CIB Marine Bancshares Inc. is facing bankruptcy because it owes more money on its trust-preferred securities than it can afford to pay.

To stave off a collapse, the Pewaukee, Wis., company has proposed a creative restructuring. If the approach succeeds, other banking companies that find themselves in the same predicament might copy it, observers say.

"I think everybody will be watching this one," said William Ludke, a partner in the Houston office of Bracewell & Giuliani LLP.

The $888 million-asset CIB Marine has deferred payments on the securities for five years, the maximum time allowed. The $36.7 million of deferred interest is due March 22, and the company said last month that it does not have enough cash on hand to pay it.

Several industry observers said this is likely the first time a banking company has deferred payments on trust-preferred securities to the brink of default. But with so many companies announcing deferrals these days, it is not expected to be the last.

"I think this is a test case," said Geri Forehand, the director of strategic services at Brintech Inc., a consulting unit of United Community Banks Inc. in Blairsville, Ga.

Carson Medlin Co. says it knows of 646 banking companies that have $131 billion of trust-preferred securities outstanding. The Houston investment bank said its tally is not comprehensive, partly because many small companies do not publicly report issuing the securities.

Forehand said defaults on these securities could rise if industry profitability remains low and those that have started deferring cannot catch up. As a result, CIB Marine's approach "could become an alternative to enable banks to address that situation," he said.

As of Dec. 31, CIB Marine had only $13 million of cash on hand, or about a third of the amount due this week.

"It appears the company is really in an extreme position," said Kenneth E. Kohler, a corporate securities partner with Morrison & Foerster LLP. "It is at the end of its rope. They are facing the default on subordinated debt, and that is enough to put them under, because they don't have the money to pay it."

John P. Hickey Jr., CIB Marine's chairman, president and chief executive, would not discuss the matter for this story. And the plan still faces a big hurdle: Those holding the securities must accept it.

The company has outlined the proposal in filings with the Securities and Exchange Commission. By the March 22 due date, CIB Marine aims to exchange its $98.6 million of trust-preferred securities for $94.9 million of preferred stock.

The deal also would remarkably restore the company's capital ratios to the levels regulators require to be considered well capitalized. That is because of the difference in the way the two types of investments are treated for regulatory capital purposes. Trust-preferred securities can make up only 25% of a company's Tier 1 capital, but the preferred-equity position being offered could be fully counted as capital, much like common stock.

The preferred stock would pay a fixed rate of 7%. But it would be noncumulative, so missed dividends would not have to be made up, and it would be perpetual, so there would be no scheduled return of principal.

Such terms may sound unappealing to those holding the current securities. But several industry observers said the added capital from the proposed restructuring could make CIB Marine a more attractive acquisition target. That could be an incentive for the securityholders to agree to the exchange, because it would improve their chances of getting paid. Also, if they refused the offer, CIB Marine could go bankrupt, leaving them in an even worse position.

"Even if there is no promise of a dividend coming, it is the lesser of two evils," Ludke said.

A potential complication: Some of the securities were not issued directly. Instead, they were pooled with other companies' issues into collateralized debt obligations. This is a common practice for small-bank issues.

Michael Iannaccone, the president of the Chicago advisory firm MDI Investments Inc., said getting approval for changes to trust-preferred securities is harder when they have been pooled.

"Because the CDO owns the trust-preferred securities, you have to go back to the trustee," he said. "He could make the decision, but he won't make the decision. He has all these people behind him, maybe 1,000, and any one of them could sue him. So you have to get all these people to agree to take the perpetual preferred."

In recent months several companies have offered to repurchase trust-preferred securities from pools for less than par, but the trustees would not allow it, Iannaccone said.

Several lawyers familiar with trust-preferred securities said they are unsure how such an exchange might work for pooled deals. They said the particulars likely would have to be worked out on a case-by-case basis, depending on how each pool was set up.

CIB Marine has been trying to sell itself since April. Last year it held talks with a prospective buyer, which it did not identify. Last month the company said the negotiations fell through.

Its troubles started in 2003, when its CIB BankChicago (which was sold a year later) ran into problems in its construction loan portfolio. In 2004 the company started deferring payments on its $61.9 million of trust-preferred securities. Since then it has been trying to right itself. It has shrunk its balance sheet (which had $3.4 billion of assets in 2004), and the number of subsidiary banks has dropped from six to two.

Most recently, last year CIB Marine dissolved Citrus Bank in Vero Beach, Fla., selling the branches, the deposits and the majority of the assets to First United Bancorp Inc. in Boca Raton.

To save money, CIB Marine also plans to merge its two remaining subsidiaries — Marine Bank in Wauwatosa, Wis., and Central Illinois Bank in Champaign, Ill. — under the Central Illinois charter.

CIB Marine has not filed its fourth-quarter results with the SEC. But according to the Federal Deposit Insurance Corp. (which reports consolidated results from banking companies), CIB Marine lost $14.5 million last year after setting aside a $19 million provision for loan losses.

At yearend two of its capital ratios were below well-capitalized levels. It reported a leverage ratio of 3.82%, which is considered undercapitalized, and a Tier 1 risk-based capital ratio of 5.36%, which is considered adequately capitalized.

The subsidiaries are faring better. Both were well capitalized at yearend. Karen Dorway, the president of BauerFinancial Inc. in Coral Gables, Fla., said her company, which rates the strength of banks nationwide on a scale of 0 to 5, has a rating of 3 for both of CIB Marine's banks.

"According to their numbers at yearend, both were in pretty good shape," she said.

The two banks had low nonperforming asset levels after taking large chargeoffs last year, Dorway said. Marine Bank charged off $13 million, and Central Illinois charged off $7.7 million. "Perhaps the chargeoffs have put problem loans behind them, but I'd like to see another quarter."

Justin Long, an associate in Bracewell & Giuliani's Austin office, said a bank holding company can file for bankruptcy protection while the bank subsidiary is still well capitalized and operating.

He cited the $36 million-asset Surety Capital Corp.'s decision to file for protection from creditors in late 2007. The Fort Worth company did so to clear a path to sell its Surety Bank without shareholder opposition.

Long said the possibilities for CIB Marine include filing voluntarily for bankruptcy protection, being forced into doing so by securityholders or, if there is no push for bankruptcy, continuing as is.

Kohler noted that Citigroup Inc. proposed a similar exchange as part of its recent deal with the Treasury Department to convert some of the preferred stock issued under the Troubled Asset Relief Program to common stock.

In Citi's case, converting the shares is contingent on pulling off offers with some other holders of preferred shares, including trust-preferred securities, to do the same. "It's not exactly the same situation, but it is an attempt by a distressed bank holding company, albeit in an entirely different league, to exchange trust-preferred for something that is viewed as a stronger form of capital — common stock in Citi's case, noncumulative perpetual preferred in CIB's," Kohler said.

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