.87
12.54-15.05.. 378,900 4.1 13.10 378,900 13.10
15.05-17.56.. 268,950 5.6 16.22 216,600 16.22
17.56-20.06.. 299,112 6.6 18.42 179,448 18.42
20.06-22.57.. 5,662 7.7 22.07 2,264 22.07
22.57-25.08.. 298,826 8.0 22.99 115,676 22.94
- ------------ --------- ------ --------- ------
$8.50-25.08.. 1,439,850 5.4 $16.45 1,081,288 $15.11
============ ========= ====== ========= ======
</Table>
NOTE 21 -- 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
18. 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 the maximum
permitted by law. Participants over the age of 50 are allowed to make a stated
amount of additional contributions on a tax deferred basis as permitted by law.
Through December 31, 2002, CIB Marine had not matched employee contributions.
During 2003, CIB Marine matched employee contribution up to 1% of compensation
and the total expense was $0.3 million. The administrative costs to maintain the
plan are paid by the plan. In the first quarter of 2004, CIB Marine suspended
the matching contribution. In the first quarter of 2005, CIB Marine reinstated
and increased the matching contribution up to 3% of compensation.
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, 2003, the plan held 205,047 shares of common stock, all of which
have been allocated to participants. CIB Marine made contributions in 2003,
2002, and 2001 of $0.4 million, $0.6 million, and $0.5 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.
In the first quarter of 2004, CIB Marine suspended contributions to the ESOP and
does not currently have any plan to reinstate such contributions.
NOTE 22 -- INCOME TAXES
The provision for income taxes (benefits) on income (loss) from continuing
operations in the consolidated statements of operations consisted of the
following components:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Current tax provision (benefit):
Federal......................................... $(14,580) $ 13,166 $ 4,721
State........................................... 89 (226) 444
Deferred (benefit)................................ 11,343 (10,344) 8,235
-------- -------- -------
$ (3,148) $ 2,596 $13,400
======== ======== =======
</Table>
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax provision (benefit) and income taxes
from continuing operations, which would have been provided by applying the
federal statutory rate of 35%, is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
---------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ---- ------- ----
(AS RESTATED) (AS RESTATED)
-------------- --------------
(DOLLARS IN THOUSANDS)
Income tax expense (benefit) at
statutory tax rate.............. $(46,844) (35.0)% $ 4,272 35.0% $13,695 35.0%
Increase (reduction) in tax rate
resulting from:
State income taxes, net of
Federal Income tax effect.... (3,739) (2.8) (359) (2.9) (59) (0.2)
Nondeductible amortization...... 275 0.2 54 0.4 116 0.3
Tax exempt interest, net........ (1,053) (0.8) (1,059) (8.7) (900) (2.3)
Affordable housing credits...... (409) (0.3) (268) (2.2) (92) (0.2)
Valuation allowance............. 48,673 36.4 315 2.6 165 0.4
Other, net...................... (51) (0.1) (359) (2.9) 475 1.2
-------- ----- ------- ---- ------- ----
$ (3,148) (2.4)% $ 2,596 21.3% $13,400 34.2%
======== ===== ======= ==== ======= ====
</Table>
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to net deferred tax
(liabilities)/assets from continuing operations in the accompanying consolidated
balance sheets are as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Net operating losses............................ $ 5,306 $ 932 $ 557
Tax credit carryforwards........................ 1,550 -- --
Allowance for loan losses....................... 41,042 24,215 13,773
Non-cash compensation........................... 352 317 493
Deferred loan fees and other.................... -- 36 970
Goodwill and intangible assets.................. 4,285 -- --
Allowance for unfunded loan commitments......... 5,728 359 --
Other real estate owned......................... 1,035 -- --
Other........................................... 569 194 153
-------- ------- -------
Deferred tax assets before valuation allowance.... 59,867 26,053 15,946
Valuation allowance............................. (48,796) (921) (606)
-------- ------- -------
Net deferred tax assets........................... 11,071 25,132 15,340
-------- ------- -------
Deferred tax liabilities:
Net unrealized gain in securities available for
sale......................................... $ 798 $ 2,849 $ 2,777
Goodwill and intangible assets.................. -- 275 --
Deferred loan fees and other.................... 19 -- --
Fixed assets.................................... 1,242 875 644
REIT Income..................................... 7,511 11,266 12,069
Other securities................................ 393 166 264
Other........................................... 197 296 501
-------- ------- -------
Total deferred tax liabilities.................... 10,160 15,727 16,255
-------- ------- -------
Net deferred tax (liabilities)/assets............. $ 911 $ 9,405 $ (915)
======== ======= =======
</Table>
The change in the net deferred tax assets is as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2003 2002 2001)
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
Deferred tax benefits (expenses) included in
provision....................................... $(11,343) $10,344 $(8,235)
Deferred taxes of acquired subsidiaries........... -- -- 219
Purchase accounting deferred tax adjustments...... -- 48 --
Deferred tax included in other comprehensive
income.......................................... 2,051 (72) (1,299)
Valuation allowance against deferred tax in other
comprehensive income............................ 798 -- --
-------- ------- -------
Total increase (decrease) in net deferred tax
assets....................................... $ (8,494) $10,320 $(9,315)
======== ======= =======
</Table>
With respect to continuing and discontinued operations, there were U.S.
Federal net operating loss, capital loss and charitable contribution
carryforwards of approximately $21.6 million and $13.7 million in 2003
134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 2002, respectively, and state net operating loss, capital loss and
charitable contribution carryforwards of approximately $101.2 million and $46.5
million in 2003 and 2002, respectively. The net operating loss carryforwards
will expire in varying amounts between 2007 and 2023. $13.5 million of the U.S.
Federal and $22.4 million of the state net operating loss carryforwards were
acquired in connection with the Canron acquisition. Canron had total U.S.
Federal loss carryforwards of $13.4 million in 2003 and 2002, and state loss
carryforwards of $31.6 million and $28.4 million in 2003 and 2002, respectively.
In addition, there were $2.1 million of capital loss carryforwards in 2003, of
which $1.7 million is attributable to Canron. The capital loss carryforwards
expire in 2008.
In addition, CIB Marine had AMT credit carryforwards of $1.0 million and
$0.1 million in 2003 and 2002, respectively. $0.1 million of the AMT credit
carryforward was acquired in connection with the Canron acquisition. There were
also $0.7 million of General Business Credit carryforwards in 2003 which will
expire in varying amounts between 2007 and 2008.
Realization of the net deferred tax assets 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, including tax planning strategies, and
where applicable, the expiration dates associated with tax carryforwards.
Due to the significant losses in 2003 and the expectation of additional
losses in 2004, management has determined that it is not more likely than not
that the net deferred tax assets at December 31, 2003 will be realized in their
entirety. Therefore, a valuation allowance has been provided by way of a charge
to federal and state tax expense to reduce the net federal and state deferred
tax asset to an amount equal to U.S. Federal loss carryback potential as of
December 31, 2003. There is no state loss carryback potential.
In 2002 and 2001, 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 it is not more likely than not
that the state deferred tax assets will be realized.
The net deferred tax asset before valuation allowance of discontinued
operations as of December 31, 2003 and 2002 was $8.2 million, respectively.
Management does not believe that it is more likely than not that these net
deferred assets will be realized in their entirety. Therefore, valuation
allowances have been set up against these net deferred tax assets in the amount
of $8.2 million and $4.0 million for 2003 and 2002, respectively.
Like many financial institutions with banking operations in Wisconsin, CIB
Marine's Wisconsin bank subsidiary transferred securities and loans to an
out-of-state subsidiary. The Nevada investment subsidiary holds and manages
those assets. The investment subsidiary does not file tax returns with, or pay
income taxes to, the State of Wisconsin. The Wisconsin Department of Revenue
(WDOR) implemented a program in 2003 to audit Wisconsin financial institutions
which formed investment subsidiaries located outside of Wisconsin. The WDOR has
generally indicated that it intends to assess income taxes on certain income of
out-of-state investment subsidiaries of Wisconsin financial institutions. CIB
Marine received a Notice of Audit from WDOR in 2003 that covered 2000 and 2001
and related primarily to the issue of income of the Nevada subsidiary. During
2004, WDOR offered a blanket settlement agreement to most banks in Wisconsin
having Nevada investment subsidiaries. The WDOR has not issued an assessment to
CIB Marine's Wisconsin bank subsidiary, but the WDOR has stated it will do so if
the matter is not settled.
CIB Marine believes it complied with Wisconsin law and that it is not
liable for any taxes or interest that the WDOR may claim. At December 31, 2003,
CIB Marine has an accrued liability including interest and net of state net
operating losses of $0.1 million. CIB Marine has not made a decision as to
whether it will contest the matter or settle with the WDOR, however, CIB Marine
does not expect resolution of this matter to have a material effect on its
consolidated financial position, results of operations or cash flows beyond the
amounts accrued.
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23 -- 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, 2003
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents................................. $ 120,426 $ 120,426
Loans held for sale....................................... 16,735 16,735
Securities available for sale............................. 637,356 637,356
Loans, net................................................ 2,250,169 2,273,718
Accrued interest receivable............................... 12,762 12,762
Financial liabilities:
Deposit liabilities....................................... 2,821,218 2,848,210
Short-term borrowings..................................... 92,601 92,601
Long-term borrowings...................................... 46,276 47,401
Junior subordinated debentures............................ 61,857 67,871
Accrued interest payable.................................. 9,399 9,399
</Table>
<Table>
<Caption>
DECEMBER 31, 2003
-----------------------------------
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- -------- ----------
(DOLLARS IN THOUSANDS)
Off-Balance Sheet Items:
Commitments to extend credit....................... $469,664 $ -- $ --
Commitments to extend mortgage loans to be held for
sale............................................ 67,697 239 239
Standby letters of credit.......................... 98,733 (16,009) (16,009)
Interest rate swap agreements...................... 76,100 3,568 3,568
Forward sale agreements............................ 82,892 (156) (156)
</Table>
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An accrued liability for probable losses on unfunded commitments to extend
credit and standby letters of credit totaled $15.7 million at December 31, 2003.
<Table>
<Caption>
DECEMBER 31, 2002
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents................................. $ 93,991 $ 93,991
Loans held for sale....................................... 229,554 229,554
Securities available for sale............................. 516,744 516,744
Loans, net................................................ 2,638,884 2,672,525
Accrued interest receivable............................... 16,669 16,669
Financial liabilities:
Deposit liabilities....................................... 2,848,404 2,897,046
Short-term borrowings..................................... 386,945 386,945
Long-term borrowings...................................... 47,141 48,976
Guaranteed trust preferred securities..................... 60,000 66,320
Accrued interest payable.................................. 11,113 11,113
</Table>
<Table>
<Caption>
DECEMBER 31, 2002
-----------------------------------
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- -------- ----------
(DOLLARS IN THOUSANDS)
Off-Balance Sheet Items:
Commitments to extend credit........................ $623,921 $ -- $ --
Commitments to extend mortgage loans to be held for
sale............................................. 275,656 2,273 2,273
Standby letters of credit........................... 108,584 (1,408) (1,408)
Interest rate swap agreements....................... 134,250 5,749 5,749
Forward sale agreements............................. 507,771 (4,188) (4,188)
</Table>
<Table>
<Caption>
DECEMBER 31, 2001
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents................................. $ 59,000 $ 59,000
Loans held for sale....................................... 34,473 34,473
Securities available for sale............................. 120,507 120,507
Loans, net................................................ 2,346,190 2,374,027
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.................................. 11,334 11,334
</Table>
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2001
-----------------------------------
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- -------- ----------
(DOLLARS IN THOUSANDS)
Off-Balance Sheet Items:
Commitments to extend credit........................ $570,882 $ -- $ --
Commitments to extend mortgage loans to be held for
sale............................................. 102,746 (1,585) (1,585)
Standby letters of credit........................... 95,078 848 848
Interest rate swap agreements....................... 55,000 1,920 1,920
Forward sale agreements............................. 137,041 2,950 2,950
</Table>
An accrued liability for probable losses on unfunded commitments to extend
credit and standby letters of credit totaled $1 million at December 31, 2002.
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 SECURITIES
The estimated fair values of securities by type are provided in Note 5 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.
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
LOANS RECEIVABLE
For loans that reprice frequently, the carrying value approximates their
value. The fair values of all other loans receivable were estimated by
discounting the expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings and
maturities. The carrying value and the fair value of loans receivable is net of
the allowance for loan losses.
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, U.S. Treasury tax and loan notes, lines of credit,
commercial paper and other similar borrowings.
LONG-TERM BORROWINGS
The carrying value of long-term borrowings payable within 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.
JUNIOR SUBORDINATED DEBENTURES AND GUARANTEED TRUST PREFERRED SECURITIES
The estimated fair value of junior subordinated debentures and guaranteed
trust preferred securities 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.
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED INTEREST PAYABLE
The carrying amounts of accrued interest approximate their fair values.
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
counterparty 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
are or would be charged for comparable transactions. The carrying value of
standby letters of credit represents the unearned fees charged for those
commitments plus accrued amounts for probable losses.
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 a 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.
NOTE 24 -- BUSINESS SEGMENTS
<Table>
<Caption>
AT OR FOR THE YEAR ENDED DECEMBER 31, 2003
---------------------------------------------------------------
CONSOLIDATED
INCOME FROM
GENERAL MORTGAGE INTERCOMPANY CONTINUING
BANKING BANKING CORPORATE ELIMINATIONS OPERATIONS
---------- -------- --------- ------------ ------------
(DOLLARS IN THOUSANDS)
Net interest income (loss).......... $ 106,090 $ 3,120 $ (5,864) $ 26 $ 103,372
Provision for credit losses......... 160,593 -- -- -- 160,593
---------- ------- -------- -------- ----------
Net interest income (loss) after
provision for credit losses....... (54,503) 3,120 (5,864) 26 (57,221)
Noninterest income.................. 6,536 9,520 23,558 (20,683) 18,931
Noninterest expense................. 79,417 8,297 28,494 (20,657) 95,551
---------- ------- -------- -------- ----------
Income (loss) from continuing
operations before income taxes.... (127,384) 4,343 (10,800) -- (133,841)
Income tax expense (benefit)........ (9,210) 1,441 4,621 -- (3,148)
---------- ------- -------- -------- ----------
Net income (loss) from continuing
operations..................... $ (118,174) $ 2,902 $(15,421) $ -- $ (130,693)
========== ======= ======== ======== ==========
Identifiable assets from continuing
operations........................ $3,179,837 $19,798 $ 10,962 $(53,416) $3,157,181
Assets of companies held for
disposal.......................... 31,348 -- -- (2,292) 29,056
---------- ------- -------- -------- ----------
Total identifiable assets........... $3,211,185 $19,798 $ 10,962 $(55,708) $3,186,237
========== ======= ======== ======== ==========
</Table>
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AT OR FOR THE YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------
CONSOLIDATED
INCOME FROM
GENERAL MORTGAGE INTERCOMPANY CONTINUING
BANKING BANKING CORPORATE ELIMINATIONS OPERATIONS
---------- -------- --------- ------------ ------------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Net interest income (loss)......... $ 110,062 $ 1,713 $ (5,187) $ 78 $ 106,666
Provision for credit losses........ 46,510 -- -- -- 46,510
---------- -------- -------- --------- ----------
Net interest income after provision
for credit losses................ 63,552 1,713 (5,187) 78 60,156
Noninterest income................. 11,662 4,943 16,728 (16,800) 16,533
Noninterest expense................ 54,730 4,850 21,626 (16,722) 64,484
---------- -------- -------- --------- ----------
Income (loss) from continuing
operations before income taxes... 20,484 1,806 (10,085) -- 12,205
Income tax expense (benefit)....... 6,261 600 (4,265) -- 2,596
---------- -------- -------- --------- ----------
Net income (loss) from continuing
operations.................... $ 14,223 $ 1,206 $ (5,820) $ -- $ 9,609
========== ======== ======== ========= ==========
Identifiable assets from continuing
operations....................... $3,447,149 $233,112 $ 14,194 $(117,024) $3,577,431
Assets of companies held for
disposal......................... 73,274 -- -- -- 73,274
---------- -------- -------- --------- ----------
Total identifiable assets.......... $3,520,423 $233,112 $ 14,194 $(117,024) $3,650,705
========== ======== ======== ========= ==========
</Table>
<Table>
<Caption>
AT OR FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------
CONSOLIDATED
INCOME FROM
GENERAL MORTGAGE INTERCOMPANY CONTINUING
BANKING BANKING CORPORATE ELIMINATIONS OPERATIONS
---------- -------- --------- ------------ ------------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
Net interest income (loss).......... $ 91,079 $ 565 $(4,398) $ 36 $ 87,282
Provision for credit losses......... 14,395 -- -- -- 14,395
---------- ------- ------- -------- ----------
Net interest income after provision
for credit losses................. 76,684 565 (4,398) 36 72,887
Noninterest income.................. 12,543 5,253 12,460 (12,637) 17,619
Noninterest expense................. 44,953 2,848 16,177 (12,601) 51,377
---------- ------- ------- -------- ----------
Income (loss) from continuing
operations before income taxes.... 44,274 2,970 (8,115) -- 39,129
Income tax expense (benefit)........ 14,849 1,152 (2,601) -- 13,400
---------- ------- ------- -------- ----------
Net income (loss) from continuing
operations..................... $ 29,425 $ 1,818 $(5,514) $ -- $ 25,729
========== ======= ======= ======== ==========
Identifiable assets from continuing
operations........................ $2,909,195 $37,839 $20,654 $(32,981) $2,934,707
Assets of companies held for
disposal.......................... 7,311 -- -- -- 7,311
---------- ------- ------- -------- ----------
Total identifiable assets........... $2,916,506 $37,839 $20,654 $(32,981) $2,942,018
========== ======= ======= ======== ==========
</Table>
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 25 -- PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only, are
presented as follows:
CONDENSED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks................................... $ 1,341 $ 513 $ 751
Investments in subsidiaries............................... 184,203 329,558 279,186
Loans..................................................... -- -- 2,738
Loans to subsidiaries..................................... 8,561 5,553 13,590
Premises and equipment, net............................... 1,802 1,171 780
Foreclosed properties..................................... 1,438 1,938 --
Other investments......................................... 6,120 5,734 5,211
Other assets.............................................. 2,317 4,341 2,122
-------- -------- --------
Total Assets............................................ $205,782 $348,808 $304,378
======== ======== ========
LIABILITIES
Short-term borrowings..................................... $ 23,595 $ 36,811 $ 29,662
Accrued interest payable.................................. 1,850 1,417 1,392
Accrued income taxes...................................... 2,096 -- 1,257
Junior subordinated debentures............................ 61,857 61,857 41,238
Other liabilities......................................... 7,861 1,160 1,004
-------- -------- --------
Total Liabilities....................................... 97,259 101,245 74,553
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 5,000,000 shares
authorized, none issued................................. -- -- --
Common stock, $1 par value; 50,000,000 shares authorized,
18,346,442, 18,312,242 and 17,876,752 issued and
outstanding, respectively............................... 18,346 18,312 17,877
Capital surplus........................................... 158,163 157,783 148,972
Retained earnings (deficit)............................... (62,759) 74,889 66,082
Accumulated other comprehensive income, net............... 2,184 4,516 4,331
Receivables from sale of stock............................ (5,208) (7,937) (7,437)
Treasury stock at cost, 86,611 shares acquired............ (2,203) -- --
-------- -------- --------
Total Stockholders' Equity.............................. 108,523 247,563 229,825
-------- -------- --------
Total Liabilities and Stockholders' Equity.............. $205,782 $348,808 $304,378
======== ======== ========
</Table>
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDEND INCOME
Dividends from subsidiaries.............................. $ 22,250 $ 1,300 $ 2,133
Loan interest from subsidiaries.......................... 298 258 60
Other.................................................... -- -- 180
--------- ------- -------
Total interest and dividend income..................... 22,548 1,558 2,373
INTEREST EXPENSE
Short-term borrowings.................................... 965 922 615
Junior subordinated debentures........................... 5,198 4,523 4,024
--------- ------- -------
Total interest expense.............................. 6,163 5,445 4,639
--------- ------- -------
Net interest income (loss)........................ 16,385 (3,887) (2,266)
Provision for credit losses.............................. -- 800 --
--------- ------- -------
Net interest income (loss) after provision for credit
losses.............................................. 16,385 (4,687) (2,266)
--------- ------- -------
NONINTEREST INCOME
Equity in undistributed earnings (loss) of
subsidiaries........................................... (144,093) 13,952 29,228
Fees from subsidiaries................................... 11,267 8,915 7,062
Other income............................................. 2,884 317 99
--------- ------- -------
Total noninterest income (loss)..................... (129,942) 23,184 36,389
--------- ------- -------
NONINTEREST EXPENSE
Compensation and employee benefits....................... 12,570 10,421 8,024
Equipment................................................ 678 443 340
Occupancy and premises................................... 827 1,043 629
Professional services.................................... 769 454 515
Write down and losses on assets.......................... 2,406 -- --
Other.................................................... 2,323 1,918 1,489
--------- ------- -------
Total noninterest expense........................... 19,573 14,279 10,997
--------- ------- -------
Income (loss) before income taxes........................ (133,130) 4,218 23,126
Income tax expense (benefit)............................. 4,518 (4,589) (2,603)
--------- ------- -------
NET INCOME (LOSS)................................... $(137,648) $ 8,807 $25,729
========= ======= =======
</Table>
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(137,648) $ 8,807 $ 25,729
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in undistributed (earnings) loss of
subsidiaries........................................ 144,093 (13,952) (29,228)
Depreciation and amortization.......................... 454 260 194
Provision for credit losses............................ -- 800 --
Deferred tax expense (benefit)......................... 6,570 (77) 642
Write down and losses on assets........................ 2,406 -- --
Loss on sale of other assets........................... 2 -- 229
(Increase) decrease in interest receivable and other
assets.............................................. (3,107) (1,460) 202
Increase (decrease) in interest payable and other
liabilities......................................... 4,880 (1,693) 436
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 17,650 (7,315) (1,796)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investment in limited
partnerships and other investments.................. 899 (301) (2,269)
Net (increase) decrease in loans....................... (3,008) 8,537 (11,248)
Net increase in investment in subsidiaries............. (23,081) (37,258) (16,510)
Dividends received from subsidiaries................... 22,250 1,300 2,133
Proceeds from sale of fixed assets..................... -- -- 59
Capital expenditures................................... (1,080) (646) (413)
--------- -------- --------
Net cash used in investing activities............... (4,020) (28,368) (28,248)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of junior subordinated debt..... -- 19,550 14,550
Proceeds from issuance of common stock................. -- 7,436 3,650
Proceeds from stock options exercised.................. 414 1,310 307
Proceeds paid for merger dissenters shares............. -- -- (238)
Net increase (decrease) in short-term borrowings....... (13,216) 7,149 11,619
--------- -------- --------
Net cash (used in) provided by financing
activities........................................ (12,802) 35,445 29,888
--------- -------- --------
Net increase (decrease) in cash and cash equivalents..... 828 (238) (156)
Cash and cash equivalents, beginning of year............. 513 751 907
--------- -------- --------
Cash and cash equivalents, end of year................... $ 1,341 $ 513 $ 751
========= ======== ========
</Table>
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 26 -- QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
SECOND THIRD FOURTH
FIRST QUARTER QUARTER QUARTER QUARTER TOTAL
------------- ------------- -------- -------- ---------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2003
Total interest income............... $51,164 $ 50,505 $ 45,713 $ 42,175 $ 189,557
Total interest expense.............. 23,106 22,705 21,074 19,300 86,185
------- -------- -------- -------- ---------
Net interest income................. 28,058 27,800 24,639 22,875 103,372
Provision for credit losses......... 24,640 34,910 75,010 26,033 160,593
------- -------- -------- -------- ---------
Net interest income after provision
for credit losses................. 3,418 (7,110) (50,371) (3,158) (57,221)
Gain on investment securities,
net............................... -- -- -- -- --
Other noninterest income............ 5,881 5,031 4,830 3,189 18,931
Impairment of goodwill and other
intangible assets(1).............. -- -- -- 14,359 14,359
Other noninterest expense........... 18,067 18,265 20,414 24,446 81,192
------- -------- -------- -------- ---------
Loss from continuing operations
before income taxes............... (8,768) (20,344) (65,955) (38,774) (133,841)
Income tax expense (benefit)(2)..... (3,566) (7,968) 6,023 2,363 (3,148)
------- -------- -------- -------- ---------
LOSS FROM CONTINUING OPERATIONS..... (5,202) (12,376) (71,978) (41,137) (130,693)
Discontinued operations(3)
Net income (loss) from
discontinued operations........ (380) (3,006) (5,191) 1,622 (6,955)
------- -------- -------- -------- ---------
NET LOSS.......................... $(5,582) $(15,382) $(77,169) $(39,515) $(137,648)
======= ======== ======== ======== =========
EARNINGS PER SHARE:
Basic
Loss from continuing operations... $ (0.28) $ (0.68) $ (3.94) $ (2.25) $ (7.15)
Discontinued operations........... (0.02) (0.16) (0.29) 0.09 (0.38)
------- -------- -------- -------- ---------
Net loss.......................... $ (0.30) $ (0.84) $ (4.23) $ (2.16) $ (7.53)
======= ======== ======== ======== =========
Diluted
Loss from continuing operations... $ (0.28) $ (0.68) $ (3.94) $ (2.25) $ (7.15)
Discontinued operations........... (0.02) (0.16) (0.29) 0.09 (0.38)
------- -------- -------- -------- ---------
Net loss.......................... $ (0.30) $ (0.84) $ (4.23) $ (2.16) $ (7.53)
======= ======== ======== ======== =========
</Table>
- ---------------
(1) In the fourth quarter of 2003, CIB Marine wrote off $14.4 million in
goodwill and other intangibles. See Note 8 -- Intangible Assets for further
information.
(2) In the third and fourth quarter of 2003, a valuation allowance was provided
by way of a charge to tax expense to reduce the net deferred tax assets. See
Note 22 -- Income Taxes for further information.
(3) In the fourth quarter of 2003, CIB Marine recorded a $1.1 million recovery
on impairment losses recognized during prior quarters and a $0.5 million tax
benefit.
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTATEMENT ADJUSTMENTS(1):
<Table>
<Caption>
FIRST SECOND
QUARTER QUARTER TOTAL
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE
DATA)
2003
Total interest income................................ $ (561) $ (1,295) $ (1,856)
Total interest expense............................... -- -- --
-------- -------- --------
Net interest income.................................. (561) (1,295) (1,856)
Provision for credit losses.......................... 15,418 24,535 39,953
-------- -------- --------
Net interest income after provision for credit
losses............................................. (15,979) (25,830) (41,809)
Gain on investment securities, net................... -- -- --
Other noninterest income............................. (155) (163) (318)
Impairment of goodwill and other intangible assets... -- -- --
Other noninterest expense............................ 21 21 42
-------- -------- --------
Loss from continuing operations before income
taxes.............................................. (16,155) (26,014) (42,169)
Income tax (benefit)................................. (5,923) (9,697) (15,620)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS...................... (10,232) (16,317) (26,549)
Discontinued operations
Net loss from discontinued operations.............. -- -- --
NET LOSS........................................... $(10,232) $(16,317) $(26,549)
======== ======== ========
EARNINGS PER SHARE:
Basic
Loss from continuing operations.................... $ (0.55) $ (0.90) $ (1.45)
Discontinued operations............................ -- -- --
-------- -------- --------
Net loss........................................... $ (0.55) $ (0.90) $ (1.45)
======== ======== ========
Diluted
Loss from continuing operations.................... $ (0.55) $ (0.90) $ (1.45)
Discontinued operations............................ -- -- --
-------- -------- --------
Net loss........................................... $ (0.55) $ (0.90) $ (1.45)
======== ======== ========
</Table>
146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS PREVIOUSLY REPORTED:
<Table>
<Caption>
FIRST SECOND
QUARTER QUARTER TOTAL
------- ------- --------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
2003
Total interest income.................................. $51,725 $51,800 $103,525
Total interest expense................................. 23,106 22,705 45,811
------- ------- --------
Net interest income.................................... 28,619 29,095 57,714
Provision for credit losses............................ 9,222 10,375 19,597
------- ------- --------
Net interest income after provision for credit
losses............................................... 19,397 18,720 38,117
Gain on investment securities, net..................... -- -- --
Other noninterest income............................... 6,036 5,194 11,230
Impairment of goodwill and other intangible assets..... -- -- --
Other noninterest expense.............................. 18,046 18,244 36,290
------- ------- --------
Loss from continuing operations before income taxes.... 7,387 5,670 13,057
Income tax expense..................................... 2,357 1,729 4,086
------- ------- --------
LOSS FROM CONTINUING OPERATIONS........................ 5,030 3,941 8,971
Discontinued operations
Net loss from discontinued operations................ (380) (3,006) (3,386)
------- ------- --------
NET LOSS............................................. $ 4,650 $ 935 $ 5,585
======= ======= ========
EARNINGS PER SHARE:
Basic
Loss from continuing operations...................... $ 0.27 $ 0.22 $ 0.49
Discontinued operations.............................. (0.02) (0.17) (0.19)
------- ------- --------
Net loss............................................. $ 0.25 $ 0.05 $ 0.30
======= ======= ========
Diluted
Loss from continuing operations...................... $ 0.27 $ 0.22 $ 0.49
Discontinued operations.............................. (0.02) (0.17) (0.19)
------- ------- --------
Net loss............................................. $ 0.25 $ 0.05 $ 0.30
======= ======= ========
</Table>
147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTATED:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2002
Total interest income....................... $48,392 $51,064 $51,903 $52,642 $204,001
Total interest expense...................... 23,619 24,275 24,748 24,693 97,335
------- ------- ------- ------- --------
Net interest income......................... 24,773 26,789 27,155 27,949 106,666
Provision for credit losses................. 3,966 8,086 13,459 20,999 46,510
------- ------- ------- ------- --------
Net interest income after provision for
credit losses............................. 20,807 18,703 13,696 6,950 60,156
Gain on investment securities, net.......... 1,104 992 1,031 -- 3,127
Other noninterest income.................... 3,393 3,643 3,132 3,238 13,406
Noninterest expense......................... 14,561 16,047 17,439 16,437 64,484
------- ------- ------- ------- --------
Income from continuing operations before
income taxes.............................. 10,743 7,291 420 (6,249) 12,205
Income tax expense (benefit)................ 3,754 2,300 (605) (2,853) 2,596
------- ------- ------- ------- --------
INCOME FROM CONTINUING OPERATIONS........... 6,989 4,991 1,025 (3,396) 9,609
Discontinued operations
Net loss from discontinued operations..... -- -- -- (802) (802)
------- ------- ------- ------- --------
NET INCOME................................ $ 6,989 $ 4,991 $ 1,025 $(4,198) $ 8,807
======= ======= ======= ======= ========
EARNINGS PER SHARE:
Basic
Income from continuing operations......... $ 0.39 $ 0.27 $ 0.06 $ (0.18) $ 0.53
Discontinued operations................... -- -- -- (0.05) (0.05)
------- ------- ------- ------- --------
Net income................................ $ 0.39 $ 0.27 $ 0.06 $ (0.23) $ 0.48
======= ======= ======= ======= ========
Diluted
Income from continuing operations......... $ 0.38 $ 0.27 $ 0.05 $ (0.18) $ 0.52
Discontinued operations................... -- -- -- (0.05) (0.05)
------- ------- ------- ------- --------
Net income................................ $ 0.38 $ 0.27 $ 0.05 $ (0.23) $ 0.47
======= ======= ======= ======= ========
</Table>
148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTATEMENT ADJUSTMENTS(1):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2002
Total interest income......................... $(32) $ (42) $ (45) $ (72) $ (191)
Total interest expense........................ -- -- -- -- --
---- ------ ------- ------- --------
Net interest income........................... (32) (42) (45) (72) (191)
Provision for credit losses................... (15) 305 1,745 8,750 10,785
---- ------ ------- ------- --------
Net interest income after provision for credit
losses...................................... (17) (347) (1,790) (8,822) (10,976)
Gain on investment securities, net............ -- -- -- -- --
Other noninterest income...................... -- -- -- -- --
Noninterest expense........................... -- -- -- -- --
---- ------ ------- ------- --------
Income from continuing operations before
income taxes................................ (17) (347) (1,790) (8,822) (10,976)
Income tax expense (benefit).................. (54) (129) (590) (3,379) (4,152)
---- ------ ------- ------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS...... 37 (218) (1,200) (5,443) (6,824)
Discontinued operations
Net loss from discontinued operations....... -- -- -- -- --
---- ------ ------- ------- --------
NET INCOME (LOSS)........................... $ 37 $ (218) $(1,200) $(5,443) $ (6,824)
==== ====== ======= ======= ========
EARNINGS PER SHARE:
Basic
Income from continuing operations........... $ -- $(0.02) $ (0.06) $ (0.30) $ (0.38)
Discontinued operations..................... -- -- -- -- --
---- ------ ------- ------- --------
Net income.................................. $ -- $(0.02) $ (0.06) $ (0.30) $ (0.38)
==== ====== ======= ======= ========
Diluted
Income from continuing operations........... $ -- $(0.01) $ (0.07) $ (0.29) $ (0.37)
Discontinued operations..................... -- -- -- -- --
---- ------ ------- ------- --------
Net income.................................. $ -- $(0.01) $ (0.07) $ (0.29) $ (0.37)
==== ====== ======= ======= ========
</Table>
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS PREVIOUSLY REPORTED:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2002
Total interest income....................... $48,424 $51,106 $51,948 $52,714 $204,192
Total interest expense...................... 23,619 24,275 24,748 24,693 97,335
------- ------- ------- ------- --------
Net interest income......................... 24,805 26,831 27,200 28,021 106,857
Provision for credit losses................. 3,981 7,781 11,714 12,249 35,725
------- ------- ------- ------- --------
Net interest income after provision for
credit losses............................. 20,824 19,050 15,486 15,772 71,132
Gain on investment securities, net.......... 1,104 992 1,031 -- 3,127
Other noninterest income.................... 3,393 3,643 3,132 3,238 13,406
Noninterest expense......................... 14,561 16,047 17,439 16,437 64,484
------- ------- ------- ------- --------
Income from continuing operations before
income taxes.............................. 10,760 7,638 2,210 2,573 23,181
Income tax expense (benefit)................ 3,808 2,429 (15) 526 6,748
------- ------- ------- ------- --------
INCOME FROM CONTINUING OPERATIONS........... 6,952 5,209 2,225 2,047 16,433
Discontinued operations
Net loss from discontinued operations..... -- -- -- (802) (802)
------- ------- ------- ------- --------
NET INCOME................................ $ 6,952 $ 5,209 $ 2,225 $ 1,245 $ 15,631
======= ======= ======= ======= ========
EARNINGS PER SHARE:
Basic
Income from continuing operations......... $ 0.39 $ 0.29 $ 0.12 $ 0.12 $ 0.91
Discontinued operations................... -- -- -- (0.05) (0.05)
------- ------- ------- ------- --------
Net income................................ $ 0.39 $ 0.29 $ 0.12 $ 0.07 $ 0.86
======= ======= ======= ======= ========
Diluted
Income from continuing operations......... $ 0.38 $ 0.28 $ 0.12 $ 0.11 $ 0.88
Discontinued operations................... -- -- -- (0.04) (0.04)
------- ------- ------- ------- --------
Net income................................ $ 0.38 $ 0.28 $ 0.12 $ 0.07 $ 0.84
======= ======= ======= ======= ========
</Table>
- ---------------
(1) Quarters ending prior to September 30, 2003 have been restated. See Note
2 -- Restatement for further information.
NOTE 27 -- SUBSEQUENT EVENTS
SALE OF CIB -- CHICAGO
In November 2004, CIB Marine sold CIB -- Chicago to an unrelated banking
organization. The final sale price was $67.4 million in cash, of which $5.4
million was used by CIB Marine to repay a short-term loan from the purchaser.
The purpose of the loan was to fund the purchase by CIB Marine of
CIB -- Chicago's interest in MICR, CIB Construction, including Canron, and the
loans and related claims against the borrowers in a Chicago condominium
development loan. In connection with the sale of CIB -- Chicago, CIB Marine
pledged the stock of Central Illinois Bank to the purchaser to secure certain
indemnification obligations with respect to CIB Marine's trust preferred
securities. CIB Marine also represented to the purchaser that for the 2004 tax
year, the sum of certain tax benefits, such as gross built-in losses and Federal
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net operating loss carry forwards, would not be less than $60 million for
CIB -- Chicago. CIB Marine agreed to indemnify the purchaser for any losses
arising out of a breach of this representation and certain other customary
representations and warranties. No claims have been made by the purchaser
related to this indemnification obligation. At the time of sale, CIB -- Chicago
operated 16 banking facilities in the Chicago metropolitan area and had
approximately $1.2 billion in assets and $1.1 billion in deposits. The sale of
CIB -- Chicago reduced consolidated loan totals by $682.8 million, nonaccrual
loans by $60.3 million and the allowance for loan loss by $38.1 million.
CIB Marine used $23.6 million of the proceeds to repay all indebtedness
under CIB Marine's revolving line of credit and injected $15.0 million of new
capital into Central Illinois Bank. The balance of the proceeds is being
utilized to help fund ongoing operations. The sale resulted in a pre-tax gain
for financial statement purposes of approximately $15.2 million. The total
consolidated assets of CIB Marine immediately after the sale were approximately
$1.4 billion. The Grand Cayman Islands branch banking facility of
CIB -- Chicago, which was established to accept Eurodollar deposits, was closed
in conjunction with the sale of the bank.
SALE AND WIND DOWN OF NONBANK SUBSIDIARIES
During 2004, CIB Marine divested itself of certain nonbank subsidiaries and
commenced the wind down of certain other nonbank subsidiaries in order to more
narrowly focus its resources on its core commercial and retail banking
strategies.
CIB Marine Commercial Finance, LLC. In June 2004, CIB -- Chicago sold to
an unrelated party substantially all of the business assets and the business of
its factoring subsidiary, CIB Marine Commercial Finance LLC. The pre-tax gain on
the sale of this operation was $0.2 million. Total assets were $10.9 million at
the time of sale. This company was fully dissolved in November 2004.
Mortgage Services, Inc. During the third quarter of 2004, CIB Marine sold
to unrelated parties substantially all of the assets and operations of Mortgage
Services, Inc. The sale of the operations was accomplished through two separate
transactions and resulted in a combined net pretax loss of $0.7 million on the
sales. CIB Marine is in the process of winding down the remaining affairs of
this company and has incurred certain liabilities with respect to the operations
of the mortgage company. These liabilities, totaling $1.8 million and $1.7
million as of December 31, 2004 and September 30, 2005, respectively, include
repurchase obligations relative to certain mortgage loans as a result of
external fraud and/or documentation issues, and certain reporting penalties.
CIB Marine Capital, LLC. During 2004, CIB Marine continued the wind down
of its mezzanine lending company, CIB Marine Capital, LLC. At December 31, 2004,
total loans outstanding were $3.4 million as compared to $19.0 million at
December 31, 2003. At September 30, 2005, total loans outstanding were $0.9
million.
Canron. During 2004, Canron sold certain of its properties and
substantially all of its equipment for $7.6 million. Substantially all of the
proceeds were used to reduce secured debt to CIB Marine. In April 2005, Canron
sold its Rexdale, Ontario facility for $8.2 million, and a portion of the
proceeds was used to pay off the remaining balance of its debt to CIB Marine.
Canron no longer owns any real estate. Canron is continuing to collect both on
and off-balance sheet receivables and settle and resolve payables and claims
through the voluntary liquidation process. In August 2005, Canron authorized and
began liquidation distributions to its shareholders. CIB Marine received $0.8
million and recorded the amount as a reduction of its investment in Canron. As
of September 30, 2005, CIB Marine's net investment in CIB Construction was
approximately $0.3 million.
MICR, Inc. In January 2005, CIB Marine retained the services of an
investment banker to assist in the marketing and sale of MICR. In 2005, MICR met
the accounting criteria as an asset held for sale. Based upon new valuation
information received in the third quarter of 2005, an impairment loss was
recognized in the amount of $1.3 million to record MICR at its fair value less
costs to sell.
151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORECLOSED PROPERTIES
In December 2003, CIB -- Chicago acquired the title to a commercial office
building that was being converted into residential condominiums. The property
was acquired through a Deed in Lieu of Foreclosure Settlement Agreement ("DIL
Agreement") from a borrower who was in default on its obligation. The property
is included in foreclosed properties at December 31, 2003. Pursuant to the DIL
Agreement, CIB -- Chicago acquired the property subject to the first lien held
by an outside financial institution and assumed the borrower's financial
obligation relating to that first lien. At December 31, 2003, the assumed
financial obligation is reported as an outstanding non-recourse mortgage note
payable.
During the second quarter of 2004, CIB -- Chicago transferred all of its
rights, title and interest in the property, along with the borrower's obligation
under the related mortgage note, to the first lien holder. CIB -- Chicago
transferred the property based upon its evaluation that the amount of additional
funds necessary to complete the project was greater than the financial benefits
and risks associated therewith. The property was transferred without any further
liability or obligation to the first lien position holder and CIB -- Chicago
reserved its legal rights to pursue the borrower and guarantors. The transfer to
the first lien holder resulted in no additional gain or loss to CIB Marine. CIB
Marine charged-off $41.7 million of the loan to its allowance for loan loss with
respect to this borrowing relationship and also recorded a $1.5 million market
value write down on the property. In July 2004, CIB -- Chicago commenced Federal
Court litigation against the borrower, guarantors and their related interests
for collection of the losses incurred by CIB Marine based upon state law claims
of breach of agreements, fraud, conversion and other theories of recovery,
including Federal RICO violations. In November 2004, CIB -- Chicago assigned the
loans and claims related to this development to CIB Marine in conjunction with
the sale of CIB -- Chicago. In April 2005, the Federal Court dismissed the RICO
claim and, as a result, lacks jurisdiction over the state law claims. In April
2005, CIB Marine commenced a state court action against the defendants on the
state law claims. In the event that there are any recoveries with respect to
these loans and claims, CIB Marine has agreed to pay the purchaser of CIB --
Chicago ten percent of any recovery after collection costs. To date, CIB Marine
has not made any recoveries with respect to such loans and claims.
REGULATORY ORDERS AND AGREEMENTS
In May 2004, CIB -- Chicago, Central Illinois Bank, Marine -- Wisconsin and
CIB -- Indiana entered into Cease and Desist Orders with their respective
banking regulators. The Memorandum entered into by CIB -- Chicago in January
2003 was released as a result of entering into the Cease and Desist Order. CIB
Marine subsequently sold CIB -- Chicago in November 2004. In May 2004, CIB
Marine entered into a Written Agreement with the Federal Reserve Bank of
Chicago. In August 2004, Citrus Bank entered into a Written Agreement with the
Office of the Comptroller of the Currency. The Orders and Agreements impose
certain restrictions and reporting requirements on CIB Marine and such
subsidiaries, and require various actions to be taken. The items include, among
others:
- Maintenance of minimum capital levels;
- Restrictions on dividend payments and redemption of shares without
regulatory approval;
- Limitations on asset and loan growth;
- Adoption of a comprehensive plan to improve earnings;
- Development of a plan to reduce concentrations of credit and loan
relationships classified as substandard or doubtful;
- Development of a system to correct loan administration deficiencies; and
- Development of a plan to correct and prevent violations of banking laws
and regulations related to affiliate transactions.
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These regulatory Orders and Agreements were filed with the SEC during 2004.
In April 2005, the Cease and Desist Orders at Marine -- Wisconsin and
CIB -- Indiana were each released and replaced with a Memorandum of
Understanding, which were entered into in March 2005, as a result of
improvements at such banks. Pursuant to the Memoranda, the banks agreed to
maintain minimum capital levels, correct loan administration deficiencies,
reduce concentrations and problem credits and not declare or pay cash dividends
without regulatory approval. In April 2005, Central Illinois Bank,
Marine -- Wisconsin and CIB -- Indiana each entered into a Memorandum of
Understanding with the FDIC and its applicable state banking regulators as a
result of deficiencies in information technology. The banks agreed to take
certain actions to document and fully implement its information security
program, exercise appropriate diligence in overseeing service providers
arrangements, and assess, develop and implement security standards and
procedures. Management believes that CIB Marine, Central Illinois Bank,
Marine -- Wisconsin, CIB -- Indiana and Citrus Bank have complied with the
majority of the provisions of the respective Orders and Agreements and are in
the process of complying with the remaining provisions.
LIQUIDITY
During 2004, some of the borrowing sources customarily utilized by CIB
Marine were restricted or were contingent on subsidiary bank pledges of fixed
income investment securities. See Note 12 -- Short-term Borrowings for further
information.
FDIC DEPOSIT INSURANCE PREMIUMS
FDIC deposit insurance premiums represented $0.5 million of the $0.9
million in FDIC and state assessments in 2003. Due to the increase in the risk
profile of CIB Marine's subsidiary banks, deposit insurance premiums
significantly increased to $4.7 million in 2004. Excluding CIB -- Chicago,
deposit insurance premiums were $0.3 million, $1.4 million, and $1.2 million in
2003, 2004 and for the nine months ended September 30, 2005, respectively.
CREDIT CONCENTRATIONS
At December 31, 2003, CIB Marine had fifteen secured borrowing
relationships (loans to one borrower or a related group of borrowers) and loans
to ten industries or industry groups that exceeded 25% of stockholders' equity.
As of December 31, 2004, CIB Marine had one secured borrowing relationship and
loans to seven industries or industry groups that exceeded 25% of stockholders'
equity. The decreases were due to the sale of CIB -- Chicago, management's
strategy to reduce these types of exposures and, to a lesser extent, the
increase in stockholders' equity from the $15.2 million pre-tax gain on the sale
of CIB -- Chicago on November 30, 2004. At September 30, 2005, there were loans
to seven industries or industry groups that exceeded 25% of CIB Marine's
stockholders' equity, and there was one loan to one borrower or a related group
of borrowers that exceeded 25% of stockholders' equity.
STOCK OPTIONS
As a result of retirements, resignations and other management and Board of
Directors changes, the volume of lapsed and surrendered stock options increased
substantially in 2004 and the first nine months of 2005. During this period,
873,513 shares previously granted pursuant to stock options lapsed and/or were
surrendered and became available for future grants under CIB Marine's 1999 Stock
Option and Incentive Plan. In September 2005, 523,750 options were granted to
various employees of the company at an exercise price of $4.10 each. As of
September 30, 2005, there were 1,090,087 options outstanding with a weighted
average exercise price of $10.69.
153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK AND RECEIVABLES FROM SALE OF STOCK
As a result of the sale of CIB -- Chicago, receipt of additional collateral
and other actions, the balance of loans classified as receivables from sale of
stock has been reduced to $0.3 million as of September 30, 2005.
During 2004, CIB Marine reduced its treasury stock by $2.6 million, or
210,950 shares, as a result of the sale of CIB -- Chicago. In the third quarter
of 2004, a subsidiary bank of CIB Marine acquired 7,452 shares of CIB Marine
stock through loan collection efforts. At September 30, 2005, treasury stock
held by CIB Marine was $0.2 million and included 12,663 shares.
154
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements or reportable events of the nature required to
be disclosed pursuant to Item 304 (b) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
CIB Marine's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of CIB Marine's disclosure controls and procedures
on December 31, 2003, have concluded that because of certain deficiencies
identified and described below which were determined to be material weaknesses
in internal controls as of such date, CIB Marine did not maintain effective
disclosure controls and procedures to ensure that material information relating
to CIB Marine and its consolidated subsidiaries would be made known to them and
by others within those entities.
(i) CIB Marine's control environment did not sufficiently promote
effective internal control over financial reporting, and this material
weakness was a contributing factor in the development of other material
weaknesses described below. Specifically, deficiencies in the control
environment included insufficient oversight and direction provided by
Management and the Board of Directors, promotion of aggressive loan growth
irrespective of inadequate human resources as well as the safety and
soundness of such growth and a lack of adequate policies and procedures to
enable the timely preparation of reliable financial statements.
(ii) CIB Marine's policies and procedures over the determination of
the allowance for loan losses were not effective.
- Policies and procedures to identify credit downgrades on a timely
basis and establish suitable loan workout plans were not effectively
followed;
- Lack of adequate credit procedures to analyze borrowers' global cash
flow; and
- Lack of adequate procedures to monitor loan collateral and valuation
on collateral dependent loans.
As a result of the these internal control deficiencies, pertinent
information was not identified, captured and communicated in a form and
timeframe that enabled CIB Marine to analyze the appropriateness of the
allowance for loan losses. Consequently, the allowance for loan losses was
materially understated in previously issued consolidated financial
statements for the fiscal quarters ended March 31 and June 30, 2003 and the
years ended December 31, 2002 and 2001. These consolidated financial
statements have been restated to reflect the correction of the
aforementioned errors.
(iii) CIB Marine's policies and procedures were not effective with
regard to coins, jewelry and precious metals loan collateral held, by
failing to adequately appraise collateral in its possession, control access
by the borrower to such collateral and periodically inspect the collateral
using persons with expertise in such collateral. As a result, internal
controls designed to prevent and/or detect significant losses were not
effective. Consequently, CIB Marine sustained a significant credit loss and
did not detect the loss on a timely basis. This deficiency results in more
than a remote likelihood that a material misstatement of CIB Marine's
annual or interim consolidated financial statements would not be prevented
or detected.
(iv) CIB Marine did not have sufficient policies and procedures to
track loans secured by the common stock of CIB Marine or used by borrowers
to purchase common stock of CIB Marine. Consequently, information necessary
to make credit decisions in conformity with sound and safe banking
practices was not identified, captured and communicated and this also
resulted in erroneous accounting for and reporting of these loans in the
consolidated financial statements of CIB Marine which resulted in a
restatement of the consolidated financial statements for the fiscal
quarters ended March 31 and
155
June 30, 2003 and the years ended December 31, 2002 and 2001, of CIB Marine
and resulted in noncompliance with certain banking regulations.
(v) CIB Marine did not have sufficient or adequate policies and
procedures over Information Technology (IT) change management.
Specifically, CIB Marine did not have policies and procedures designed to
prevent unauthorized changes to IT programs, queries and calculations. This
deficiency results in more than a remote likelihood that a material
misstatement of CIB Marine's annual or interim consolidated financial
statements would not be prevented or detected.
b. CHANGES IN INTERNAL CONTROLS
Significant changes to improve internal controls within CIB Marine during
the fourth quarter of 2003 included the realignment of reporting lines of the
loan review function from Credit Administration to the Chief Financial Officer
and the hiring of a new head of Credit Administration, the naming of a new Chief
Lending Officer, substantial completion of an assessment of impairment of the
loan portfolios at all of CIB Marine's affiliates for determining the adequacy
of allowance for loan losses, and a change in policy prohibiting any additional
loans secured by CIB Marine stock.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all directors of CIB
Marine at December 31, 2003, the period that each has held any position with CIB
Marine, a brief account of each director's business experience during at least
the past five years, and the expiration of such director's term. CIB Marine did
not hold an annual meeting of shareholders during 2004. Directors whose term
would have otherwise expired during 2004 remained on the Board of CIB Marine.
DIRECTORS
<Table>
<Caption>
SERVING TERM SCHEDULED POSITION WITH CIB MARINE OR OTHER PRINCIPAL
NAME AND AGE SINCE TO EXPIRE OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ------- -------------- -------------------------------------------
Jose Araujo (58)..................... 1988 2005 International Business Development Officer
of Citrus Bank since April 2003; President
of Joaraucar Consulting, Inc., an
industrial gas service company, since
October 1997; and President of Gascarb, a
carbon dioxide manufacturing company, from
February 1969 to September 1997.
C. Todd Atkins (37).................. 2003 2006 Real estate developer and investor through
various closely held real estate and
investment companies since 1997; associate
of The Atkins Group, a real estate
management and development company, since
1990. Director of Central Illinois Bank
since 1992(1).
Norman E. Baker (57)................. 1988 2004 President and Chief Executive Officer of
Estoy Pronto, Inc., a consulting and
investment company, since July 1994; and
President and Chief Executive Officer of
Associated Storage and Transfer, a
warehousing and trucking company, from July
1969 to July 1996.
</Table>
156
<Table>
<Caption>
SERVING TERM SCHEDULED POSITION WITH CIB MARINE OR OTHER PRINCIPAL
NAME AND AGE SINCE TO EXPIRE OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ------- -------------- -------------------------------------------
John T. Bean (42).................... 1998 2006 President, Chief Executive Officer and
Director of CIB -- Chicago since January
1997; Executive Vice President of Central
Illinois Bank MC, a subsidiary bank of CIB
Marine, from October 1994 to January 1997;
and Senior Vice President of Central
Illinois Bank from November 1993 to October
1994(2).
W. Scott Blake (43).................. 1987 2004 President of Blake Capital Corp., a real
estate development, investment and property
management company, since July 1998; and
President of Blake-Weise Real Estate Corp.,
a real estate development, investment and
property management company, from October
1988 to June 1998(3).
Dean M. Katsaros (47)................ 1995 2004 Owner of Katsaros & Associates, a tax and
accounting business, since September 1981;
General Partner, KB Consultants, a computer
equipment sales and computer consulting
services company, from May 1990 to
September 2002(4).
Jerry D. Maahs (72).................. 1987 2005 Chairman and Chief Executive Officer of
Alto Shaam, Inc. since 2001; President and
Chief Executive Officer of Alto Shaam, Inc.
from 1968 to 2001; President and Chief
Executive Officer of Enthermics, Inc.,
manufacturers of food service equipment,
since 1968; and President and Chief
Executive Officer of AS International, an
international sales company since 1975.
J. Michael Straka (66)............... 1987 2006 President and Chief Executive Officer of
CIB Marine since 1987; and Director or
Chairman and Director of each of CIB
Marine's bank and nonbank subsidiaries,
including Central Illinois Bank since 1987,
CIB -- Chicago since 1994, Marine --
Wisconsin since 1997, CIB -- Indiana since
1998, Marine -- FSB since November 1999,
Citrus Bank since 2001, CIB Marine
Information Services, Inc. since 1990,
Mortgage Services, Inc. since 1995, CIB
Marine Capital, LLC since 2001, and CIB
Marine Commercial Finance, LLC since
2002(5).
Donald M. Trilling (73).............. 1987 2004 Chairman of the Board of CIB Marine from
September 1987 to February 2004; Secretary
of Illini Tile Distributors Inc., an
importer and distributor of ceramic tiles,
from 1983 to 2002(6).
Howard E. Zimmerman (74)............. 1987 2005 Chairman of the Board of Zimmerman Real
Estate Group, a real estate appraisal and
consulting company, since 1986.
</Table>
157
- ---------------
(1) C. Todd Atkins resigned from the Board of CIB Marine on April 15, 2004.
(2) John T. Bean resigned from all positions with CIB Marine and the Board of
CIB Marine on March 3, 2004.
(3) W. Scott Blake was appointed Chairman of the Board of CIB Marine on February
26, 2004, to replace Donald M. Trilling who resigned as Chairman but
continued as a board member.
(4) Dean M. Katsaros resigned from the Board of CIB Marine on November 30, 2004.
(5) J. Michael Straka is the father of Donald J. Straka, former Senior Vice
President, Chief Legal Officer and Secretary of CIB Marine, and Patrick J.
Straka, Senior Vice President and Chief Investment Officer of CIB Marine.
Mr. J. Michael Straka resigned from all officer and board positions with CIB
Marine on March 24, 2004.
(6) In September 2003, Illini Tile Distributors, Inc. entered into liquidation
through an assignment for the benefit of creditors under Illinois law.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of all
executive officers of CIB Marine at December 31, 2003, 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 (66)............... Mr. Straka was the President and Chief Executive Officer of
CIB Marine and 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(1).
Michael L. Rechkemmer (54)........... 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.
Michael J. Miller (52)............... Mr. Miller is Executive Vice President and Chief Lending
Officer and has held these positions since December 11,
2003. Prior to joining CIB Marine, Mr. Miller was Senior
Vice President and Department Manager of U.S. Bank, N.A.
since 1997, and held various positions at Bank One, N.A.
since 1976. Effective April 2005, Mr. Miller was appointed
President and CEO of Marine Wisconsin and ceased serving as
Chief Lending Officer of Marine -- Wisconsin.
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 (41)................ Mr. Straka was Senior Vice President, Chief Legal Officer
and Secretary of CIB Marine and 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(2).
</Table>
158
<Table>
<Caption>
NAME AND AGE OFFICE AND EXPERIENCE
- ------------ ---------------------
Patrick J. Straka (36)............... 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.
Stephen C. Bonnell (53).............. Mr. Bonnell had 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(3).
</Table>
- ---------------
(1) On April 12, 2004, Stanley J. Calderon was appointed President and CEO of
CIB Marine and replaced Mr. Straka. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Subsequent
Events -- Management Changes" for additional information relative to
management and Board of Directors changes.
(2) On April 15, 2005, Daniel J. Rasmussen was named Senior Vice President and
General Counsel of CIB Marine. Mr. Rasmussen previously served as Vice
President and Senior Attorney, and succeeded Donald J. Straka who was
assigned other duties in April 2005 and resigned his employment with CIB
Marine in June 2005. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Subsequent
Events -- Management Changes" for additional information relative to
management and Board of Directors changes.
(3) On February 9, 2004, Margaret A. Incandela was appointed Chief Credit
Officer of CIB Marine and Stephen C. Bonnell was appointed Chief Workout
Manager. Mr. Bonnell resigned from all positions with CIB Marine on March 3,
2004. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Subsequent Events -- Management
Changes" for additional information relative to management and Board of
Directors changes.
AUDIT COMMITTEE FINANCIAL EXPERT
At December 31, 2003, CIB Marine did not have an "audit committee financial
expert," as that term is defined by SEC rules, serving on its Audit Committee.
The Board believes that the Audit Committee members collectively have sufficient
knowledge of financial and auditing matters to effectively oversee CIB Marine's
accounting and financial reporting practices. The Board and the Audit Committee
have the power to engage experts or consultants as they deem appropriate to
carry out their responsibilities. In October 2004, Gary L. Longman joined the
Board of CIB Marine and its Audit Committee. The Board has determined that Mr.
Longman is a audit committee financial expert.
CODE OF ETHICS
CIB Marine has adopted a Code of Ethics, which applies to all of CIB
Marine's directors, officers and employees, and was most recently amended on
October 28, 2004.
159
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of CIB Marine and the four other highest paid executive officers of CIB
Marine (the "Named Executive Officers").
<Table>
<Caption>
LONG-TERM COMPENSATION
-----------------------
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
------------------ STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMP.(2)
- --------------------------- ---- -------- ------- ----------- ---------
J. Michael Straka.......................... 2003 $525,000 $ 0 0 $111,888
President and Chief Executive Officer 2002 500,000 0 0 88,702
2001 400,000 32,423 34,950 86,302
Steven T. Klitzing......................... 2003 $195,000 $ 0 0 $ 2,707
Senior Vice President, Chief Financial
Officer 2002 180,000 0 0 4,232
and Treasurer 2001 161,250 12,963 13,543 9,111
Donald J. Straka........................... 2003 $195,000 $ 0 0 $ 17,613
Senior Vice President, Chief Legal
Officer and 2002 180,000 0 0 4,611
Secretary 2001 161,250 13,154 13,543 7,063
Stephen C. Bonnell......................... 2003 $195,000 $ 0 0 $ 18,098
Senior Vice President and Chief Credit 2002 165,000 0 0 4,831
Officer 2001 143,000 11,725 8,912 5,312
Michael L. Rechkemmer...................... 2003 $178,000 $ 0 0 $ 2,837
Executive Vice President and Chief
Operating 2002 165,000 0 0 4,211
Officer 2001 150,000 12,104 9,830 5,506
</Table>
- ---------------
(1) Includes amounts earned in the fiscal year, whether or not deferred. As
permitted by rules established by the SEC, no amounts are shown with respect
to certain "perquisites" where such amounts do not exceed in the aggregate
the lesser of 10% of salary plus bonus or $50,000.
(2) All other compensation for each Named Executive Officer consists of the
following:
<Table>
<Caption>
BOARD OF LIFE
DIRECTOR INSURANCE ESOP VACATION
NAME YEAR FEES(A) PREMIUMS CONTRIBUTION PAYOUT TOTAL
- ---- ------ -------- --------- ------------ -------- --------
J. Michael Straka............... 2003 $105,450 $4,417 $2,021 $ -- $111,888
2002 79,500 5,122 4,080 -- 88,702
2001 74,300 2,957 3,749 5,296 86,302
Steven T. Klitzing.............. 2003 $ -- $ 686 $2,021 $ -- $ 2,707
2002 -- 245 3,987 -- 4,232
2001 -- 185 3,749 5,177 9,111
Donald J. Straka................ 2003 $ 15,000(b) $ 631 $1,982 $ -- $ 17,613
2002 500 171 3,940 -- 4,611
2001 -- 135 3,749 3,179 7,063
Stephen C. Bonnell.............. 2003 $ 15,000(b) $1,077 $2,021 $ -- $ 18,098
2002 500 669 3,662 -- 4,831
2001 -- 606 3,541 1,165 5,312
Michael L. Rechkemmer........... 2003 $ -- $1,021 $1,816 $ -- $ 2,837
2002 -- 561 3,650 -- 4,211
2001 -- 555 3,653 1,298 5,506
</Table>
- ---------------
(a) Includes payment for meetings of the Board of Directors of CIB Marine and
its subsidiaries and for committee meetings of its subsidiaries.
(b) Includes fees for serving on the Board of Directors of Canron Corporation.
160
OPTIONS
No stock options were granted during 2003 to the Named Executive Officers.
The following table sets forth information regarding shares acquired on the
exercise of stock options during 2003 and the year-end values of unexercised
stock options held by the Named Executive Officers.
<Table>
<Caption>
TOTAL NUMBER OF SECURITIES
UNDERLYING UNEXERCISED TOTAL VALUE OF UNEXERCISED,
NUMBER OF OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR END HELD AT FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
J. Michael Straka...... -- -- 128,818 39,130 -- --
Steven T. Klitzing..... 9,000 $186,930 49,258 14,404 -- --
Donald J. Straka....... -- -- 44,070 15,045 -- --
Stephen C. Bonnell..... 11,250 $233,663 47,412 10,681 -- --
Michael L. Rechkemmer.. -- -- 41,336 11,384 -- --
</Table>
- ---------------
(1) This amount represents the difference between the fair market value of one
share of CIB Marine common stock on December 31, 2003, $5.94 and the option
exercise price times the total number of shares subject to exercisable or
unexercisable options. Because there is no public market for CIB Marine
common stock, the $5.94 per share fair market value was derived by using CIB
Marine's book value at December 31, 2003.
(2) This amount is based on the difference between the estimated fair market
value of the common stock as determined at the time the options were
exercised and the exercise price paid.
COMPENSATION OF DIRECTORS
DIRECTORS' FEES AND COMPENSATION
During 2003, (i) each director, except John T. Bean, received an annual
retainer fee in the amount of $10,000; (ii) each director, except Jose Araujo
and John T. Bean, was paid a fee of $1,000 for each meeting of the Board of
Directors attended; (iii) each director, except Mr. Bean, serving on the audit
committee received $1,000 for each committee meeting attended; and (iv) each
director, except Mr. Araujo and Mr. Bean, serving on another committee received
$500 for each meeting attended during 2003. Mr. Araujo commenced employment as
International Business Officer of Citrus Bank on April 15, 2003. Pursuant to his
compensation agreement, Mr. Araujo no longer was paid fees for attending
regularly scheduled CIB Marine board meetings. During 2003, Mr. Araujo was paid
a salary of $28,333 and commissions of $234 in connection with his employment.
Mr. Araujo received his retainer and $7,800 for Board fees attended prior to
becoming an employee of Citrus Bank.
DIRECTORS' DEFERRED COMPENSATION PLAN
Effective December 1994, CIB Marine adopted a plan allowing directors to
elect to defer receipt of all or a portion of their director fees. Under the
plan, any director may enter into a written deferred compensation agreement
under which that director's fees are retained by CIB Marine in a segregated
account. These fees remain an asset of CIB Marine, subject to the claims of its
creditors, until paid to the director under the agreement. The deferred
directors' fees accrue interest, and a director has a right to cancel future
deferrals at any time. The fees may be withdrawn and are payable in equal
monthly installments over a period of five years at the time of retirement or
upon the death of the director, either before or after retirement. If the
director resigns from the Board, the deferred fees are paid in full in a single
lump sum payment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of CIB Marine determines executive compensation
and consists entirely of non-employee Directors, although J. Michael Straka,
President and Chief Executive Officer of
161
CIB Marine, made recommendations to the Compensation Committee regarding
compensation of officers other than himself. Mr. Straka determined the
compensation of the executive officers of CIB Marine's subsidiaries, except that
the Compensation Committee reviewed the compensation of John T. Bean.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is responsible for
developing executive compensation philosophies, determining the components of
the compensation to be paid to the President and Chief Executive Officer and the
four other highest paid executive officers, and assuring that the compensation
program is administered in a manner consistent with compensation objectives.
EXECUTIVE COMPENSATION
The Compensation Committee determines the salary of the President and Chief
Executive Officer and the four other highest paid executive officers of CIB
Marine. The Committee consulted with J. Michael Straka in 2003 relative to the
setting of salaries and compensation of the four other highest paid executive
officers of CIB Marine. Executive officers' compensation principally consists of
a salary, bonus compensation under CIB Marine's bonus plan and stock options.
The committee seeks to ensure that executive officer compensation is
competitive, promotes both short and long-term interests of the shareholders,
and includes a variable component linking a portion of compensation with the
overall performance of CIB Marine.
Executive officers' base salaries are based upon CIB Marine's performance,
individual performance evaluations, salary history and peer group information
concerning the compensation levels of executive officers at comparable bank
holding companies or banks. The Committee considers the payment of Board fees to
J. Michael Straka as part of his annual compensation. In establishing the base
salaries of the executive officers for 2003, the committee took into account CIB
Marine's growth and performance in 2002.
The Compensation and Stock Option Committees periodically review salaries,
stock options and other aspects of executive compensation in order to assure
that CIB Marine's executive compensation remains competitive with other bank
holding companies which are similar in asset size and operate in its geographic
markets. The committee seeks to ensure that such compensation represents both
the individual's performance as well as the current and past performance of CIB
Marine.
STOCK OPTIONS
The Compensation and Stock Option Committees believe it is appropriate to
more closely align the interests of the executive officers to the future
performance of CIB Marine, and to more closely align their interests with
shareholders, through the granting of stock options. No stock options were
granted to the executive officers during 2003 as shares available for future
grants under the plan were limited and as a result of the financial condition of
CIB Marine during 2003.
BONUS PROGRAM
Employees of CIB Marine and its subsidiaries, including executive officers,
are eligible to participate in a cash bonus program provided that CIB Marine and
the employee meet certain performance goals. Bonuses are based on a percentage
of base salary, which increases in graduated steps in the event that CIB Marine
achieves or surpasses budgeted earnings for the fiscal year. Since executive
officers and other senior officers are in a better position to contribute to the
achievement of such goals, the percentage of base salary that they are eligible
to receive as a bonus is proportionately higher. The executive officers were not
paid a bonus for 2003.
OTHER BENEFIT PROGRAMS
CIB Marine provides its employees with vacation, holiday and insurance
protection plans, including medical, dental, life, accidental death and
dismemberment, travel and accident, and disability. CIB Marine also makes
available to its employees a 401(k) plan which permits participants to make
voluntary tax deferred
162
contributions up to the maximum permitted by law. Commencing January 1, 2003,
CIB Marine began providing all employees of CIB Marine participating in the
401(k) Plan a match equal to 25% of the employee's deferral up to 1% of the
employee's salary. CIB Marine also has an employee stock ownership plan for the
benefit of employees who are eighteen years or older and have achieved a certain
length of service. Executive officers are eligible to participate in all of
these plans. During 2003, CIB Marine contributed approximately 1% of the
employee's salary to the employee stock ownership plan.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code (the "Code") and related
regulations provide that a public company may not deduct, for federal income tax
purposes, compensation in excess of $1 million per year paid to certain
executive officers employed by CIB Marine at year-end, other than compensation
which qualifies as "performance-based compensation" under the Code and related
regulations or is otherwise exempt from the provisions of Section 162(m). In
designing future compensation programs for the Chief Executive Officer and the
other highly compensated executive officers, the committees will take into
account the deductibility of such compensation under Section 162(m).
Respectfully Submitted,
The Compensation and Stock Option
Committees
Howard E. Zimmerman (Committee
Chairman)
Norman E. Baker
Steven C. Hillard
Donald M. Trilling
163
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2003, with
respect to CIB Marine's compensation plans under which equity securities are
authorized for issuance:
<Table>
<Caption>
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS(1)
- ------------- -------------------- -------------------- ---------------------
Equity compensation plans
approved by security
holders..................... 1,439,850 $16.45 188,485
Equity compensation plans not
approved by security
holders..................... -- -- --
TOTAL....................... 1,439,850 $16.45 188,485
</Table>
- ---------------
(1) All securities remaining available for future issuance will be issued under
the 1999 Stock Option and Incentive Plan.
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
The following persons are known to CIB Marine to be the beneficial owners
of more than 5% of the outstanding common stock of CIB Marine as of December 31,
2003, based on information available to CIB Marine.
<Table>
<Caption>
NUMBER OF SHARES PERCENT OF
OF COMMON STOCK COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK
- ------------------------------------ ------------------ ----------
Strategic Capital Trust Company........................... 993,652(1) 5.42%
1608 Broadmoor Drive
Champaign, Illinois 61820
John and Mary Lydia Hadley................................ 1,116,950(2) 6.09%
915 W. Park Avenue
Champaign, Illinois 61821
</Table>
- ---------------
(1) Based solely on information provided by Strategic Capital Trust Company.
(2) Based solely on information in CIB Marine's stock transfer records.
164
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of December 31, 2003, the number of
shares of common stock beneficially owned by (1) each director of CIB Marine
(including nominees), (2) each of the Executive Officers, and (3) all directors
and executive officers of CIB Marine as a group. Except as otherwise indicated,
each person listed has sole voting and investment power over shares beneficially
owned. For purposes of this table, all references to the right to acquire shares
within 60 days refer to the 60 day period commencing December 31, 2003.
<Table>
<Caption>
COMMON SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS
- ------------------------ ------------- --------
Jose Araujo................................................. 111,890(1) *
C. Todd Atkins.............................................. 89,925(2) *
Norman E. Baker............................................. 398,840(3) 2.17%
John T. Bean................................................ 90,105(4) *
W. Scott Blake.............................................. 162,590(5) *
Stephen C. Bonnell.......................................... 81,645(6) *
Dean M. Katsaros............................................ 344,540(7) 1.88%
Steven T. Klitzing.......................................... 76,911(8) *
Jerry D. Maahs.............................................. 313,940(9) 1.71%
Michael L. Rechkemmer....................................... 52,478(10) *
Donald J. Straka............................................ 54,582(11) *
J. Michael Straka........................................... 308,455(12) 1.68%
Patrick J. Straka........................................... 38,801(13) *
Donald M. Trilling.......................................... 228,222(14) 1.24%
Howard E. Zimmerman......................................... 136,990(15) *
All directors and executive officers as a group (16
persons).................................................. 2,489,914(16) 13.57%
</Table>
- ---------------
* LESS THAN ONE PERCENT.
(1) Includes 29,390 shares that Mr. Araujo has the right to acquire within 60
days upon the exercise of stock options.
(2) Includes 18,000 shares held in trust for the benefit of Mr. Atkins'
children and 3,450 shares Mr. Atkins has the right to acquire within 60
days upon the exercise of stock options.
(3) Includes 29,390 shares Mr. Baker has the right to acquire within 60 days
upon the exercise of stock options.
(4) Includes 7,500 shares jointly owned by Mr. Bean and his wife, 1,950 shares
owned by Mr. Bean's wife, and 71,055 shares that Mr. Bean has the right to
acquire within 60 days upon the exercise of stock options.
(5) Includes 29,390 shares that Mr. Blake has the right to acquire within 60
days upon the exercise of stock options.
(6) Includes 47,412 shares that Mr. Bonnell has the right to acquire within 60
days upon the exercise of stock options.
(7) Includes 120,559 shares jointly owned by Mr. Katsaros and his wife and
30,290 shares that Mr. Katsaros has the right to acquire within 60 days
upon the exercise of stock options.
(8) Includes 49,258 shares that Mr. Klitzing has the right to acquire within 60
days upon the exercise of stock options.
(9) Includes 285,000 shares jointly owned by Mr. Maahs and his wife and 28,940
shares that Mr. Maahs has the right to acquire within 60 days upon the
exercise of stock options.
165
(10) Includes 41,336 shares that Mr. Rechkemmer has the right to acquire within
60 days upon the exercise of stock options.
(11) Includes 800 shares jointly owned by Mr. Straka and his wife, 4,800 shares
owned by a partnership with respect to which Mr. Straka shares voting and
investment power, and 44,070 shares Mr. Straka has the right to acquire
within 60 days upon exercise of stock options.
(12) Includes 110,055 shares jointly owned by Mr. Straka and his wife, 3,000
shares owned by Mr. Straka's wife, 6,300 shares owned by partnerships with
respect to which Mr. Straka shares voting and investment power, and 128,818
shares that Mr. Straka has the right to acquire within 60 days upon the
exercise of stock options.
(13) Includes 6,300 shares owned by partnerships with respect to which Mr.
Straka shares voting and investment power and 24,848 shares that Mr. Straka
has the right to acquire within 60 days upon the exercise of stock options.
(14) Includes 68,705 shares held in a trust for the benefit of Mr. Trilling's
wife and 30,740 shares that Mr. Trilling has the right to acquire within 60
days upon the exercise of stock options.
(15) Includes 3,250 shares held in a trust for the benefit of Mr. Zimmerman's
wife and 29,390 shares Mr. Zimmerman has the right to acquire within 60
days upon the exercise of stock options.
(16) Includes, in addition to those shares footnoted above, 24,848 shares which
other executive officers as a group have the right to acquire within 60
days upon the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CIB Marine has business relationships with entities in which directors and
executive officers of CIB Marine or members of their immediate family have
ownership interests. These business relationships are summarized below. CIB
Marine believes each transaction described was on commercially reasonable terms.
J. Michael Straka was the President, Chief Executive Officer and a Director
of CIB Marine in 2003. Karen Straka, his wife, operates a sole proprietorship
known as Plank & Peg that sells antiques. During 2003, CIB Marine and its
subsidiaries paid Plank & Peg $5,219.50 in connection with the purchase of
antiques to furnish offices of CIB Marine and its subsidiaries. Additionally,
Michael J. Straka, his son, operates a sole proprietorship known as Plank &
Peg -- TNG that sells antiques and office fixtures to CIB Marine and its
subsidiaries. During 2003, CIB Marine and its subsidiaries paid Plank &
Peg -- TNG $97,529.15. Michael Straka was also an employee of CIB Marine,
providing construction related services, and was paid $70,013.76 during 2003,
which amount includes a salary of $36,600 and a bonus of $700.00.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services rendered
by KPMG LLP for the audit of CIB Marine's annual financial statements for 2003
and 2002, and fees billed for other services rendered by KPMG LLP.
<Table>
<Caption>
2003 2002
------ ----
(DOLLARS IN
THOUSANDS)
Audit fees(1)............................................... $1,541 $332
Audit related fees(2)....................................... 34 233
Tax fees(3)................................................. 537 163
------ ----
Total fees.................................................. $2,112 $728
====== ====
</Table>
- ---------------
(1) Includes $0.1 million paid during both 2003 and 2002 for audit services
related to Canron Corporation, a company in which CIB Marine acquired an 84%
interest in October 2002 and which is held for disposal.
166
(2) Audit related fees consisted of audits of financial statements of certain
employee benefit plans, audits of mortgage banking compliance and due
diligence services, and included $0.2 million in fees for an audit of Canron
during 2002.
(3) Tax fees consisted of fees for tax consultation and tax compliance services,
and included $0.3 million and $0.1 million paid in relation to Canron during
2003 and 2002, respectively.
PRE-APPROVAL POLICY & PROCEDURES
The Audit Committee must pre-approve all audit and non-audit services
provided by the Company's independent auditors, as provided in its Charter
adopted on April 9, 2003. The chair of the Audit Committee has the authority to
grant pre-approvals of audit and non-audit services between meetings, provided
that any such pre-approvals must be presented to and approved by the full Audit
Committee at its next scheduled meeting.
13% of the fees charged by the independent auditors for tax related
services were approved after the service commenced, in reliance on paragraph
(c)(7)(i)(C) of Rule 2-01 under Regulation S-X.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of CIB Marine:
(1) Reviewed and discussed the audited financial statements with
management;
(2) Discussed with its independent auditors, KPMG LLP, the matters
required to be discussed by Statement on Auditing Standards No. 61;
(3) Received the written disclosures and the letter from KPMG LLP
required by Independence Standards Board Standard No. 1; and
(4) Discussed with KPMG LLP the auditors' independence.
Based on these reviews and discussions, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in CIB
Marine's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
The Audit Committee has considered whether the provision of non-audit
services is compatible with the independent auditors' independence and satisfied
itself as to the auditors' independence.
Respectfully Submitted,
The Audit Committee
Gary L. Longman (Committee Chairman)
Steven C. Hillard
Donald M. Trilling
Howard E. Zimmerman
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.
- Report of Independent Registered Public Accounting Firm.
- Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001.
167
- Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002, and 2001.
- Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2003, 2002, and 2001.
- Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002, and 2001.
- 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.
3.2 Bylaws of CIB Marine Bancshares, Inc.
*10.1 CIB Marine Bancshares, Inc. 1999 Stock Option and Incentive
Plan, as amended (incorporated by reference to Exhibit 10.1
to CIB Marine's Form 10-K filed with the Securities and
Exchange Commission on March 31, 2003).
*10.2 First Amendment to the CIB Marine Bancshares, Inc. 1999
Stock Option and Incentive Plan.
*10.3 CIB Marine Bancshares, Inc. 1999 Stock Option and Incentive
Plan Key Employee Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 99.1 of CIB Marine's
Form 8-K filed with the Securities and Exchange Commission
on September 23, 2005).
*10.4 CIB Marine Bancshares, Inc. 1999 Stock Option and Incentive
Plan Key Employee Non-Qualified Stock Option Agreement
(accelerated vesting upon sale of subsidiary bank)
(incorporated by reference to Exhibit 99.2 of CIB Marine's
Form 8-K filed with the Securities and Exchange Commission
on September 23, 2005).
*10.5 Form of Deferred Compensation Agreement of CIB Marine
(incorporated by reference to Exhibit 10.3 to CIB Marine's
Form 10-K filed on April 30, 1998).
*10.6 Employment Agreement between Stanley J. Calderon and CIB
Marine Bancshares, Inc. (incorporated by reference to
Exhibit 99 to CIB Marine's Form 8-K filed November 22,
2004).
*10.7 Employment Agreements between Michael J. Miller and CIB
Marine Bancshares, Inc. (incorporated by reference to
Exhibit 99.1 to CIB Marine's Form 8-K filed December 27,
2004).
*10.8 Employment Agreements between Margaret A. Incandela and CIB
Marine Bancshares, Inc. (incorporated by reference to
Exhibit 99.2 to CIB Marine's Form 8-K filed December 27,
2004).
14.1 Code of Ethics (incorporated by reference to Exhibit 99 to
the Company's Form 8-K filed November 2, 2004).
21 Subsidiaries of CIB Marine
23.1 Consent of KPMG LLP
31.1 Certification of Stanley J. Calderon, Chief Executive
Officer, under Rule 13a-14(d)/15d-14(d).
31.2 Certification of Steven T. Klitzing, Chief Financial
Officer, under Rule 13a-14(d)/15d-14(d).
32.1 Certification of Stanley J. Calderon, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of 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) For the quarter ended December 31, 2003, CIB Marine filed one Form 8-K
on November 18, 2003. The Form 8-K reported information under Item 12 and did
not include financial information.
168
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIB MARINE BANCSHARES, INC.
(registrant)
By: /s/ STANLEY J. CALDERON
------------------------------------
Stanley J Calderon
President and Chief Executive
Officer
Date: October 28, 2005
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/ STANLEY J. CALDERON President and Chief Executive
------------------------------------------------ Officer (Principal Executive
Stanley J Calderon Officer) and Director
/s/ STEVEN T. KLITZING Chief Financial Officer
------------------------------------------------ (Principal Financial and
Steven T. Klitzing Accounting Officer)
/s/ JOSE ARAUJO Director
------------------------------------------------
Jose Araujo
/s/ NORMAN E. BAKER Director
------------------------------------------------
Norman E. Baker
/s/ W. SCOTT BLAKE Chairman of the Board of
------------------------------------------------ Directors and Director
W. Scott Blake
/s/ STEVEN C. HILLARD Director
------------------------------------------------
Steven C. Hillard
/s/ GARY L. LONGMAN Director
------------------------------------------------
Gary L. Longman
/s/ JERRY D. MAAHS Director
------------------------------------------------
Jerry D. Maahs
/s/ DONALD M. TRILLING Director
------------------------------------------------
Donald M. Trilling
/s/ HOWARD E. ZIMMERMAN Director
------------------------------------------------
Howard E. Zimmerman
</Table>
169