PINX:CIBH Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

(Mark One)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended March 31, 2012

 

or

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from __________ to ________

 

Commission file number 000-24149

 

CIB MARINE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Wisconsin 37-1203599
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
1930 W. Bluemound Road, Suite D, Waukesha, Wisconsin 53186
(Address of principal executive offices) (Zip Code)

 

(262) 695-6010

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No £

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company R
    (Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

 

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

 

As of April 30, 2012 there were 18,346,391 shares issued and 18,135,344 shares outstanding of the registrant’s common stock, $1.00 par value per share.

 

 
 

 

EXPLANATORY NOTE

 

This document is intended to speak as of March 31, 2012, except as otherwise noted.

 

FORM 10-Q TABLE OF CONTENTS

 

  Page #
   
Part I – Financial Information  
   
Item 1 Financial Statements (Unaudited)  
   
Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 3
   
Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 4
   
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2012 and 2011 6
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 7
   
Notes to Unaudited Consolidated Financial Statements 8
   
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
   
Item 3 Quantitative and Qualitative Disclosures About Market Risk 49
   
Item 4 Controls and Procedures 49
   
Part II – Other Information  
   
Item 1 Legal Proceedings 50
   
Item 1A Risk Factors 50
   
Item 6 Exhibits 50
   
Signatures 51

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CIB MARINE BANCSHARES, INC.

 

Consolidated Balance Sheets

 

   March 31, 2012
(Unaudited)
   December 31, 2011 
   (Dollars in thousands, except share data) 
Assets          
Cash and due from banks  $58,908   $44,828 
Securities available for sale   88,345    89,009 
Loans held for sale   678    2,120 
Loans   348,386    357,632 
Allowance for loan losses   (16,092)   (16,128)
Net loans   332,294    341,504 
Federal Home Loan Bank stock   6,264    11,555 
Premises and equipment, net   4,531    4,559 
Accrued interest receivable   1,733    1,648 
Other real estate owned   8,031    7,088 
Other assets   1,320    1,665 
Total assets  $502,104   $503,976 
Liabilities and Stockholders’ Equity          
Deposits:          
Noninterest-bearing demand  $57,524   $58,884 
Interest-bearing demand   30,041    29,080 
Savings   160,055    154,365 
Time   174,917    180,257 
Total deposits   422,537    422,586 
Short-term borrowings   6,287    9,784 
Federal Home Loan Bank advances   5,000    5,000 
Accrued interest payable   336    376 
Other liabilities   2,743    2,008 
Total liabilities   436,903    439,754 
Commitments and contingent liabilities (Note 10)        
Stockholders’ Equity          
Preferred stock, $1 par value; 5,000,000 authorized shares; 7% fixed noncumulative perpetual issued-55,624 shares of Series A and 4,376 shares of Series B convertible; aggregate liquidation preference-$60,000   51,000    51,000 
Common stock, $1 par value; 50,000,000 authorized shares;18,346,391 issued shares; 18,135,344 outstanding shares   18,346    18,346 
Capital surplus   158,484    158,480 
Accumulated deficit   (159,409)   (159,298)
Accumulated other comprehensive income related to available for sale securities   2,082    2,113 
Accumulated other comprehensive loss related to non-credit other-than-temporary impairments   (4,773)   (5,890)
Accumulated other comprehensive loss, net   (2,691)   (3,777)
Treasury stock 218,499 shares at cost   (529)   (529)
Total stockholders’ equity   65,201    64,222 
Total liabilities and stockholders’ equity  $502,104   $503,976 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

3
 

 

CIB MARINE BANCSHARES, INC.

 

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands, except per
share data)
 
Interest and Dividend Income          
Loans  $4,704   $5,225 
Loans held for sale   34    102 
Securities   1,007    1,449 
Other investments   24    15 
Total interest and dividend income   5,769    6,791 
Interest Expense          
Deposits   867    1,534 
Short-term borrowings   3    3 
Federal Home Loan Bank advances   53    102 
Total interest expense   923    1,639 
Net interest income   4,846    5,152 
Provision for loan losses   73    1,089 
Net interest income after provision for loan losses   4,773    4,063 
Noninterest Income          
Deposit service charges   134    168 
Other service fees   58    24 
Other income   10    29 
Total other-than-temporary impairment losses          
Total impairment loss   (128)   (52)
Loss recognized in other comprehensive income        
Net impairment loss recognized in earnings   (128)   (52)
Gains on sale of assets   31    40 
Total noninterest income   105    209 
Noninterest Expense          
Compensation and employee benefits   2,432    2,383 
Equipment   202    285 
Occupancy and premises   384    431 
Data processing   142    200 
Federal deposit insurance   266    372 
Professional services   382    426 
Telephone and data communication   104    137 
Insurance   216    140 
Write downs and losses on assets   413    779 
Other expense   448    464 
Total noninterest expense   4,989    5,617 
Loss from continuing operations before income taxes   (111)   (1,345)
Income tax expense        
Net Loss   (111)   (1,345)
Preferred stock dividends        
Net loss allocated to common stockholders  $(111)  $(1,345)

(Continued)

4
 

 

CIB MARINE BANCSHARES, INC.

 

Consolidated Statements of Operations and Comprehensive Income (continued)

(Unaudited)

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands, except per
share data)
 
Other comprehensive income (loss):          
Change in unrealized losses on securities available for sale, net of reclassification  $(31)  $195 
Change in unrealized losses on securities available for sale for which a portion of OTTI has been recognized in earnings, net of reclassification   1,117    876 
Net realized gains on available for sale securities        
Total other comprehensive income   1,086    1,071 
Comprehensive income (loss)  $975   $(274)
           
Loss Per Share          
Basic loss from continuing operations  $(0.01)  $(0.07)
Diluted loss from continuing operations  $(0.01)  $(0.07)
           
Weighted average shares-basic and diluted   18,127,892    18,127,892 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

5
 

CIB MARINE BANCSHARES, INC.

 

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   Common Stock               Accumulated
Other
   Stock
Receivables
and
     
   Shares   Par
Value
   Preferred
Stock
   Capital
Surplus
   Accumulated
Deficit
   Comprehensive
Income (Loss)
   Treasury
Stock
   Total 
       (Dollars in thousands) 
                                 
Balance at January 1, 2011   18,346,391   $18,346   $51,000   $158,458   $(153,874)  $(4,648)  $(529)  $68,753 
Comprehensive loss:                                        
Net loss                   (1,345)           (1,345)
Other comprehensive income                       1,071        1,071 
Total comprehensive loss                                      (274)
Stock option expense               6                6 
Balance at March 31, 2011   18,346,391   $18,346   $51,000   $158,464   $(155,219)  $(3,577)  $(529)  $68,485 
                                         
Balance at January 1, 2012   18,346,391   $18,346   $51,000   $158,480   $(159,298)  $(3,777)  $(529)  $64,222 
Comprehensive income:                                        
Net loss                   (111)           (111)
Other comprehensive income                       1,086        1,086 
Total comprehensive income                                      975 
Stock option expense               4                4 
Balance at March 31, 2012   18,346,391   $18,346   $51,000   $158,484   $(159,409)  $(2,691)  $(529)  $65,201 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

6
 

 

CIB MARINE BANCSHARES, INC.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Cash Flows from Operating Activities          
Net loss  $(111)  $(1,345)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Deferred loan fee amortization   25    3 
Depreciation and other amortization   90    52 
Provision for loan losses   73    1,089 
Originations of loans held for sale       (34)
Proceeds from sale of loans held for sale   1,444    342 
Gains on sale of assets   (31)   (40)
Write down and losses on assets   413    779 
Impairment loss on investment securities   128    52 
Decrease in interest receivable and other assets   255    543 
Decrease in accrued interest payable and other liabilities   (571)   (201)
Net cash provided by operating activities   1,715    1,240 
Cash Flows from Investing Activities          
Maturities of securities available for sale   6,355    5,870 
Purchase of securities available for sale   (3,100)    
Repayments of mortgage-backed securities available for sale   5,476    11,571 
Purchase of mortgage-backed securities available for sale   (5,850)    
Decrease in Federal Home Loan Bank stock   5,291     
Net decrease in other investments   16    17 
Net decrease in loans   7,824    16,250 
Proceeds from sale of other real estate owned   19    262 
Premises and equipment expenditures   (120)   (25)
Net cash provided by investing activities   15,911    33,945 
Cash Flows from Financing Activities          
Decrease in deposits   (49)   (2,743)
Net decrease in short-term borrowings   (3,497)   (6,797)
Net cash used in financing activities   (3,546)   (9,540)
Net increase in cash and cash equivalents   14,080    25,645 
Cash and cash equivalents, beginning of period   44,828    27,267 
Cash and cash equivalents, end of period  $58,908   $52,912 
Supplemental Cash Flow Information          
Cash paid (received) during the period for:          
Interest expense  $963   $1,719 
Income taxes       (64)
Supplemental Disclosures of Noncash Activities          
Transfer of loans to other real estate owned   1,288    163 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

7
 

 

CIB MARINE BANCSHARES, INC.

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1-Basis of Presentation

 

Nature of Operations

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for interim financial information. Certain information and footnote disclosures have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with CIB Marine Bancshares, Inc.’s 2011 Annual Report on Form 10-K (“2011 Form 10-K”). References to “CIB Marine” include CIB Marine Bancshares, Inc. and its subsidiaries unless otherwise specified. In the opinion of management, the unaudited consolidated financial statements included in this Form 10-Q reflect all adjustments necessary to present fairly CIB Marine’s financial condition, results of operations and cash flows. The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of results for the entire year. The consolidated financial statements include the accounts of CIB Marine and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities including the allowance for loan losses, valuation of investments and impairment, if any, other real estate owned and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates used in the preparation of the consolidated financial statements are based on various factors, including the current interest rate environment, value of collateral securing loans and investments, assessed probabilities of default of obligors in loans and investment securities, recent sales of investments in the marketplace, recent sales and condition in real estate markets and economic conditions, both locally and nationally. Changes in these factors can significantly affect CIB Marine’s net interest income, noninterest expense and the value of its recorded assets and liabilities.

 

Reclassifications

 

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

 

New Accounting Pronouncements

 

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

 

Note 2-Securities Available for Sale

 

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

 

8
 

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   (Dollars in thousands) 
March 31, 2012                    
U.S. government agencies (non SBAs)  $2,001   $2   $   $2,003 
U.S. government agencies (SBA loan-backed)   3,100    2        3,102 
States and political subdivisions   27,256    1,914    440    28,730 
Trust preferred collateralized debt obligations   8,280        4,760    3,520 
Other debt obligation   150            150 
Residential mortgage-backed securities (agencies)   29,434    1,400    8    30,826 
Residential mortgage-backed securities (non-agencies (1))   20,815    173    974    20,014 
Total securities available for sale  $91,036   $3,491   $6,182   $88,345 
December 31, 2011                    
U.S. government agencies (non SBAs)  $7,006   $65   $   $7,071 
States and political subdivisions   28,611    1,835    502    29,944 
Trust preferred collateralized debt obligations   8,295        5,061    3,234 
Other debt obligation   150            150 
Residential mortgage-backed securities (agencies)   25,075    1,435        26,510 
Residential mortgage-backed securities (non-agencies (1))   23,649    149    1,698    22,100 
Total securities available for sale  $92,786   $3,484   $7,261   $89,009 

____________

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

 

During the first quarter of 2012, $3.1 million of securities backed by Small Business Administration (“SBA”) loans were purchased at premiums with maturities from 16 to 18 years and with principal cash flows guaranteed by the SBA.

 

Securities available for sale with a carrying value of $35.0 million and $47.1 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, Federal Home Loan Bank of Chicago (“FHLBC”) advances, repurchase agreements, federal reserve discount window advances, a federal funds and letter of credit guidance facility at a correspondent bank, and for other purposes as required or permitted by law.

 

The amortized cost and fair value of securities at March 31, 2012, by contractual maturity, are shown below. Certain securities, other than mortgage-backed securities, may be called earlier than their maturity date. Expected maturities may differ from contractual maturities in mortgage-backed securities, because certain mortgages may be prepaid without penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following contractual maturity schedule.

 

   Amortized
Cost
   Fair
Value
 
   (Dollars in thousands) 
Due in one year or less  $3,324   $3,357 
Due after one year through five years   9,842    10,522 
Due after five years through ten years   13,421    13,776 
Due after ten years   14,200    9,850 
    40,787    37,505 
Residential mortgage-backed securities (agencies)   29,434    30,826 
Residential mortgage-backed securities (non-agencies)   20,815    20,014 
Total securities available for sale  $91,036   $88,345 

 

The following tables represent gross unrealized losses and the related fair value of securities aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011:

 

9
 

 

   Less than 12 months in an
unrealized loss position
   12 months or longer in an
unrealized loss position
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
   (Dollars in thousands) 
March 31, 2012                              
States and political subdivisions  $1,653   $7   $2,034   $433   $3,687   $440 
Trust preferred collateralized debt obligations           3,520    4,760    3,520    4,760 
Residential mortgage-backed securities (agencies)   1,599    8            1,599    8 
Residential mortgage-backed securities (non-agencies)   2,103    5    10,072    969    12,175    974 
Total securities with unrealized losses  $5,355   $20   $15,626   $6,162   $20,981   $6,182 
Securities without unrealized losses                       67,364      
Total securities                      $88,345      
                               
December 31, 2011                              
States and political subdivisions  $1,628   $33   $1,996   $469   $3,624   $502 
Trust preferred collateralized debt obligations           3,234    5,061    3,234    5,061 
Residential mortgage-backed securities (non-agencies)   3,417    33    10,702    1,665    14,119    1,698 
Total securities with unrealized losses  $5,045   $66   $15,932   $7,195   $20,977   $7,261 
Securities without unrealized losses                       68,032      
Total securities                      $89,009      

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis and more frequently when economic or market conditions warrant. For those securities with fair value less than cost at March 31, 2012, because CIB Marine does not intend to sell the investment nor is it more likely than not that CIB Marine will be required to sell the investments before recovery of their respective amortized cost bases, which may be maturity, CIB Marine does not consider those securities to have been OTTI at quarter end or prior, except for the following: (1) seven residential mortgage-backed securities (non-agencies) (“Non-agency MBS”) with $0.1 million credit-related OTTI recognized during both first quarters of 2012 and 2011 and (2) two trust preferred collateralized debt obligations (“TPCDOs”) with no credit-related OTTI recognized during both the first quarters of 2012 and 2011.

 

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

 

Net unrealized losses on investment securities at March 31, 2012 were $2.7 million compared to $3.8 million at December 31, 2011. At March 31, 2012, TPCDOs accounted for $4.8 million in net unrealized losses and Non-agency MBS accounted for $0.8 million. The remaining securities had net unrealized gains of $2.9 million at March 31, 2012.

 

States and Political Subdivisions (“Municipal Securities”). At March 31, 2012, for those Municipal Securities rated by nationally recognized statistical rating agencies, all were rated investment grade except one general obligation bond issued by the City of Detroit, Michigan issued in 2005, which is rated B with a par value of $2.5 million, amortized cost of $2.5 million and fair market value of $2.0 million, to be repaid with ad valorem property taxes. This bond was rated AAA at issue and at the time of purchase by CIB Marine. The city is taking budgetary actions to reduce its operating expense under a consent agreement with the State of Michigan that gives the state some oversight of city finances but avoids the appointment of an emergency manager. There is no reported OTTI at March 31, 2012. CIB Marine does not intend to sell, nor is it more likely than not that it will be required to sell, any of its Municipal Securities before recovery of their amortized cost bases, which may be maturity and CIB Marine does not expect a credit loss. As a result, CIB Marine has not recognized any OTTI on its Municipal Securities.

 

Trust Preferred Collateralized Debt Obligations. At March 31, 2012, CIB Marine held four TPCDOs with an $8.6 million par value, an amortized cost of $8.3 million and fair value of $3.5 million. To a limited extent these securities are protected against credit loss by credit enhancements, such as over-collateralization and subordinated securities. Unless they are the most senior class security in the structure, however, they also may be subordinated to more senior classes as identified later in this section. All the TPCDOs have collateral pools and are not single-issuer securities. Preferred Term Securities, LTD (“PreTSLs”) 27 A-1 and 28 A-1 are the most senior classes where all other classes issued in those pools are subordinated to them, and PreTSLs 23 C-FP and 26 B-1 are mezzanine or subordinated classes, but not the most deeply subordinated classes of securities in their pools.

 

10
 

 

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

 

Additional information related to the TPCDOs and related OTTI as of March 31, 2012 is provided in the table below:

 

   PreTSL 23   PreTSL 26   PreTSL 27   PreTSL 28 
   (Dollars in thousands) 
Class   C-FP    B-1    A-1    A-1 
Seniority   Mezzanine    Mezzanine    Senior    Senior 
Amortized cost  $747   $3,846   $1,823   $1,864 
Fair value   114    589    1,417    1,400 
Unrealized loss   (633)   (3,257)   (406)   (464)
Total credit-related OTTI recognized in earnings (1)   (66)   (103)        
Moody’s /S&P /Fitch Ratings   C/NR/C    Ca/NR/CC    Baa3/CCC/BB    Baa3/CCC/BB 
Percent of current deferrals and defaults to total collateral balances   27%   28%   28%   27%
Break in yield (2)   13%   22%   38%   38%
Coverage (3)   (19)%   (19)%   18%   24%
Number of issues in performing collateral   94    49    33    38 
Percent of expected deferrals & defaults to performing collateral (4)   8%   8%   8%   8%
Percent of excess subordination to performing collateral (5)   (15%)   (4%)   31%   34%

____________

(1)Total OTTI recognized in earnings and accumulated other comprehensive income (“AOCI”) reflect results since the acquisition date of the securities by CIB Marine, all of which was recognized prior to March 31, 2012.
(2)The percent of additional immediate defaults of performing collateral at a 85% loss severity rate that would cause a break in yield, meaning that the security would not receive all its contractual cash flows through maturity even though a class could enter a period where payments received are payments-in-kind (“PIK”) but later paid in cash in addition to any accrued interest on the PIKs. Based on a collateral level analysis, PreTSL 23 and 26 projected deferrals and defaults indicate there would be a break in yield resulting in credit component OTTI.
(3)The percentage points by which the class is over or (under) collateralized with respect to its collateral ratio thresholds at which cash payments are to be received from lower classes or directed to higher classes (i.e., if the coverage actual over (under) is negative). A current positive (negative) coverage ratio by itself does not necessarily mean that there will be a full receipt (shortfall) of contractual cash flows through maturity as actual results realized with respect to future defaults, default timing, loss severities, recovery timing, redirections of payments in other classes and other factors could act to cause (correct) a deficiency at a future date.
(4)A point within a range of estimates for the percent of future deferrals and defaults to performing collateral used in assessing credit-related OTTI.
(5)The excess subordination as a percentage of the remaining performing collateral is calculated by taking the difference of total performing collateral less the current class balances of senior classes divided by the current class balances of those senior to and including the respective class for which the measure is applicable.

 

Residential Mortgage-Backed Securities (Non-agencies). The unrealized losses in Non-agency MBS are primarily the result of deteriorated asset quality and financial market liquidity conditions. This has impacted the market prices to varying degrees for each respective security based upon the relative credit quality and liquidity premiums applicable to each security.

 

11
 

 

At March 31, 2012, securities with a par value of $15.5 million and unrealized losses of $0.9 million were below investment grade compared to securities with a par value of $17.2 million and unrealized losses of $1.6 million at December 31, 2011. The decline of $1.7 million in par value was primarily due to the repayment of principal. CIB Marine’s principal and interest payments received on these securities from the purchase date through March 31, 2012 have all been timely and in full except for two securities with credit-related OTTI, where payments received have been timely but with amounts reduced by losses previously recognized as credit-related OTTI where subordinated tranches are no longer able to absorb the loss. The table below displays the current composition of the Non-agency MBS portfolio as of March 31, 2012, based on the lowest credit rating assigned by any of the rating agencies.

 

At March 31, 2012
Credit Rating  Par   Amortized
Cost
   Unrealized Gain
(Loss)
 
   (Dollars in thousands) 
AAA  $3,964   $3,948   $105 
AA   1,016    983    (3)
A   1,569    1,561    11 
BB or below (1)   15,535    14,323    (914)
Total  $22,084   $20,815   $(801)

 

 

(1)BB and lower credit ratings are considered to be below investment grade. All securities were originally rated AAA.

 

At March 31, 2012, the issues from 2004 or earlier represented $6.5 million in amortized cost with a fair value of $6.6 million, and the issue dates from 2005 through 2006 represented $14.3 million in amortized cost with a fair value of $13.4 million and an unrealized loss of $0.9 million. At March 31, 2012, the balance-weighted mean and median percentages for each security of various delinquency and nonperformance measures to the total mortgage loans collateralizing those securities were: (1) 5.9% and 5.7%, respectively, for loans 60 or more days past due but not in foreclosure or transferred to OREO; (2) 6.7% and 4.0%, respectively, for loans in foreclosure plus OREO; and (3) 12.6% and 7.7%, respectively, for the total of loans 60 or more days past due, in foreclosure and OREO. With respect to the ratios reported in (3), the range across the securities was 0.0% to 33.5%. California represents a state-level geographic concentration of 36% of the total residential mortgage collateral and Florida represents a concentration of approximately 5%. No other state is more than 5%.

 

The table below summarizes the Non-agency MBS in which OTTI has been recognized during the current or prior periods. In making estimates of credit losses for those securities with OTTI, some of the key assumptions for the underlying residential mortgage loan collateral for March 31, 2012 included annualized prepayment speeds ranging between 5% and 12%, future cumulative default rates ranging between 21% and 48%, weighted average loss severity rates ranging between 45% and 69%, and resulting future cumulative collateral loss rates ranging between 10% and 30%. Resulting cash flows were projected considering the affects of related securities sharing an interest in the same pool of collateral to derive expected credit loss outcomes through maturity.

 

At or For the Three Months Ended March 31, 2012
Total Residential Mortgage-Backed Securities (non-agency) with OTTI
Credit Category  Amortized
Cost
   Fair
Value
   Total credit-
related OTTI
Recognized in
Earnings
   Total OTTI
Recognized in
AOCI
   Range of
Nonperforming
Loans to Total
Loans (2)
   Range of
Mean
Original
LTVs (2)
   Issue
Date
   Range of
Current Levels
of Credit
Support from
Subordination
 
   (dollars in thousands) 
Below Investment Grade (1)  $8,857   $7,974   $(1,436)  $(883)   10 – 34%   64 – 72%   2005 - 2006    0 – 7%

 

(1)BB and lower credit ratings are considered to be below investment grade. All securities were originally rated AAA.
(2)Ranges represent the high and low measures for each security’s respective loan collateral pool for securities with OTTI recognized. Nonperforming loans here means past due 60 or more days, in foreclosure or held as OREO. The full amount of nonperforming loans are not expected to translate into a dollar-for-dollar loss to the collateral pool due to borrower efforts to bring the loans current or sell the mortgage residential properties or collection activities of the servicing agents that includes liquidation of collateral and the pursuit of deficiencies where available from the borrowers.

 

Roll Forward of OTTI Related to Credit Loss. The following table is a roll forward of the amount of OTTI related to credit losses that have been recognized in earnings for which a portion of OTTI was recognized in AOCI for the quarters ended March 31, 2012 and 2011:

 

12
 

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Beginning of period balance of the amount related to credit losses on debt securities held by CIB Marine at the beginning of the period for which a portion of OTTI was recognized in AOCI  $1,478   $1,190 
Additions for the amount related to credit loss for which an OTTI was not previously recognized        
Additional increase to the amount related to the credit loss for which OTTI was previously recognized when CIB Marine does not intend to sell the security and is it more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis   128    52 
End of period balance of credit losses related to OTTI for which a portion was recognized in AOCI  $1,606   $1,242 

 

Note 3- Loans and Allowance for Loan Losses

 

Loans

 

The components of loans were as follows:

 

   At March 31, 2012   At December 31, 2011 
   Amount   % of Total   Amount   % of Total 
   (Dollars in thousands) 
Commercial  $43,901    12.6%  $44,385    12.4%
Commercial real estate   216,495    62.3    221,420    62.1 
Construction and development   14,099    4.1    17,260    4.8 
Residential real estate   18,100    5.2    16,593    4.7 
Home equity   31,136    9.0    31,831    8.9 
Purchased home equity pools   21,297    6.1    22,646    6.4 
Other consumer   2,448    0.7    2,542    0.7 
Gross loans   347,476    100.0%   356,677    100.0%
Deferred loan costs   910         955      
Loans   348,386         357,632      
Allowance for loan losses   (16,092)        (16,128)     
Loans, net  $332,294        $341,504      

 

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

 

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

 

   March 31, 2012 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
   (Dollars in thousands) 
Accruing Loans                              
Commercial  $548   $   $   $548   $42,760   $43,308 
Commercial real estate:                              
Owner occupied                   61,104    61,104 
Non-owner occupied                   145,436    145,436 
Construction and development                   10,450    10,450 
Residential real estate:                              
Owner occupied                   12,935    12,935 
Non-owner occupied                   4,371    4,371 
Home equity   438            438    30,163    30,601 
Purchased home equity pools   495            495    20,802    21,297 
Other consumer       10        10    2,438    2,448 
Deferred loan costs   4            4    906    910 
Total  $1,485   $10   $   $1,495   $331,365   $332,860 

 

13
 

 

   March 31, 2012 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
   (Dollars in thousands) 
Nonaccrual Loans (1)                              
Commercial  $   $   $593   $593   $   $593 
Commercial real estate:                              
Owner occupied                        
Non-owner occupied           9,489    9,489    466    9,955 
Construction and development   1,123        1,220    2,343    1,306    3,649 
Residential real estate:                              
Owner occupied       278    273    551    243    794 
Non-owner occupied                        
Home equity       12        12    523    535 
Purchased home equity pools                        
Other consumer                        
Deferred loan costs                        
Total  $1,123   $290   $11,575   $12,988   $2,538   $15,526 
                               
Total loans                              
Commercial  $548   $   $593   $1,141   $42,760   $43,901 
Commercial real estate:                              
Owner occupied                   61,104    61,104 
Non-owner occupied           9,489    9,489    145,902    155,391 
Construction and development   1,123        1,220    2,343    11,756    14,099 
Residential real estate:                              
Owner occupied       278    273    551    13,178    13,729 
Non-owner occupied                   4,371    4,371 
Home equity   438    12        450    30,686    31,136 
Purchased home equity pools   495            495    20,802    21,297 
Other consumer       10        10    2,438    2,448 
Deferred loan costs   4            4    906    910 
Total  $2,608   $300   $11,575   $14,483   $333,903   $348,386 

 

   December 31, 2011 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
   (Dollars in thousands) 
Accruing Loans                              
Commercial  $250   $   $   $250   $43,812   $44,062 
Commercial real estate:                              
Owner occupied   34            34    56,332    56,366 
Non-owner occupied                   153,777    153,777 
Construction and development                   10,424    10,424 
Residential real estate:                              
Owner occupied   172            172    11,452    11,624 
Non-owner occupied                   4,377    4,377 
Home equity   496    267        763    30,564    31,327 
Purchased home equity pools   193    495        688    21,958    22,646 
Other consumer                   2,479    2,479 
Deferred loan costs   3    2        5    950    955 
Total  $1,148   $764   $   $1,912   $336,125   $338,037 
                               
Nonaccrual Loans (1)                              
Commercial  $   $   $323   $323   $   $323 
Commercial real estate:                              
Owner occupied                        
Non-owner occupied   91        9,445    9,536    1,741    11,277 
Construction and development   1,345        2,470    3,815    3,021    6,836 
Residential real estate:                              
Owner occupied       87    356    443    149    592 
Non-owner occupied                        
Home equity   68    74        142    362    504 
Purchased home equity pools                        
Other consumer                   63    63 
Deferred loan costs                        
Total  $1,504   $161   $12,594   $14,259   $5,336   $19,595 

 

14
 

 

   December 31, 2011 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
   (Dollars in thousands) 
Total loans                              
Commercial  $250   $   $323   $573   $43,812   $44,385 
Commercial real estate:                              
Owner occupied   34            34    56,332    56,366 
Non-owner occupied   91        9,445    9,536    155,518    165,054 
Construction and development   1,345        2,470    3,815    13,445    17,260 
Residential real estate:                              
Owner occupied   172    87    356    615    11,601    12,216 
Non-owner occupied                   4,377    4,377 
Home equity   564    341        905    30,926    31,831 
Purchased home equity pools   193    495        688    21,958    22,646 
Other consumer                   2,542    2,542 
Deferred loan costs   3    2        5    950    955 
Total  $2,652   $925   $12,594   $16,171   $341,461   $357,632 

____________

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

 

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

 

   March 31, 2012   December 31, 2011 
   (Dollars in thousands) 
Nonaccrual-loans  $15,526   $19,595 
Nonaccrual-loans held for sale       1,375 
Restructured loans accruing   10,211    10,706 
90 days or more past due and still accruing-loans and loans held for sale        

 

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

 

   March 31, 2012   December 31, 2011 
   (Dollars in thousands) 
Commercial  $593   $323 
Commercial real estate:          
Owner occupied        
Non-owner occupied   9,955    11,277 
Construction and development   3,649    6,836 
Residential real estate:          
Owner occupied   794    592 
Non-owner occupied        
Home equity   535    504 
Other consumer       63 
Total  $15,526   $19,595 

 

   March 31, 2012   December 31, 2011 
   (Dollars in thousands) 
Impaired loans without a specific allowance  $10,466   $13,257 
Impaired loans with a specific allowance   21,634    23,026 
Total impaired loans  $32,100   $36,283 
Specific allowance related to impaired loans  $5,444   $5,528 

 

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

 

15
 

 

   Unpaid
Principal
Balance
   Recorded
Investment
   Specific
Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
 
   (Dollars in thousands) 
March 31, 2012                         
With no related allowance:                         
Commercial  $270   $270   $   $135   $ 
Commercial real estate:                         
Owner occupied                    
Non-owner occupied   7,684    5,550        5,614    6 
Construction and development   8,683    3,620        5,210     
Residential real estate:                         
Owner occupied   649    612        474    1 
Non-owner occupied                    
Home equity   342    342        352     
Purchased home equity pools                    
Other consumer   72    72        76     
   $17,700   $10,466   $   $11,861   $7 
With an allowance recorded:                         
Commercial  $336   $335   $141   $336   $ 
Commercial real estate:                         
Owner occupied   5,603    5,603    809    5,470    26 
Non-owner occupied   13,369    13,369    4,260    14,292    18 
Construction and development                    
Residential real estate:                         
Owner occupied   568    564    41    491    1 
Non-owner occupied                    
Home equity   1,326    1,326    110    1,272    4 
Purchased home equity pools   430    430    77    431     
Other consumer   7    7    6    38     
    21,639    21,634    5,444    22,330    49 
Total  $39,339   $32,100   $5,444   $34,191   $56 

 

The amount of cash basis income recognized on impaired loans totaled $0.02 million and $0.04 million for the first quarter of 2012 and 2011, respectively.

 

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

 

16
 

 

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

 

Allowance for Loan Losses

 

Changes in the allowance for loan losses were as follows:

 

   Quarters Ended March 31, 
   2012   2011 
     
Balance at beginning of period  $16,128   $14,645 
Charge-offs   (2,729)   (1,391)
Recoveries   2,620    583 
Net loan charge-offs   (109)   (808)
Provision for loan losses   73    1,089 
Balance at end of period  $16,092   $14,926 
Allowance for loan losses as a percentage of loans   4.62%   3.75%

 

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

 

   At or For the Quarter Ended March 31, 2012 
   Commercial   Commercial
Real Estate
   Construction
and
Development
   Residential
Real Estate
   Home
Equity
   Purchased
Home
Equity Pools
   Other
Consumer
   Total 
   (Dollars in thousands) 
Balance at beginning of period  $1,417   $10,471   $428   $344   $964   $2,425   $79   $16,128 
Provision (credit) for loan losses   (181)   577    680    (11)   268    (1,304)   44    73 
Charge-offs       (924)   (672)   (37)   (231)   (793)   (72)   (2,729)
Recoveries   6    483    1        17    2,112    1    2,620 
Balance at end of period  $1,242   $10,607   $437   $296   $1,018   $2,440   $52   $16,092 
                                         
Allowance for loan losses:                                        
Ending balance individually evaluated for impairment  $141   $5,069   $   $41   $110   $77   $6   $5,444 
Ending balance collectively evaluated for impairment   1,101    5,538    437    255    908    2,363    46    10,648 
                                         
Loans:                                        
Ending balance individually evaluated for impairment  $605   $24,522   $3,620   $1,176   $1,668   $430   $79   $32,100 
Ending balance collectively evaluated for impairment   43,296    191,973    10,479    16,924    29,468    20,867    2,369    315,376 

 

17
 

 

   At or For the Year Ended December 31, 2011 
   Commercial   Commercial
Real Estate
   Construction
and
Development
   Residential
Real Estate
   Home
Equity
   Purchased
Home
Equity Pools
   Other
Consumer
   Total 
   (Dollars in thousands) 
                                 
Balance at beginning of year  $2,691   $7,466   $873   $351   $856   $2,349   $59   $14,645 
Provision (credit) for loan losses   (1,433)   7,626    1,239    (6)   1,438    (2,521)   38    6,381 
Charge-offs       (5,390)   (2,027)   (1)   (1,392)   (2,639)   (19)   (11,468)
Recoveries   159    769    343        62    5,236    1    6,570 
Balance at end of year  $1,417   $10,471   $428   $344   $964   $2,425   $79   $16,128 
                                         
Allowance for loan losses:                                        
Ending balance individually evaluated for impairment  $126   $5,162   $   $62   $71   $70   $37   $5,528 
Ending balance collectively evaluated for impairment   1,291    5,309    428    282    893    2,355    42    10,600 
                                         
Loans:                                        
Ending balance individually evaluated for impairment  $336   $26,233   $6,799   $753   $1,581   $432   $149   $36,283 
Ending balance collectively evaluated for impairment   44,049    195,187    10,461    15,840    30,250    22,214    2,393    320,394 

 

   At or For the Quarter Ended March 31, 2011 
   Commercial   Commercial
Real Estate
   Construction
and
Development
   Residential
Real Estate
   Home
Equity
   Purchased
Home
Equity Pools
   Other
Consumer
   Total 
   (Dollars in thousands) 
                                 
Balance at beginning of year  $2,691   $7,466   $873   $351   $856   $2,349   $59   $14,645 
Provision (credit) for loan losses   (655)   1,243    162    (70)   311    101    (3)   1,089 
Charge-offs       (406)   (113)       (235)   (634)   (3)   (1,391)
Recoveries   140    326            16    101        583 
Balance at end of year  $2,176   $8,629   $922   $281   $948   $1,917   $53   $14,926 
                                         
Allowance for loan losses:                                        
Ending balance individually evaluated for impairment  $885   $3,982   $82   $75   $166   $55   $6   $5,251 
Ending balance collectively evaluated for impairment   1,291    4,647    840    206    782    1,862    47    9,675 
                                         
Loans:                                        
Ending balance individually evaluated for impairment  $2,348   $24,751   $13,852   $824   $2,140   $482   $105   $44,502 
Ending balance collectively evaluated for impairment   43,710    213,025    18,309    15,278    34,835    25,396    2,508    353,061 

 

Troubled Debt Restructurings

 

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

 

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

 

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

 

18
 

 

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

 

   Quarters Ended March 31, 
   2012   2011 
   Number of
Contracts
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
   Number of
Contracts
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
   (Dollars in thousands) 
Troubled Debt Restructurings                              
Commercial real estate:                              
Non-owner occupied   2   $528   $521       $   $ 
Residential real estate:                              
Owner occupied   2    222    222             
Home equity   1    16    16    1    44    44 
    5   $766   $759    1   $44   $44 

 

   Quarters Ended March 31, 
   2012   2011 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
   (Dollars in thousands) 
Troubled Debt Restructurings with payment defaults                    
Commercial real estate:                    
Non-owner occupied   1   $608    1   $110 
Construction and development   1    200         
Residential real estate:                    
Owner occupied   1    67         
    3   $875    1   $110 

 

For the quarters ending March 31, 2012 and 2011, net charge-offs related to troubled debt restructurings totalled $0.3 million and $0.4 million, respectively.

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

19
 

 

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

 

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

 

   Pass   Special
Mention
   Substandard-
Accrual
   Substandard-
Nonaccrual
   Doubtful   Total Loans 
   (Dollars in thousands) 
March 31, 2012                              
Commercial  $39,342   $3,385   $581   $593   $   $43,901 
Commercial real estate:                              
Owner occupied   52,426    3,042    5,636            61,104 
Non-owner occupied   128,276    8,024    9,136    9,955        155,391 
Construction and development   9,843    350    257    3,649        14,099 
Residential real estate:                              
Owner occupied   11,585    744    606    521    273    13,729 
Non-owner occupied   4,340    31                4,371 
Home equity   29,374    352    875    535        31,136 
Purchased home equity pools   14,515        6,782            21,297 
Other consumer   2,183    248    17            2,448 
   $291,884   $16,176   $23,890   $15,253   $273    347,476 
Deferred loan costs                            910 
Total                           $348,386 
                               
December 31, 2011                              
Commercial  $35,847   $7,367   $848   $323   $   $44,385 
Commercial real estate:                              
Owner occupied   49,696    959    5,711            56,366 
Non-owner occupied   128,156    15,733    9,888    11,277        165,054 
Construction and development   8,981    1,184    259    6,836        17,260 
Residential real estate:                              
Owner occupied   10,368    762    494    236    356    12,216 
Non-owner occupied   4,345    32                4,377 
Home equity   29,884    359    1,084    504        31,831 
Purchased home equity pools   14,997        7,649            22,646 
Other consumer   2,220    251    8    63        2,542 
   $284,494   $26,647   $25,941   $19,239   $356    356,677 
Deferred loan costs                            955 
Total                           $357,632 

 

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

 

Note 4-Other Real Estate Owned

 

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

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Balance at beginning of period  $7,088   $5,314 
Transfer of loans at net realizable value to OREO   1,288    163 
Sale proceeds   (19)   (262)
Gain from sale of OREO   9    39 
Write down and losses on sales of OREO   (335)   (725)
Balance at end of period  $8,031   $4,529 

 

Net expenses from operations of OREO, gains/losses on disposals and write downs of properties were $0.3 million, and $0.7 million for the quarters ended March 31, 2012 and 2011, respectively.

20
 

 

Note 5-Federal Home Loan Bank Chicago

 

As a member of the FHLBC, CIBM Bank is required to maintain minimum amounts of FHLBC stock as required by that institution. At December 31, 2011, CIB Marine owned $11.6 million carrying value in FHLBC stock and the stock was carried at par of which $1.3 million were required stock holdings with the FHLBC based on the asset size of CIBM Bank. On February 15, 2012, the FHLBC repurchased $5.3 million of stock at par value. After the repurchase CIB Marine had $6.3 million remaining carrying value in FHLBC stock of which $1.3 million were required stock holdings with the FHLBC.

 

Note 6-Short-term Borrowings

 

The following is a summary of short-term borrowings:

 

   March 31, 2012   December 31, 2011 
   Balance   Rate   Balance   Rate 
   (Dollars in thousands) 
Securities sold under repurchase agreements  $6,287    0.14%  $9,784    0.21%

 

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

 

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

 

Note 7- Federal Home Loan Bank Advances

 

Long-term borrowings of $5.0 million and a maturity date of August 14, 2012, at both March 31, 2012 and December 31, 2011 consisted of borrowings from the FHLBC having an original maturity of greater than one year. All of the borrowings are fixed-rate borrowings collateralized by municipal securities and loans. CIB Marine is required to maintain qualifying collateral as security for both short-term and long-term FHLBC borrowings. CIBM Bank had assets pledged at the FHLBC sufficient to support total borrowings of $42.1 million and $8.5 million at March 31, 2012 and December 31, 2011, respectively. These assets consisted of securities with a fair value of $2.9 million and $9.4 million at March 31, 2012 and December 31, 2011, respectively, and loans of $39.5 million at March 31, 2012. During 2012, CIBM Bank received an upgrade from the FHLBC allowing the use of a blanket lien for qualifying loan assets which increased CIBM Bank’s availability of borrowing credit with the agency. As a result, additional potential borrowings available at the FHLBC at March 31, 2012 and December 31, 2011 were $37.1 million and $3.5 million, respectively.

 

Note 8-Stockholders’ Equity

 

Regulatory Capital

 

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

 

21
 

 

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

 

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

 

   Actual   For Capital
Adequacy Purposes
   To Be Well
Capitalized
Under Prompt
Corrective Provisions
   Minimum Required
Pursuant to the 
Consent Order
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio 
March 31, 2012                                        
Total capital to risk weighted assets                                        
CIB Marine Bancshares, Inc.  $73,263    17.49%  $33,518    8.00%                    
CIBM Bank   61,469    14.75    33,346    8.00   $41,682    10.00%  $50,018    12.00%
                                         
Tier 1 capital to risk weighted assets                                        
CIB Marine Bancshares, Inc.  $67,892    16.20%  $16,759    4.00%                    
CIBM Bank   56,126    13.47    16,673    4.00   $25,009                
                                         
Tier 1 leverage to average assets                                        
CIB Marine Bancshares, Inc.  $67,892    13.49%  $20,130    4.00%                    
CIBM Bank   56,126    11.22    20,017    4.00   $25,022    5.00%  $50,043    10.00%
                                         
December 31, 2011                                        
Total capital to risk weighted assets                                        
CIB Marine Bancshares, Inc.  $73,566    16.93%  $34,772    8.00%                    
CIBM Bank   61,489    14.26    34,489    8.00   $43,111    10.00%  $51,733    12.00%
                                         
Tier 1 capital to risk weighted assets                                        
CIB Marine Bancshares, Inc.  $67,999    15.64%  $17,386    4.00%                    
CIBM Bank   55,969    12.98    17,244    4.00   $25,867                
                                         
Tier 1 leverage to average assets                                        
CIB Marine Bancshares, Inc.  $67,999    13.15%  $20,685    4.00%                    
CIBM Bank   55,969    10.93    20,473    4.00   $25,592    5.00%  $51,184    10.00%

 

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

 

Note 9-Loss per Share

 

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

22
 

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands, except share and per share data) 
Loss from continuing operations  $(111)  $(1,345)
Preferred stock dividends        
Net loss allocated to common stockholders  $(111)  $(1,345)
Weighted average shares outstanding:          
Total weighted average common shares outstanding   18,135,344    18,135,344 
Shares owned by CIBM Bank   (7,452)   (7,452)
Weighted average common shares outstanding   18,127,892    18,127,892 
Effect of dilutive stock options outstanding        
Basic   18,127,892    18,127,892 
Assumed conversion of Series B preferred to common        
Diluted   18,127,892    18,127,892 
           
Loss per share :          
Basic loss from continuing operations  $(0.01)  $(0.07)
Diluted loss from continuing operations   (0.01)   (0.07)

 

Options to purchase 401,956 and 451,712 shares of common stock for the quarters ended March 31, 2012 and 2011, respectively, were excluded from the calculation of diluted loss per share because the exercise price of the outstanding stock options was greater than the average market price of the common shares (anti-dilutive options).

 

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

 

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

 

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

 

   March 31, 2012   December 31, 2011 
   (Dollars in thousands) 
Commitments to extend credit:          
Fixed  $1,121   $1,724 
Variable   31,762    30,110 
Standby letters of credit   2,414    2,385 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee except for overdraft lines of credit, which a fixed maturity date is not established. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. CIB Marine evaluates each customer’s creditworthiness and determines the amount of the collateral necessary based on management’s credit evaluation of the counterparty. Collateral held varies, but may include marketable securities, accounts receivable, inventories, property and equipment, and real estate. The interest rates range between 2.24% and 18.00% with a weighted average of 4.39%. The maturity dates range between April 2012 and open dated, the latter is related to overdraft protection accounts. Loan commitments to commercial customers totaled $23.6 million, with the maturity dates ranging between April 2012 and August 2022 and a weighted average term of eight months.

 

Lending-Related and Other Commitments

 

Standby letters of credit are conditional commitments that CIB Marine issues to guarantee the performance of a customer to a third-party. The maximum potential future payments guaranteed by CIB Marine under standby letter of credit arrangements was $2.4 million at March 31, 2012 and December 31, 2011, with a weighted average term of approximately 8 months and 11 months at March 31, 2012 and December 31, 2011, respectively.

 

23
 

 

Contingent Liabilities

 

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

 

Note 11-Fair Value

 

The following tables present information about CIB Marine’s assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that CIB Marine has the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Additional information concerning the Level 3 assets at March 31, 2012 is detailed below:

 

    Fair Value    Valuation
Technique(s)
  Unobservable Input   Range
(Weighted
Average)
 
    (Dollars in Thousands)              
TPCDOs   $ 3,520   Discounted cash flow   Constant prepayment rate   1.0%-1.0% (1.0%)  
              Probability of default, cumulative   7.7%-8.4% (8.2%)  
              Loss severity   85%-85% (85%)  
Loans held for sale     678   Market approach   Loan prices   28%-52% (32%)  

 

       Fair Value for Measurements Made on a Recurring Basis 
Description  Fair Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)
 
   (Dollars in thousands) 
March 31, 2012                    
Assets                    
U.S. government agencies (non SBA)  $2,003   $   $2,003   $ 
U.S. government agencies (SBA loan-backed)   3,102        3,102     
States and political subdivisions   28,730        28,730     
Trust preferred securities collateralized debt obligations   3,520            3,520 
Other debt obligations   150        150     
Residential mortgage-backed securities (agencies)   30,826        30,826     
Residential mortgage-backed securities (non-agencies)   20,014        20,014     
Total  $88,345   $   $84,825   $3,520 
                     
December 31, 2011                    
Assets                    
U.S. government agencies  $7,071   $   $7,071   $ 
States and political subdivisions   29,944        29,944     
Trust preferred securities collateralized debt obligations   3,234            3,234 
Other debt obligations   150        150     
Residential mortgage-backed securities (agencies)   26,510        26,510     
Residential mortgage-backed securities (non-agencies)   22,100        22,100     
Total  $89,009   $   $85,775   $3,234 

 

24
 

 

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

 

   Loans Held
for Sale
   Other Equity
Investments
 
   (Dollars in thousands) 
         
Quarter Ended March 31, 2012          
Balance at beginning of period  $2,120   $ 
Write down        
Gain on sale   2     
Settlements   (1,444)    
Balance at March 31, 2012  $678   $ 
           
Quarter Ended March 31, 2011          
Balance at beginning of period  $6,628   $65 
Write down        
Gain on sale        
Settlements   (308)    
Balance at March 31, 2011  $6,320   $65 

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Available for Sale Securities          
Beginning of year balance  $3,234   $2,985 
Total gains or losses (realized/unrealized):          
Included in earnings        
Included in other comprehensive income   288    428 
Settlements   (2)   (7)
Balance at end of period  $3,520   $3,406 
Total gains or losses for the year included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at end of period  $288   $428 

 

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

 

   Fair Value for Measurements Made on a Nonrecurring Basis 
Description  Fair Value   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total Gains
(Losses)
Year-to-Date
 
   (Dollars in thousands) 
March 31, 2012                    
Loans held for sale:                         
Commercial real estate  $148   $   $   $148   $ 
Construction and development   530            530    2 
Impaired loans (1)                         
Commercial   442        442        39 
Commercial real estate   8,014        8,014        (796)
Construction and development   2,203        2,203        (669)
Residential real estate   282        282        (33)
Home equity   448        448        (17)
Purchased home equity pools                    
Other consumer   73        73        (63)
Total impaired loans   11,462        11,462        (1,539)
Other real estate owned:                         
Commercial   80        80        6 
Commercial real estate   32        32         
Construction and development   6,606        6,606        (287)
Residential real estate   1,313        1,313        (45)
Total  $20,171   $   $19,493   $678   $(1,863)

 

25
 

 

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

____________

(1) Impaired loans gains (losses) include only those attributable to the loans represented in the fair value measurements for March 31, 2012 and December 31, 2011. Total impaired loans at March 31, 2012 and December 31, 2011 were $32.1 million and $36.3 million, respectively.

 

Gains and losses (realized and unrealized) for assets and liabilities reported at fair value on a recurring basis included in earnings for the quarters ended March 31, 2012 and 2011 (above) are reported in other revenues as follows:

 

   Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Other Revenues          
Total gains or losses in earnings (or changes in net assets) for the period  $   $ 
Change in unrealized gains or losses relating to assets still held at reporting date   288    428 

 

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

 

Securities Available for Sale. Where quoted market prices are available from active markets with high volumes of frequent trades for identical securities, the security is presented as a Level 1 input security. These would include predominantly U.S. Treasury Bills, Notes and Bonds. Securities classified under Level 2 inputs include those where quoted market prices are available from an active market of similar but not identical securities, where pricing models use the U.S. Treasury or LIBOR swap yield curves, where market quoted volatilities are used, and where correlated or market corroborated inputs are used such as prepayment speeds, expected default and loss severity rates. Securities with predominantly Level 2 inputs and using a market approach to valuation include U.S. government agency and government sponsored enterprise issued securities and mortgage-backed securities, certain corporate or foreign sovereign debt securities, private issue mortgage-backed securities, other asset-backed securities, equity securities with quoted market prices but low or infrequent trades and debt obligations of states and political subdivisions. Where Level 1 or Level 2 inputs are either not available, or are significantly adjusted, the securities are classified under Level 3 inputs. The available for sale securities using Level 3 inputs were TPCDOs with fair values measured using predominantly the income valuation approach (present value technique), where expected future cash flows less expected losses were discounted using a discount rate consisting of benchmark interest rates plus credit, liquidity and option premium spreads from similar and comparable, but not identical, types of debt instruments and from models. The credit and liquidity premium spreads used in the discount rates and the credit factors used in deriving cash flows represent significant unobservable inputs.

26
 

 

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

 

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

 

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

 

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

 

       Fair Value Measurement 
   Carrying
Amount
   Level 1   Level 2   Level 3   Total 
   (Dollars in thousands) 
At March 31, 2012                    
Financial assets:                         
Cash and cash equivalents  $58,908   $58,908   $   $   $58,908 
Loans held for sale   678            678    678 
Securities available for sale   88,345        84,825    3,520    88,345 
Loans, net   332,294        11,462    307,739    319,201 
Accrued interest receivable   1,733        765    968    1,733 
Financial liabilities:                         
Deposits   422,537    247,620    177,805        425,425 
Short-term borrowings   6,287        6,287        6,287 
Federal Home Loan Bank advances   5,000        5,078        5,078 
Accrued interest payable   336        336        336 

 

27
 

 

 

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

 

   At March 31, 2012   At December 31, 2011 
   Contractual
or Notional
Amount
   Carrying
Amount
   Estimated
Fair Value
   Contractual
or Notional
Amount
   Carrying
Amount
   Estimated
Fair Value
 
   (Dollars in thousands) 
Off-balance sheet items:                              
Commitments to extend credit                              
Fixed  $1,121    $   $   $1,724   $   $ 
Variable   31,762            30,110         
Standby letters of credit   2,414    (4)   (4)   2,385    (6)   (6)

 

Fair value amounts represent estimates of value at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated.

 

Because of the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make reasonable comparisons of CIB Marine’s fair value to that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated fair value disclosures and to realize that because of these uncertainties the aggregate fair value should in no way be construed as representative of the underlying value of CIB Marine.

 

The following describes the methodology and assumptions used to estimate fair value of financial instruments.

 

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

 

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

 

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

 

Federal Home Loan Bank. There is no market for FHLBC stock and it may only be sold back to the FHLBC or another member institution at par with the FHLBC and the Federal Housing Finance Agency’s (“FHFA”) approval. As a result, its cost, and its par amount at this time represents its carrying amount. The carrying amount of FHLBC stock was $6.3 million and $11.6 million at March 31, 2012 and December 31, 2011, respectively.

 

28
 

 

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

 

Deposit Liabilities. The carrying value of deposits with no stated maturity approximates their fair value as they are payable on demand resulting in a Level 1 classification. The fair value of fixed time deposits was estimated using the income approach to valuation by discounting expected future cash flows. The discount rates used in these analyses are based on market rates of interest for time deposits of similar remaining maturities resulting in a Level 2 classification.

 

Short-term Borrowings. The carrying value of short-term borrowings payable within three months or less approximates their fair value resulting in a Level 2 classification. The estimated fair value of borrowed funds with a maturity greater than three months is based on quoted market prices, when available. Borrowed funds with a maturity greater than three months for which quoted prices were not available were valued using the income approach to valuation by discounting expected future cash flows by a current market rate for similar types of debt resulting in a Level 2 classification. 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.

 

Federal Home Loan Bank Advances. The fair market value of long-term borrowings payable was estimated using the income approach to valuation by discounting the expected future cash flows using current interest rates for instruments with similar terms resulting in a Level 2 classification.

 

Accrued Interest Payable. The carrying amount of accrued interest payable is used to approximate its fair value resulting in a Level 2 or 3 classification consistent with the respective liability.

 

Off-Balance Sheet Instruments. The fair value and carrying value of letters of credit and unused and open ended lines of credit have been estimated based on the unearned fees charged for those commitments, net of accrued liability for probable losses.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion and analysis that presents CIB Marine’s consolidated financial condition as of March 31, 2012, and its changes in financial condition and results of operations for the quarters ended March 31, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements and notes contained in Part I, Item 1 of this Form 10-Q, as well as CIB Marine’s 2011 Form 10-K.

 

FORWARD-LOOKING STATEMENTS

 

CIB Marine has made statements in this Form 10-Q 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,” “intend,” “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 that are subject to many uncertainties and factors relating to CIB Marine’s operations and the business environment, which could change at any time.

 

There are inherent difficulties in predicting factors that may affect the accuracy of forward-looking statements. These factors include those referenced in Part I, Item 1A-Risk Factors of CIB Marine’s 2011 Form 10-K, and as may be described from time to time in CIB Marine’s subsequent Securities and Exchange Commission (“SEC”) filings, and such factors are incorporated herein by reference. See also Part II, Item 1-Legal Proceedings of this Form 10-Q.

 

29
 

 

Stockholders should note that many factors, some of which are discussed elsewhere in this Form 10-Q and in the documents that are incorporated by reference, could affect the future financial results of CIB Marine and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors, many of which are beyond CIB Marine’s control, include but are not limited to:

 

·operating, legal, and regulatory risks;
·economic, political, and competitive forces affecting CIB Marine’s banking business;
·the impact on net interest income and securities values from changes in monetary policy and general economic and political conditions;
·the risk that CIB Marine’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful; and
·other factors discussed in Part II Item 1A, “Risk Factors,” below and elsewhere herein.

 

These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made. CIB Marine undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are subject to significant risks and uncertainties and CIB Marine’s actual results may differ materially from the results discussed in forward-looking statements.

 

Overview

 

The following discussion and analysis is presented to assist in the understanding and evaluation of CIB Marine’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.

 

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. CIB Marine made no significant changes in its critical accounting policies and significant estimates from those disclosed in its 2011 Form 10-K.

 

Results of Operations

 

Results of Operations- Summary

 

Net loss from continuing operations for the first quarter of 2012 was $0.1 million, an improvement of $1.2 million compared to the net loss of $1.3 million for the first quarter of 2011. The reduction in the net loss between periods was primarily due to a reduction in the provision for loan losses and lower noninterest expense. The first quarter 2012 provision for loan losses was $1.0 million lower than the first quarter of 2011, due primarily to an improvement in credit quality and recoveries in the purchased home equity pools. Noninterest expense was lower by $0.6 million due primarily to reduced write-downs on assets and lower FDIC insurance, as well as smaller reductions in expenses for a number of areas including occupancy and premise, equipment, professional service, data processing and telecommunications.

 

The following table sets forth selected unaudited consolidated financial data. The selected unaudited consolidated financial data should be read in conjunction with the Unaudited Consolidated Financial Statements, including the related notes contained in Part I, Item 1 of this Form 10-Q.

 

30
 

 

Selected Unaudited Consolidated Financial Data

 

   At or for the Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands, except share and per share data) 
Selected Statements of Operations Data          
Interest and dividend income  $5,769   $6,791 
Interest expense   923    1,639 
Net interest income   4,846    5,152 
Provision for loan losses   73    1,089 
Net interest income after provision for loan losses   4,773    4,063 
Noninterest income   105    209 
Noninterest expense   4,989    5,617 
Loss from continuing operations before income taxes   (111)   (1,345)
Income tax expense        
Net loss from continuing operations  $(111)  $(1,345)
Common Share Data          
Basic and diluted loss from continuing operations  $(0.01)  $(0.07)
Net loss   (0.01)   (0.07)
Dividends        
Book value per share  $0.29   $0.47 
Weighted average shares outstanding-basic and diluted   18,127,892    18,127,892 
Financial Condition Data          
Total assets excluding assets of company held for disposal  $502,104   $577,934 
Loans   348,386    398,554 
Allowance for loan losses   (16,092)   (14,926)
Securities available for sale   88,345    110,503 
Deposits   422,537    490,784 
Borrowings   11,287    15,964 
Stockholders’ equity   65,201    68,485 
Financial Ratios and Other Data          
Performance ratios:          
Net interest margin (1)   3.93%   3.62%
Net interest spread (2)   3.70    3.32 
Noninterest income to average assets (3)   0.08    0.15 
Noninterest expense to average assets   4.02    3.90 
Efficiency ratio (4)   100.77    104.78 
Loss on average assets (5)   (0.09)   (0.93)
Loss on average equity (6)   (0.82)   (7.92)
Asset quality ratios:          
Nonaccrual loans to total loans (7)   4.46%   9.35%
Nonaccrual loans, restructured loans and loans 90 days or more past due and still accruing to total loans (7)   7.39    10.54 
Nonperforming assets, restructured loans and loans 90 days or more past due and still accruing to total assets (7)   6.73    8.05 
Allowance for loan losses to total loans   4.62    3.75 
Allowance for loan losses to nonaccrual loans, restructured loans and loans 90 days or more past due and still accruing (7)   62.52    35.53 
Net charge-offs annualized to average loans   0.12    0.81 
Capital ratios:          
Total equity to total continuing assets   12.99%   11.85%
Total risk-based capital ratio   17.49    15.93 
Tier 1 risk-based capital ratio   16.20    14.66 
Leverage capital ratio   13.49    12.25 
Other data:          
Number of employees (full-time equivalent)   139    144 
Number of banking facilities   13    15 

 


(1)Net interest margin is the ratio of net interest income to average interest-earning assets.
(2)Net interest spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.
(3)Noninterest income to average assets excludes gains and losses on securities.
(4)The efficiency ratio is noninterest expense divided by the sum of net interest income plus noninterest income, excluding gains and losses on securities.
(5)Loss on average assets is net loss from continuing operations divided by average total assets.
(6)Loss on average equity is net loss from continuing operations divided by average common equity.
(7)Excludes loans held for sale from nonaccrual loans, nonperforming assets and 90 days or more past due and still accruing loans.

 

31
 

 

Net Interest Income

 

The following table sets forth information regarding average balances, interest income, or interest expense, and the average rates earned or paid for each of CIB Marine’s major asset, liability and stockholders’ equity categories. Interest income on tax-exempt securities has not been adjusted to reflect the tax equivalent basis, since CIB Marine does not expect to realize all of the tax benefits associated with these securities due to substantial losses incurred.

 

   Quarters Ended March 31, 
   2012   2011 
   Average
Balance
   Interest
Earned/Paid
   Average
Yield/Cost
   Average
Balance
   Interest
Earned/Paid
   Average
Yield/Cost
 
   (Dollars in thousands) 
Assets                              
Interest-earning assets                              
Securities available for sale:                              
Taxable (1)  $87,289   $1,006    4.61%  $118,808   $1,441    4.85%
Tax-exempt   68    1    5.88    152    2    5.26 
Total securities available for sale   87,357    1,007    4.61    118,960    1,443    4.85 
Loans held for sale (1)   1,156    34    11.83    6,382    102    6.48 
Loans (1)(2):                              
Commercial   48,855    590    4.86    51,699    604    4.74 
Commercial real estate   234,294    2,885    4.95    274,542    3,300    4.87 
Consumer   70,666    1,229    6.99    80,034    1,321    6.69 
Total loans   353,815    4,704    5.35    406,275    5,225    5.22 
Federal funds sold, reverse repos and interest-earning due from banks   43,690    22    0.20    32,494    15    0.19 
Federal Home Loan Bank Stock   8,880    2    0.09    11,555    6    0.21 
Total interest-earning assets   494,898    5,769    4.68    575,666    6,791    4.77 
Noninterest-earning assets                              
Cash and due from banks   6,791              7,967           
Premises and equipment   4,570              5,016           
Allowance for loan losses   (16,455)             (14,667)          
Accrued interest receivable and other assets   9,299              9,979           
Total noninterest-earning assets   4,205              8,295           
Total assets  $499,103             $583,961           
                               
Liabilities and Stockholders’ Equity                              
Interest-bearing liabilities                              
Deposits:                              
Interest-bearing demand deposits  $30,978   $16    0.21%  $32,834   $22    0.27%
Money market   142,016    161    0.46    145,657    298    0.83 
Other savings deposits   15,872    12    0.30    10,171    6    0.24 
Time deposits   177,142    678    1.54    251,597    1,208    1.95 
Total interest-bearing deposits   366,008    867    0.95    440,259    1,534    1.41 
Borrowings-short-term   7,245    3    0.17    6,782    3    0.18 
Borrowings-long-term   5,000    53    4.26    10,000    102    4.14 
Total borrowed funds   12,245    56    1.84    16,782    105    2.54 
Total interest-bearing liabilities   378,253    923    0.98    457,041    1,639    1.45 
Noninterest-bearing demand deposits   54,406              54,288           
Accrued interest and other liabilities   2,162              3,772           
Stockholders’ equity   64,282              68,860           
Total liabilities and stockholders’ equity  $499,103             $583,961           
Net interest income and net interest spread (1)(3)       $4,846    3.70%       $5,152    3.32%
Net interest-earning assets  $116,645             $118,625           
Net interest margin (1)(4)             3.93%             3.62%
Ratio of average interest-earning assets to average interest-bearing liabilities   1.31              1.26           

 


(1)Balance totals include respective nonaccrual assets.
(2)Interest earned on loans includes a nominal amount of amortized loan costs for both the quarters ended March 31, 2012 and 2011.
(3)Net interest spread is the yield on average interest-earning assets less the rate on interest-bearing liabilities.
(4)Net interest margin is the ratio of net interest income to average interest-earning assets.

 

Net interest income decreased $0.3 million, or 5.9%, from $5.2 million in the first quarter of 2011 to $4.9 million in the first quarter of 2012. The decrease was mainly attributable to a reduction in volumes of earning assets partially offset by reduced average costs of deposits.

 

Total interest income decreased $1.0 million, or 15.0%, from $6.8 million in the first quarter of 2011 to $5.8 million in the first quarter of 2012. The decrease was due to a $0.4 million, or 30.2%, decrease in interest income on securities and a $0.5 million, or 10.0%, decrease in interest income on loans during the first quarter of 2012 compared to the same period in 2011. The decrease in interest income on the securities resulted primarily from a $31.6 million strategic reduction in average balances. The decrease in interest income on loans resulted primarily from a $52.5 million reduction in average loan balances, partially offset by a 13 basis point improvement in loan yields due in part to declining nonaccrual loan balances and one-time recoveries of interest on previously charged-off purchased home equity loans of $0.2 million during the first quarter of 2012 compared to the first quarter of 2011.

 

32
 

 

Total interest expense decreased $0.7 million, or 43.7%, from $1.6 million in the first quarter of 2011 to $0.9 million in the first quarter of 2012. The decrease was primarily due to a $0.5 million, or 43.9%, reduction in interest expense on time deposits. This decrease was due to a 41 basis point decline in average interest costs paid on time deposits and a $74.5 million strategic reduction in average balances for time deposits. CIB Marine reduced time deposits and corresponding securities to reduce total assets as part of its capital management plan in a manner consistent with its liquidity and interest rate risk management strategies. In addition, this planned reduction was due to the limited earning opportunities from the difference in rates paid on the time deposits versus the available interest rate paid on government securities of comparable term, as well as the continued limited lending opportunities in the local geographies.

 

CIB Marine’s net interest margin, which is the ratio of net interest income to average interest-earning assets, increased by 31 basis points from 3.62% during the first quarter of 2011 to 3.93% during the first quarter of 2012 and its net interest spread, which is the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities increased 38 basis points during the same period. The net interest margin increase was primarily due to the improved cost and composition of interest-bearing liabilities, with an increased percent comprising lower cost non-time deposits. Average yields of interest-earning assets decreased 9 basis points and average cost of interest-bearing liabilities decreased 47 basis points for the first quarter of 2012 compared to the same period in 2011.

 

The following table presents an analysis of changes in net interest income resulting from changes in average volumes of interest-earning assets and interest-bearing liabilities, and average rates earned and paid.

 

   Quarter Ended March 31, 2012 Compared to
Quarter Ended March 31, 2011 (1)
 
   Volume   Rate   Total   % Change 
   (Dollars in thousands) 
Interest Income                    
Securities-taxable  $(366)  $(69)  $(435)   (30.2)%
Securities-tax-exempt   (1)       (1)   (50.0)
Total securities   (367)   (69)   (436)   (30.2)
Loans held for sale   (118)   50    (68)   (66.7)
Commercial   (31)   17    (14)   (2.3)
Commercial real estate   (470)   55    (415)   (12.6)
Consumer   (153)   61    (92)   (7.0)
Total loans (including fees)   (654)   133    (521)   (10.0)
Federal funds sold, reverse repos and interest-bearing due from banks   5    2    7    46.7 
Federal Home Loan Bank Stock   (1)   (3)   (4)   (66.7)
Total interest income   (1,135)   113    (1,022)   (15.0)
Interest Expense                    
Interest-bearing demand deposits   (1)   (5)   (6)   (27.3)
Money market   (8)   (129)   (137)   (46.0)
Other savings deposits   4    2    6    100.0 
Time deposits   (310)   (220)   (530)   (43.9)
Total deposits   (315)   (352)   (667)   (43.5)
Borrowings-short-term                
Borrowings-long-term   (52)   3    (49)   (48.0)
Total borrowed funds   (52)   3    (49)   (46.7)
Total interest expense   (367)   (349)   (716)   (43.7)
Net interest income  $(768)  $462   $(306)   (5.9)%

 


(1)Variances which were not specifically attributable to volume or rate have been allocated proportionally between volume and rate using absolute values as a basis for the allocation. Nonaccrual loans are included in the average balances used in determining yields.

 

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Provision for Credit Losses

 

The provision for loan losses is predominantly a function of CIB Marine’s allowance for loan losses methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the allowance for loan losses, which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonaccrual loans, historical losses and delinquencies on each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. The provision for loan losses was $0.1 million and $1.1 million for the quarters ended March 31, 2012 and 2011, respectively.

 

During the first quarter of 2012, the provision for loan loss was lower by $1.0 million compared to the same period for 2011 due to continued improvement in asset quality and recoveries in the purchased home equity pools.

 

Although improvement in provisions in the first quarter of 2012 relative to the same period last year were significant, classified and impaired loan volumes continue to be elevated and the continuation of deteriorated real estate markets and a tepid jobs recovery continues to adversely affect some of CIBM Bank’s borrowers. As a result, the construction and development and commercial real estate loan segments required additional provisions for loan losses of $0.7 million and $0.6 million, respectively, in the first quarter of 2012 compared to $0.2 million and $1.2 million, respectively, in the same period of 2011. The purchased home equity pool segment had a $1.3 million reversal of provisions during the first quarter of 2012 compared to $0.1 million in provisions during the first quarter of 2011, due primarily to $2.1 million in recoveries during the first quarter of 2012 compared to $0.1 million during the same period in 2011. There can be no certainty as to whether CIB Marine will experience improved credit quality or recoveries during future quarters so as to permit it to record further reversals of the provision for any of the portfolio segments, or whether additional provisions may be required.

 

Noninterest Income

 

Noninterest income decreased $0.1 million from $0.2 million for the quarter ended March 31, 2011 to $0.1 million for the quarter ended March 31, 2012. The decrease was primarily due to a $0.1 million increase in OTTI.

 

Noninterest Expense

 

Total noninterest expense decreased $0.6 million, from $5.6 million for the quarter ended March 31, 2011 to $5.0 million for the quarter ended March 31, 2012. The decrease was due to decreases in write down and losses on assets and FDIC insurance. During the first quarter of 2012, write down and losses on assets consisted of $0.3 million of OREO and $0.1 million of fixed assets compared to $0.7 million of write downs and loss on OREO and $0.1 million of write downs on fixed assets during the first quarter of 2011.

 

Income Taxes

 

No tax benefit has been recognized on the consolidated net operating losses for 2012 or 2011 due to the fact that realization of the tax benefits related to the federal and state net operating loss carryforwards of CIB Marine are not “more likely than not” to be realized.

 

Financial Condition

 

Overview

 

During the first quarter of 2012, CIB Marine continued to show improvement in certain key asset quality measures such as the nonaccrual loan to total loan ratio declined 52% over the related 2011 measure, and the charge-off ratio declined from 0.81% to 0.12% over the same period. During the first quarter of 2012, CIB Marine and CIBM Bank saw more stability in total assets with only a slight reduction of total assets as well as improved capital ratios. The March 31, 2012, Tier 1 leverage to average assets ratio for CIB Marine improved to 13.49% from 13.15% at December 31, 2011.

 

Securities Available for Sale

 

Total securities available for sale at March 31, 2012 were $88.3 million, a decrease of $0.7 million, or 0.7%, from $89.0 million at December 31, 2011. The decrease was primarily due to prepayments, repayments and maturities from the existing portfolio. At March 31, 2012, CIB Marine had Non-agency MBS holdings of $22.1 million par value with a fair value of $20.0 million, down from holdings at December 31, 2011 of $24.8 million par value with a fair value of $22.1 million. The decline of $2.7 million in par value was primarily due to the repayment of principal.

 

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The net unrealized loss on securities available for sale was $2.7 million at March 31, 2012 compared to $3.8 million at December 31, 2011. The net unrealized losses are mainly in TPCDOs and Non-agency MBS, resulting from adverse credit quality and decreased liquidity for these securities.

 

At March 31, 2012, 5.8% of the securities portfolio consisted of U.S. government agency securities, 57.5% of mortgage-backed securities and 32.5% of obligations of states and political subdivisions compared to 7.9%, 54.6% and 33.6% at December 31, 2011, respectively. The ratio of total securities to total assets was 17.6% and 17.7% at March 31, 2012 and December 31, 2011, respectively.

 

Loans Held for Sale

 

At March 31, 2012 and December 31, 2011, loans held for sale were $0.7 million and $2.1 million, respectively. Loan sales of $1.4 million occurred during the first quarter of 2012 and resulted in nominal recognized gain on sale. At March 31, 2012, there were no loans held for sale on nonaccrual status compared to $1.4 million at December 31, 2011.

 

Loans

 

General

 

Loans, net of the allowance for loan losses, were $332.3 million at March 31, 2012, a decrease of $9.2 million, or 2.7%, from $341.5 million at December 31, 2011, and represented 66.2% and 67.8% of CIB Marine’s total assets at March 31, 2012 and December 31, 2011, respectively. The decrease in loans from December 31, 2011 to March 31, 2012 was across all segments except residential real estate, but primarily in the commercial real estate and construction and development loan segments, predominantly reflecting repayments, collections and the impact of charge-offs.

 

CIB Marine has no agreements to acquire any loan pools or portfolios, home equity or other, from other parties at this time. As a community bank in the markets it serves, CIB Marine may buy or participate in (or sell in whole or part) individual loans from (or to) other lenders, but only on a loan-by-loan basis where CIB Marine determines compliance with its loan and acquisition policies prior to acquiring such loans.

 

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.

 

   At March 31, 2012   At December 31, 2011 
   Amount   % of Total   Amount   % of Total 
   (Dollars in thousands) 
Commercial  $43,901    12.6%  $44,385    12.4%
Commercial real estate   216,495    62.3    221,420    62.1 
Construction and development   14,099    4.1    17,260    4.8 
Residential real estate   18,100    5.2    16,593    4.7 
Home equity   31,136    9.0    31,831    8.9 
Purchased home equity pools   21,297    6.1    22,646    6.4 
Other consumer   2,448    0.7    2,542    0.7 
Gross loans   347,476    100.0%   356,677    100.0%
Deferred loan costs   910         955      
Loans   348,386         357,632      
Allowance for loan losses   (16,092)        (16,128)     
Loans, net  $332,294        $341,504      

 

During the second quarter of 2011, CIBM Bank closed its Arizona office but continues to service loans generated by the branch. At March 31, 2012, total loans from the prior Arizona office were down to $37 million, including $2.1 million rated special mention, $8.7 million rated substandard accrual and $2.6 million rated substandard nonaccrual. At December 31, 2011, total loans from the prior Arizona office were $46 million, respectively, including $2.3 million rated special mention, $9.8 million rated substandard accrual and $3.5 million rated substandard nonaccrual.

 

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Commercial Loans

 

At March 31, 2012, commercial loans totaled $43.9 million and represented 12.6% of gross loans, a decrease of $0.5 million, or 1.1%, from the prior year end.

 

Commercial  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
       (Dollars in thousands)     
Loans  $43,901    100.0%   12.6%  $44,385    100.0%   12.4%
Nonaccrual   593    1.4    0.2    323    0.7    0.1 
Restructured accruing   12    0.0    0.0    13    0.0    0.0 
Allowance for loan losses   1,242    2.8    0.4    1,417    3.2    0.4 
Net recoveries year-to-date   (6)             (159)          
Credit to allowance for loan losses year-to-date   (181)             (1,433)          
Allowance for loan losses/nonaccrual loans        209%             439%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        384(1)             439(1)     

 


(1)Nonaccrual loans less those that are impaired with no specific reserves.

 

At March 31, 2012, commercial loans were largely distributed to customers located in Illinois (33%), Indiana (32%), Wisconsin (25%) and Arizona (8%), while nonaccrual commercial loans pertained to customers located in Illinois (54%), Arizona (42%) and Wisconsin (4%). At December 31, 2011, commercial loans were largely distributed to customers located in Illinois (34%), Indiana (28%), Wisconsin (28%) and Arizona (8%), while nonaccrual commercial loans pertained to customers located exclusively in Illinois.

 

Provision adjustments for commercial loans were negative due to a decline in balances, improved classifications, and a decline in impairments on loans for this segment.

 

Commercial Real Estate Loans

 

Commercial real estate loan provisions decreased from $1.2 million during the first quarter of 2011 to $0.6 million during the same period in 2012. The decrease was primarily due to improved loan risk classifications within this segment category.

 

Commercial Real Estate  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
   (Dollars in thousands) 
Loans  $216,495    100.0%   62.3%  $221,420    100.0%   62.1%
Nonaccrual   9,955    4.6    2.9    11,277    5.1    3.2 
Restructured accruing   8,400    3.9    2.4    8,931    4.0    2.5 
Allowance for loan losses   10,607    4.9    3.1    10,471    4.7    2.9 
Net charge-offs year-to-date   441              4,621           
Provisions to allowance for loan losses year-to-date   577              7,626           
Allowance for loan losses/nonaccrual loans        107%             93%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        241(1)             187(1)     

 


(1)Nonaccrual loans less those that are impaired with no specific reserves.

 

At March 31, 2012, commercial real estate loans totaled $216.5 million and represented 62.3% of gross loans. At March 31, 2012, commercial real estate loans were largely distributed to customers with properties located in Illinois (48%), Wisconsin (25%), Arizona (13%) and Indiana (10%), while nonaccrual commercial real estate loans were distributed to customers located in Illinois (51%), Florida (37%), Arizona (10%), and Wisconsin (2%). At December 31, 2011, commercial real estate loans totaled $221.4 million and represented 62.1% of gross loans. At December 31, 2011, commercial real estate loans were largely distributed to customers with properties located in Illinois (48%), Wisconsin (23%), Arizona (14%) and Indiana (9%), while nonaccrual commercial real estate loans were distributed to customers located in Illinois (48%), Florida (34%), Arizona (16%), and Wisconsin (2%).

 

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At March 31, 2012, commercial real estate loans comprised owner occupied real estate properties ($61.1 million) and non-owner occupied real estate properties ($155.4 million); with non-owner occupied property loan types concentrated in office space ($43.8 million), multifamily residential ($23.3 million), retail space ($21.9 million), hospitality ($19.0 million) and nursing homes and assisted living ($12.0 million). At December 31, 2011, commercial real estate loans comprised owner occupied real estate properties ($56.4 million) and non-owner occupied real estate properties ($165.0 million); with non-owner occupied property loan types concentrated in office space ($45.9 million), multifamily residential ($23.8 million), retail space ($22.1 million), hospitality ($19.1 million) and nursing homes and assisted living ($11.1 million).

 

Construction and Development Loans

 

Construction and Development  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
   (Dollars in thousands) 
Loans  $14,099    100.0%   4.1%  $17,260    100.0%   4.8%
Nonaccrual   3,649    25.9    1.1    6,836    39.6    1.9 
Restructured accruing                        
Allowance for loan losses   437    3.1    0.1    428    2.5    0.1 
Net charge-offs year-to-date   671              1,684           
Provisions to allowance for loan losses year-to-date   680              1,239           
Allowance for loan losses/nonaccrual loans        12%             6%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        1,556(1)             1,173(1)     

 


(1)Nonaccrual loans less those that are impaired with no specific reserves.

 

At March 31, 2012, construction and development loans totaled $14.1 million and represented 4.1% of gross loans, a decrease of $3.2 million, or 18.3%, from December 31, 2011. At March 31, 2012, construction and development loans were largely distributed to customers with properties located in Illinois (35%), Wisconsin (27%), Indiana (24%), Nevada (8%) and Arizona (1%), while nonaccrual construction and development loans were distributed to customers located in Indiana (34%), Nevada (31%), Wisconsin (25%), Illinois (6%) and Arizona (4%). At December 31, 2011, construction and development loans totaled $17.3 million and represented 4.8% of gross loans. At December 31, 2011, construction and development loans were largely distributed to customers with properties located in Wisconsin (35%), Illinois (30%), Indiana (20%), Nevada (10%) and Arizona (1%), while nonaccrual construction and development loans were distributed to customers located in Wisconsin (49%), Nevada (26%) and Indiana (20%), Illinois (3%) and Arizona (2%).

 

At March 31, 2012, construction and development loans primarily comprised loans for properties with vacant land held for future commercial or residential development ($10 million) and non-owner occupied construction loans ($2 million), with the majority of the latter concentrated in condominium and townhome property types ($1 million). At December 31, 2011, construction and development loans primarily comprised loans for properties with vacant land held for future commercial or residential development ($12 million) and non-owner occupied construction loans ($4 million), with the majority of the latter concentrated in condominium and townhome property types ($2 million).

 

Nonaccrual construction and development loans declined by $3.2 million during the first quarter 2012 compared to December 31, 2011.

 

Residential Real Estate, Home Equity and Other Consumer Loans

 

Total consumer and residential loans were $51.7 million and $51.0 million at March 31, 2012 and December 31, 2011, respectively, and represented 15% of total gross loan credit exposure. The consumer and residential portfolio was diversified as follows:

 

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At March 31, 2012, residential real estate loans not held for sale totaled $18.1 million and represented 5.2% of gross loans, compared to $16.6 million, or 4.7%, at December 31, 2011.

 

Residential Real Estate (1-4 Family First Lien)  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
   (Dollars in thousands) 
Loans  $18,100    100.0%   5.2%  $16,593    100.0%   4.7%
Nonaccrual   794    4.4    0.2    592    3.6    0.2 
Restructured accruing   271    1.5    0.1    167    1.0    0.0 
Allowance for loan losses   296    1.6    0.1    344    2.1    0.1 
Net charge-offs year-to-date   37              1           
Credit to allowance for loan losses year-to-date   (11)             (6)          
Allowance for loan losses/nonaccrual loans        37%             58%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        163(1)             134(1)     

 


(1)Nonaccrual loans less those that are impaired with no specific reserves.

 

At March 31, 2012 and December 31, 2011, 1-4 family residential loans were largely distributed to customers with properties located in Illinois, Indiana, Arizona and Wisconsin.

 

Home Equity (Line and Term Loans)  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
   (Dollars in thousands) 
Loans  $31,136    100.0%   9.0%  $31,831    100.0%   8.9%
Nonaccrual   535    1.7    0.2    504    1.6    0.1 
Restructured accruing   1,019    3.3    0.3    1,077    3.4    0.3 
Allowance for loan losses   1,018    3.3    0.3    964    3.0    0.3 
Net charge-offs year-to-date   214              1,330           
Provisions to allowance for loan losses year-to-date   268              1,438           
Allowance for loan losses/nonaccrual loans        190%             191%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        527(1)             684(1)     

 


(1)Nonaccrual loans less those that are impaired with no specific reserves.

 

At March 31, 2012 and December 31, 2011, home equity loans were largely distributed to customers with properties located in Illinois, Wisconsin, Indiana and Arizona.

 

Other Consumer  March 31, 2012   December 31, 2011 
   Balances   % of
Balances
   % of
Loans
   Balances   % of
Balances
   % of
Loans
 
   (Dollars in thousands) 
Loans  $2,448    100.0%   0.7%  $2,542    100.0%   0.7%
Nonaccrual               63    2.5    0.0 
Restructured accruing   79    3.2    0.0    86    3.4    0.0 
Allowance for loan losses   52    2.1    0.0    79    3.1    0.0 
Net charge-offs year-to-date   71              18           
Provisions to allowance for loan losses year-to-date   44              38           
Allowance for loan losses/nonaccrual loans        NA%             125%     
Allowance for loan losses/nonaccrual loans less impaired loans with no specific reserves        NA              NA      
                               

 

The table below displays many of the factors that contributed to the establishment of an appropriate allowance for loan losses for the purchased home equity pools.

 

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   At or For the Quarters Ended March 31, 
   2012   2011 
   (Dollars in thousands) 
Purchased Home Equity Pools          
Loan balance  $21,297   $25,878 
Beginning allowance for loan losses  $2,425   $2,349 
Net recoveries (charge-offs)   1,319    (533)
Provisions (credit)   (1,304)   101 
Ending allowance for loan losses  $2,440   $1,917 
Ending allowance for loan losses/loan balance   11.46%   7.41%
           
Economic conditions          
Delinquency (1)   3.8%   5.6%
Unemployment rate annual average(2)   8.2%   8.9%
Nonfarm payroll year on year change (2)  $1,899   $1,489 
U.S. home price index year on year % change (2)   (3.78)%   (3.98)%

 


(1)Delinquency is the percent of total loans delinquent 27 or more days and less than 89 days.
(2)Sources: Unemployment rate - US Department of Labor, Nonfarm Payroll - US Department of Labor, U.S. Home Price Index - Case-Shiller (March 2012 is year on year ending January 2011).

 

The purchased home equity pools totaled $21.3 million at March 31, 2012 compared to $22.6 million at December 31, 2011. The reduction in balances during the first quarter of 2012 of $1.3 million resulted from payments of $0.5 million and charge-offs of $0.8 million. The allowance for loan losses for the home equity loan pools was $2.4 million or 11.46% of remaining balances at March 31, 2012, and $2.4 million or 10.71% of remaining balances at December 31, 2011. At March 31, 2012 and December 31, 2011, the amount of loans past due 30 to 89 days and still accruing interest was $0.5 million and $0.7 million, respectively. At March 31, 2012 and December 31, 2011, purchased home equity pools were distributed across the U.S., with the largest concentrations in Texas (15%), California (9%), Georgia (5%), Virginia (5%), Washington (5%), Illinois (4%) and Minnesota (4%).