CORUS BANKSHARES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-6136

CORUS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)

MINNESOTA 41-0823592
(State of incorporation or organization) (I.R.S. Employer Identification No.)

3959 N. LINCOLN AVE., CHICAGO, ILLINOIS 60613-2431
(Address of principal executive offices) (Zip Code)

(773) 832-3088
(Registrant's telephone number)

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
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

As of October 31, 2002, the Registrant had 14,119,244 common shares,
$0.05 par value, outstanding.

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CORUS BANKSHARES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2002

TABLE OF CONTENTS

PART I. -- FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

1

CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes

2

CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)

See accompanying notes.

CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)

See accompanying notes.

3

CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Dollars in thousands)

See accompanying notes.

4

CORUS BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Condensed Consolidated Financial Statements

The Condensed Consolidated Balance Sheets and Statements of Income, Cash
Flows and Changes in Shareholders' Equity are unaudited. The interim
financial statements reflect all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
Corus Bankshares, Inc.'s consolidated financial statements for the three
years ended December 31, 2001 included in Corus' Annual Report on Form 10-K
for the year ended December 31, 2001. The results of operations for the
interim period should not be considered indicative of results to be expected
for the full year.

Certain prior year amounts have been reclassified to conform to the current
presentation.

2. New Accounting Standards

In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" was issued establishing accounting and reporting
standards requiring all business combinations initiated after June 30, 2001,
to be accounted for using the purchase method. SFAS No. 141 was effective
for Corus for the fiscal quarter beginning July 1, 2001.

Also in June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
issued effective for the first period of all fiscal years beginning after
December 15, 2001, with early adoption permitted for entities with fiscal
years beginning after March 15, 2001. SFAS No. 142 addresses how acquired
intangible assets should be accounted for in financial statements upon their
acquisition, and also how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. In general, non-goodwill intangible assets are to be amortized
in accordance with their estimated useful lives. In addition, amortization
of goodwill has been eliminated, with capitalized goodwill now being
subjected to at least an annual assessment for impairment. A two-step
process is to be used to determine, first whether an impairment exists, and
then whether an adjustment is required.

SFAS No. 142 was effective for Corus for the fiscal quarter beginning
January 1, 2002. The adoption of this statement did not result in any
transition goodwill impairment adjustments.

5

3. Segment Reporting

The following reflects the disclosure requirements set forth by Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information." For purposes of this statement,
Management has determined that Commercial Lending, Consumer Lending, Retail
Banking and Corporate Support are the primary operating segments of the
Company.

Commercial Lending derives its revenues from interest and fees on loans made
to businesses. The loan products include, among others, commercial real
estate mortgage term loans, construction loans, and loans to customers in
the check cashing industry.

Consumer Lending is composed of home equity, residential mortgage, student,
and other loans to individual borrowers. Revenues of this segment are from
interest and fees on the loans.

The Retail Banking segment provides general banking services such as
checking, savings, money market and time deposit accounts as well as a
variety of other services. Revenues for Retail Banking are derived from
credit for funds provided to the other segments, as well as fees related to
banking services.

Corporate Support includes the net effect of support units after revenue and
expense allocations, treasury management, and other corporate activities.
Revenues primarily relate to dividends from the Company's investment in the
common stocks of financial industry companies and the net effect of transfer
pricing related to loan and deposit balances. In addition, revenues include
realized gains/(losses) on the sale of equity securities. Corporate Support
also incorporates the difference between the Company's reported provision
for credit losses, which is determined in accordance with generally accepted
accounting principles, and the credit provisions allocated to the reportable
business units.

Business line results are derived from the Company's business unit
profitability reporting system by specifically attributing managed balance
sheet assets, deposits, and other liabilities and their related income or
expense. Funds transfer pricing methodologies are utilized to allocate a
cost for funds used or credit for funds provided to all business line assets
and liabilities. The provision for credit losses recorded by each operating
segment is based on the net charge-offs incurred by each line of business.
Income and expenses directly related to each business line, including fees,
service charges, salaries and benefits, and other direct expenses are
accounted for within each segment's financial results in a manner similar to
the consolidated financial statements. Expenses incurred by centrally
managed operations units that directly support business lines' operations
are charged to the business lines based on standard unit costs and volume
measurements. Capital is allocated to each line of business, including both
on and off-balance sheet items, based on its inherent risks, including
credit, operational, and other business risks. Designations, assignments,
and allocations may change from time to time as management accounting
systems are enhanced or product lines change.

6

Following is a summary of significant segment information, as required by SFAS
No. 131:

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

(1) Net interest income before provision for loan losses plus noninterest
income.

The profitability of each of Corus' business segments may be affected by changes
in, and the level of, interest rates. The direction and degree of this impact
will vary based on the asset/liability mix of each segment.

7

4. Statement of Financial Accounting Standards No. 133/138 ("SFAS 133/138")

The statements establish accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. Special accounting for
qualifying hedges ("hedge accounting") allows a derivative's gains and
losses to be either offset by the results of the hedged item or deferred
through recognition in a component of other comprehensive income. Those
derivatives that do not qualify for hedge accounting are required to be
marked to market with the impact of the market adjustment recorded directly
to income. The Statements were effective for Corus beginning January 1,
2001.

Corus utilizes interest rate fixed-to-floating swaps (pay fixed/receive
floating) and basis swaps to reduce interest rate risk by improving the
balance between rate sensitive assets and liabilities. While these
derivatives provide the desired economic hedge to interest rate
fluctuations, they do not all meet the strict criteria required to qualify
for hedge accounting. During the first three quarters of 2002, all but one
of the fixed-to-floating swaps qualified as fair value hedges and received
hedge accounting treatment. In addition, the basis swaps are not being
accounted for under hedge accounting.

For the nine months ended September 30, 2002, Corus recorded net SFAS
133/138 income of $3.1 million, which consisted of a $41,000 expense
included in net interest income and $3.2 million of income included in
securities gains.

5. Other Borrowings

On June 26, 2001, Corus entered into an agreement with a third party to
borrow $70 million, consisting of a term note in the amount of $50 million
and a revolving note in the amount of $20 million, both at an effective
interest rate equal to LIBOR plus 150 basis points, adjusted quarterly. Both
loans mature on June 25, 2004, and either loan may be prepaid at any time
without premium or penalty, except for certain yield maintenance charges not
to exceed 3 months interest. Minimum principal repayment of the term loan is
$1.0 million quarterly beginning September 30, 2001 and the revolving loan
is payable upon maturity. Interest is payable quarterly. In addition, a fee
at an annual rate of 1/4% of the average unused revolving note commitment is
due quarterly.

Among other restrictions, loan covenants require Corus to maintain
prescribed levels of capital, limit the level of nonperforming loans
relative to capital, and maintain a minimum ratio of the Allowance for Loan
Losses to total loans. The debt is secured by 100% of the common stock of
the subsidiary bank. As of September 30, 2002, management believes that
Corus was in compliance with all loan covenants.

Interest and fees for both notes for the first three quarters of 2002
totaled $1.4 million. At September 30, 2002, the term note and revolving
credit line had outstanding balances of $45 million and $5.2 million,
respectively.

8

6. Statement of Financial Accounting Standards No. 142

The following table presents net income and earnings per share. Prior
year amounts have been restated to exclude amortization expense related
to goodwill, as required by SFAS No. 142.

Note: The goodwill amortization was not tax deductible and as a result pre-tax
and after-tax amounts are equivalent.

9

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

BUSINESS SUMMARY

Corus Bankshares, Inc. is a one-bank holding company headquartered in Chicago,
Illinois. In addition to deposit gathering and servicing the check cashing
industry, Corus specializes in making commercial real estate and construction
loans with a concentration, by property type, in residential condominiums,
office buildings, hotels and apartments. With regard to the remainder of its
loan portfolio, Corus is allowing its residential first mortgage and home equity
loan balances to "run-off."

OPERATING RESULTS

For the three months ended September 30, 2002, net income was $14.5 million, or
$1.01 per share on a diluted basis, an increase of 21.7% from net income of
$11.9 million, or $0.83 per share on a diluted basis, in 2001. For the nine
months ended September 30, 2002, net income was $38.8 million, or $2.71 per
share on a diluted basis, a decrease of 5.1% from net income of $40.9 million,
or $2.85 per share on a diluted basis, in 2001.

Earnings for the third quarter of 2002 represented annualized returns of 12.2%
on equity (ROE) and 2.2% on assets (ROA) compared to 11.0% and 1.7% for the same
period in 2001. Earnings for the nine months ended September 30, 2002
represented annualized returns of 11.1% on equity (ROE) and 2.0% on assets (ROA)
compared to 13.0% and 2.0% for the same period in 2001.

Net Interest Income

Net interest income, which is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowings, is the major
source of earnings for Corus. The related net interest margin represents net
interest income as a percentage of the average earning assets during the period.

For the three and nine months ended September 30, 2002, Corus' net interest
margin declined by 21 and 50 basis points, respectively, compared to the prior
year. These results reflect the continuing impact of the Federal Reserve's
dramatic interest rate cuts throughout 2001. As previously stated, Corus is
asset sensitive meaning that variable rate assets exceed variable rate
liabilities. This asset sensitivity will generally result in lower net interest
margins as market rates decline. However, this same asset sensitivity will be
beneficial to Corus in a higher interest rate environment. Therefore with
interest rates at 40-year lows, Corus is well positioned to benefit from
eventual interest rate increases.

Partially reducing the effect of lower average interest rates on Corus' net
interest margin was an increase in loan fee income. Loan fee income, which is a
part of interest income, totaled $4.9 million in the third quarter of 2002
versus $3.9 million during the third quarter of 2001. Year-to-date, fee income
for 2002 was $15.6 million versus $10.6 million during the same period in 2001.

10

AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN (Unaudited)
- --------------------------------------------------------------------------------

(1) Dividends on the bank stock portfolio reflects a tax equivalent adjustment
for the 70% dividend received deduction.
(2) Interest income on tax-advantaged loans and securities reflects a tax
equivalent adjustment based on an income tax rate of 35%.
(3) Unremitted interest on nonaccrual loans is not included in the amounts.
Includes net interest income derived from interest rate swap contracts.

12

Noninterest Income

For the three and nine months ended September 30, 2002, noninterest income
increased by $3.6 million and $610,000, respectively compared to the prior year.
The largest factor contributing to the increase was net securities gains,
however there were notable fluctuations in the other noninterest income
categories as well.

Securities Gains, net
For the three and nine months ended September 30, 2002, net security gains
increased by $2.3 million and $3.6 million, respectively. The following details
the net securities gains by source:

Sales of common stocks at the Bank Holding Company relate to the common stock
portfolio of various financial industry companies held at the Holding Company
(see page 20 for additional details). Corus will sell all or part of certain
positions in order to take advantage of market opportunities as they arise.
Proceeds of these sales are generally reinvested in the portfolio.

Gains from the sales of securities at the subsidiary bank totaled $3.6 million
and $3.2 million for the three and nine months ended September 30, 2002,
respectively. These gains are primarily driven by the sale of certain agency
securities.

Finally, for the three and nine months ended September 30, 2002, the Bank had
gains of $361,000 and $3.2 million, respectively, from what we refer to as "SFAS
No. 133/138" mark-to-market adjustments. Due to their unusual nature, the basis
for these gains requires additional explanation.

Like many banks, Corus utilizes derivatives to hedge its interest rate risk.
This is accomplished primarily via interest rate swaps (to effectively convert
fixed-rate loans to floating-rate or visa-versa) and interest rate basis swaps
(to effectively convert LIBOR-based floating-rate loans to Treasury-based
floating-rate loans).

As of January 1, 2001, virtually all companies were required to adopt new
derivative accounting rules (known as SFAS 133/138). These rules require that
all derivative instruments be included on the balance sheet at market value. In
addition, the rules provide that if a derivative is "paired-off" against
specific assets and/or liabilities and also passes an additional succession of
tests, then the income statement impact of any periodic changes in the value of
the derivative effectively do not need to be reflected on the company's income
statement. Such derivatives are afforded what is termed "hedge accounting"
treatment. The rules are enormously complex, but suffice it to say that even
though the basis swaps we have entered into are designed to hedge our interest
rate risk - that is, regardless of the accounting treatment the basis swaps are
economic hedges - they do not qualify for hedge accounting treatment and thus
changes in the market value of these instruments must be reflected on our income
statement as security gains/(losses). Our interest rate swaps, on the other
hand, generally do qualify for hedge accounting.

Since Corus' basis swaps do not qualify for hedge accounting treatment, periodic
changes in their market value will appear as security gains/(losses) on our
income statement. Since this income does not stem from having actually sold the
instruments, it is subject to reversal based on future changes in the market
values. In fact, if we hold basis swaps to maturity, which we generally do, the
value of the instruments will ultimately return to $0 (by market convention).
What this means is that the cumulative gains or losses recognized at any point
in time are temporary as they will ultimately reverse, such that the cumulative
gains and losses over the life of a basis swap will sum to zero.

13

For the year ended December 31, 2001 we booked a net $1.9 million of SFAS
133/138 security gains. So far in 2002 we have booked, as disclosed above, net
SFAS 133/138 security gains of $3.2 million - for a total of $5.1 million. While
the portfolio of basis swaps vary both in notional amounts and maturities, they
will all have matured by the end of 2007. This means that, absent Corus entering
into any additional basis swaps between now and the end of 2007 (although it is
likely we will put on new basis swaps before then), those previously recognized
$5.1 million of security gains will have to "reverse" in the form of $5.1
million of security losses between now and the end of 2007. While we can predict
the eventual reversal of these gains, we cannot predict in what periods or in
what periodic amounts those reversals will occur.

Service Charges on Deposit Accounts
Service charge income grew by $285,000 and $905,000, respectively, for the three
and nine months ended September 30, 2002 compared to the prior year. The
increase resulted from the impact of lower customer earnings credits. Each
month, commercial checking customers receive a noncash earnings credit based on
their account balance and short-term interest rates. The earnings credit reduces
the impact of activity fees charged to the account. Lower short-term interest
rates result in a lower earnings credit and higher net service charges.

Gain on Sale of Student Loans
In the fourth quarter 2000, Corus entered into an agreement to sell the majority
of its student loan portfolio. The sale was completed in two phases and netted
the Company, in total, nearly $25 million. The second and final phase of the
sale was completed in the second quarter of 2001 for a gain of $2.2 million.

Other Income
Several factors contributed to the variance in other income, as follows:

In October 2000, Corus sold its Trust and Investment Management business under
terms that included an "earn-out" provision for payments through 2005. In lieu
of the on-going "earn-out" payments, Corus agreed in the third quarter of 2002,
to accept a one-time payment of $1.0 million. Prior year amounts reflect normal
monthly accruals.

Concurrent with the previously mentioned sale of the student loan portfolio,
Corus entered into a temporary loan servicing agreement with the purchaser. The
term of the agreement extended through June 2001 with total fees earned of $1.5
million.

The remaining portion of other income includes various charges and fees as well
as a $724,000 gain on the sale of fixed assets in June 2001.

Noninterest Expense

For the three and nine months ended September 30, 2002, noninterest expense
decreased by $2.7 million and $5.6 million, respectively, compared to 2001.
These declines were driven primarily by lower salaries and employee benefit
expenses.

14

The decrease in salaries and employee benefits resulted from two main factors.
First, over the course of the last year, Corus has narrowed its focus in terms
of lending operations. Specifically, Corus sold both its student lending and
medical finance portfolios and has essentially discontinued all new residential
lending originations. As a result, salaries and benefits in the discontinued
areas have decreased dramatically.

The second factor driving the decrease in salaries and benefits is the impact of
the quarterly mark-to-market adjustments associated with the Commercial Loan
Officer Commission Program ("the Program"). The Program is a deferred
compensation plan and allows for compensation to be deferred in Corus Common
Stock. While the initial commission is expensed when earned, accounting rules
require continuous adjustments based on changes in the market value of Corus'
Common Stock. For the three and nine months ended September 30, 2002, the net
impact of these adjustments was a decrease to salaries and benefits expense of
$261,000 and $197,000, respectively, compared to an increase of $1.3 million for
those periods in 2001. No such entries were recorded prior to the third quarter
of 2001, as they were considered immaterial.

Other noninterest expenses in 2002 declined by $287,000 and $712,000 for the
three and nine months ended September 30, respectively, compared to the prior
year. This decrease partially resulted from higher advertising in 2001 for the
introduction of the new "Totally Free Checking" program and higher legal
expenses in 2001 related to residential loan foreclosures. The remainder of the
net decrease reflects Corus' continued focus on cost control.

Finally, the amortization of goodwill was discontinued in 2002 upon the adoption
of Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets." See Note 6 of Notes to Condensed Consolidated Financial
Statements.

15

FINANCIAL CONDITION

Earning Assets

The following table details the composition of Corus' earning assets:

Loans

Corus is focused on commercial real estate ("CRE") lending, which makes up 87%
of total loans outstanding at September 30, 2002, and has increased by $167
million, or 13.5%, compared to December 31, 2001 and 2.8% compared to one year
ago. Corus originated over $500 million CRE loans in the third quarter of 2002,
bringing year-to-date originations to $1.1 billion. The following table provides
additional detail with respect to Corus' loan portfolio:

Mezzanine loans are essentially second mortgage loans on commercial real estate
projects. Interest rates charged for Mezzanine loans are generally considerably
higher than a typical commercial real estate loan but also carry additional
risk.

The table above includes only actual balances outstanding. When commitments are
factored in, commercial real estate loan growth is even more significant.
Commitments include unfunded loan amounts, commitment letters and letters of
credit.

The table on the following page shows a reconciliation of commercial real estate
loans outstanding to the total including commitments.

16

Commercial Real Estate Loans Outstanding Including Commitments

Including commitments, year-to-date growth is over $653 million or 37%. Corus'
commitments are primarily comprised of unfunded commitments under commercial
real estate construction loans and commitment letters the Bank has issued on
loans that have not yet closed. As highlighted in the table on the following
page, the majority of the commitments relate to condominiums, rental apartments,
and office building loans.

While committed amounts are useful for period-to-period comparisons, caution
should be used in attempting to use commitments as a basis for predicting future
outstanding balances.

17

The following tables break out commercial real estate loans by property type,
location, and size:

COMMERCIAL REAL ESTATE LOANS - BY PROPERTY TYPE
- --------------------------------------------------------------------------------

COMMERCIAL REAL ESTATE LOANS - BY LOCATION
- --------------------------------------------------------------------------------

COMMERCIAL REAL ESTATE LOANS - BY TOTAL COMMITMENT
- --------------------------------------------------------------------------------

* Includes both funded and unfunded commitments, letters of credit and
outstanding commitment letters

18

Loan Participations

While Corus generally prefers to initiate and fund its own loans without
participations either bought or sold, there are limited instances where Corus
has either purchased or sold interests in certain loans. The following table
details purchased loan participations in which Corus has an interest:

The commercial real estate markets have been good for many years and Corus has
had particularly impressive results. With commercial real estate loan
originations in excess of $4.5 billion since 1994, net charge-offs on Corus'
commercial real estate loans have totaled just $195,000 for the 13 years from
1989 through September 30, 2002. While our commercial real estate portfolio
continues to show minimal delinquencies and virtually no losses, we recognize
this sort of performance cannot persist indefinitely.

Commercial loans are primarily loans to Corus' customers in the check cashing
industry. Balances fluctuate based on seasonal cash requirements and are
generally secured by the equity of the check cashing operation.

With regard to the remaining portfolio, residential first mortgage and home
equity loan balances continue to decline as the Bank implements plans to allow
these portfolios to "run-off." Minimal new originations are expected. In
addition, Corus' decision to exit the medical finance business has been
successfully executed with virtually no balances remaining.

19

Common Stocks

At September 30, 2002, Corus had investments in the common stocks of 32
financial industry companies totaling $141.6 million, including net unrealized
gains of $40.2 million. These investments are included in the available-for-sale
classification. The following is a list of Corus' top 25 holdings, by market
value, as of September 30, 2002:

MARKET PERCENTAGE OF
CORPORATION SHARES HELD VALUE PORTFOLIO
- --------------------------------------------------------------------------------
(Dollars in thousands)
Comerica Inc. 241,300 $ 11,636 8.2%
Old Second Bancorp Inc. 275,000 10,500 7.4
Charter One Financial Inc. 338,538 10,061 7.1
Amsouth Bancorporation 466,015 9,665 6.8
FleetBoston Financial Corp. 423,960 8,619 6.1
Wachovia Corp. 223,840 7,317 5.2
Citigroup Inc. 225,000 6,671 4.7
MAF Bancorp Inc. 208,125 6,431 4.5
Bank of America Corp. 99,873 6,372 4.5
JP Morgan Chase & Co. 319,100 6,060 4.3
Bank One Corp. 137,700 5,150 3.6
US Bancorp 268,871 4,996 3.5
South Trust Corp. 195,900 4,751 3.4
Merrill Lynch & Co. Inc. 132,000 4,349 3.1
Union Planters Corp. 143,555 3,942 2.8
Compass Bancshares Inc. 108,750 3,207 2.3
Amcore Financial Inc. 142,500 3,129 2.2
Hibernia Corp. 154,200 3,083 2.2
Suntrust Banks Inc. 48,000 2,951 2.1
Bank of New York Co. Inc. 100,000 2,874 2.0
Morgan Stanley Dean Witter & Co. 82,000 2,778 2.0
Mellon Financial Corp. 100,000 2,593 1.8
Associated Banc Corp. 80,786 2,563 1.8
Mercantile Bankshares Corp. 58,500 2,233 1.6
Banknorth Group Inc. 90,000 2,138 1.5
--------------------
Total for 25 highest market values $134,069 94.7%

All Others (7 stocks) 7,576 5.3
--------------------
Total $141,645 100.0%
====================

During the three and nine months ended September 30, 2002, Corus received
dividends on the stock portfolio of $1.2 million and $3.6 million, respectively,
compared to $1.1 million and $3.3 million during the same period in 2001. In
addition, Corus realized net gains from the stock portfolio of $951,000 during
the first nine months of 2002 compared to net gains of $2.1 million during the
same period in 2001.

20

Securities Other Than Common Stocks

At September 30, 2002 total securities other than common stocks were $287
million, an increase of $143 million, or 99%, compared with $144 million at
December 31, 2001. The increase resulted from the purchase of fixed-rate
securities in 2002 utilizing funds previously invested in Federal Funds Sold.

Nonperforming Assets

Nonperforming loans are nonaccrual loans, restructured loans and 90 days or more
past due loans still accruing interest. The breakdown by loan category is shown
below:

Nonperforming loans have increased compared to the prior year and the most
recent year-end, driven primarily by commercial real estate loans, more
specifically two mezzanine loans. One of the mezzanine loans, with a balance of
$5.4 million, was placed on nonaccrual in April and the other loan, with a
balance of $2.9 million, was just recently placed on nonaccrual. While
management is naturally concerned about any loan placed on nonaccrual, we are
monitoring these loans closely and believe that the risk of principal loss is
minimal.

Nonperforming residential first mortgage loans are secured by first mortgages on
primarily owner-occupied, residential property. During the nine months ended
September 30, 2002, nonperforming residential first mortgages declined by $1.7
million. The decrease resulted primarily from the completion of foreclosure on
properties, effectively transferring them to other real estate owned.
Nonperforming home equity loans also decreased as a result of the charge-off of
certain nonperforming loans. See allowance for loan losses section below.

21

At September 30, 2002, other real estate owned was comprised of three
residential properties with aggregate book values of $916,000. During the third
quarter of 2002, Corus sold five residential properties with aggregate book
values of $1.4 million for a net gain of $226,000.

Excluded from the preceding table are student loans that Corus has no reason to
believe have lost their guarantee. Guaranteed student loans more than 90 days
past due and not included in the above nonperforming asset table totaled
$916,000, $1.7 million, and $2.2 million at September 30, 2002, December 31,
2001, and September 30, 2001, respectively.

Allowance for Loan Losses

Management believes that the level of the allowance for loan losses was adequate
at September 30, 2002. A reconciliation of the activity in the allowance for
loan losses is as follows:

Net charge-offs during the third quarter of this year were $3.4 million. Of that
amount, $3.2 million is related to overdrafts and loans to four customers in the
check cashing business ($2.6 million in Overdrafts and $559,000 included in
Commercial). Problems with these overdrafts and loans were discovered after the
voluntary departure of a bank officer responsible for supervision of these
accounts. These losses are the first the Bank has experienced in nearly twenty
years of servicing the check cashing industry. An internal review is underway
and all aspects of the losses are being examined. Additional controls and review
procedures are being implemented or are already in place.

22

The student loan recoveries of $2.9 million in the first nine months of 2001
consist almost entirely of recoveries related to the settlement of a lawsuit in
2000. Collection of these recoveries was essentially completed as of December
31, 2001 with minimal future recoveries expected.

Accrued Interest Receivable and Other Assets

At December 31, 2001, Accrued Interest Receivable and Other Assets included a
receivable balance related to the sale of a security. The transaction, in the
amount of $77.7 million, cleared on January 2, 2002.

Liabilities

The following table details the composition of deposit products by type:

SEPTEMBER 30 December September 30
2002 2001 2001
------------- ---------- ------------
Money Market 43% 42% 43%
Certificates of Deposit 32 35 34
Demand 11 11 11
Savings 8 7 7
NOW 6 5 5
------------- ---------- ------------
Total 100% 100% 100%
============= ========== ============

At September 30, 2002, December 31, 2001 and September 30, 2001, Corus had
retail certificates of deposit obtained from brokers of $258 million, $317
million and $327 million, respectively.

23

Capital

Regulatory capital and the associated ratios for Corus and its subsidiary bank
as of September 30, 2002 are presented below:

(1) Tier 1 capital, which is shareholders' equity less goodwill, disallowed
portion of deferred income taxes and unrealized gains on available-for-sale
securities; computed as a ratio to quarterly average assets less goodwill,
disallowed portion of deferred income taxes and unrealized gains on
available-for-sale securities.
(2) Tier 1 capital; computed as a ratio to risk-adjusted assets.
(3) Tier 1 capital plus qualifying loan loss allowance and SFAS No. 115 gain;
computed as a ratio to risk-adjusted assets.

Commercial Real Estate "Risk" & Capital Disclosure

Management has made a concerted effort to distill the numerous objective, as
well as subjective, risks inherent in the commercial real estate ("CRE") loans
we originate into a rigorous system to analyze and quantify risk. At its core,
this system uses both management's and the loan officer's estimation of a loan's
Probability of Default ("POD") and its Loss Given Default ("LGD") if a serious
recession should occur. This point bears repeating - the POD and LGD estimates
are not based on today's market conditions, instead they are arrived at by
"stressing" all major assumptions regarding the cash flow and/or values of the
underlying real estate down to levels that could manifest themselves during a
"serious" recession. As a proxy, we use, among others things, the extreme
declines in CRE property values witnessed during the late 1980s and early 1990s.
Typically, we assume that office and hotel projects will be worth only 50% to
60% of their cost (not appraised value) and we typically assume that rental and
for-sale housing will be worth 60% to 80% of cost. Keep in mind that while these
are the typical discounts, each loan is analyzed individually and may have
discounts larger or smaller than mentioned above.

Below is a table that summarizes, by quarter end, the total size of our CRE loan
portfolio, the weighted average POD and LGD percentages and the resulting
implied CRE loans that could default and losses that could occur. As you will
see, we have made several simplifying assumptions, perhaps the main one being
that we would keep the Allowance for Loan and Lease Losses ("ALLL") stable by
matching charge-offs with an equal amount of loan loss provisions. We are not
implying that such a "matching" would be appropriate or even allowed by
generally accepted accounting principles. Rather, we are doing this simply to
make the analysis easier to follow.

24

(Dollars in millions)
CRE LOANS & UNFUNDED COMMITMENTS
- --------------------------------------------------------------------------------

POTENTIAL DEFAULTS & LOSSES
- --------------------------------------------------------------------------------

ALLL & LOAN LOSS PROVISIONS
- --------------------------------------------------------------------------------

NONPERFORMING & NONACCRUAL LOANS
- --------------------------------------------------------------------------------

"LOST" INTEREST INCOME
- --------------------------------------------------------------------------------

While this table provides numerous important insights, the lines entitled "Loan
Loss Provisions" and "Potential total `lost' interest income" are the two that
have the most pronounced implications for future earnings. If the potential
charge-offs occurred evenly over a two-year period and the allowance for loan
losses was kept at a stable balance this would require an equal amount of loan
loss provisions over those same two years. Using the September 30(th) figures,
which imply total potential charge-offs of $67 million, this would mean loan
loss provisions of $33.5 million per year during those two years. If we made
the further, very conservative, assumption that all nonperforming CRE loans
that had not been charged off became nonaccrual this would imply, at current
average rates on the CRE loans, we would have "lost" interest income totaling
$20 million per year. Again, please keep in mind that all of the preceding
figures are predicated on our use of POD and LGD figures that are based on
conditions we believe could exist during a serious recession and, further, that
the "lost" interest income figure is based on the additional very conservative
assumption that all nonperforming loans will also be nonaccrual.

25

While the above figures are a critical piece of the output from our internal
"risk" identification system, the system would be incomplete if these risks did
not assist in calculating an appropriate level of risk-adjusted capital for the
Bank to maintain, but they do. Broadly speaking, the capital we allocate to CRE
loans can be split into three interrelated, but distinct, categories.

The first, and largest component, is that for the Bank to receive the highest
regulatory capital rating, known as "well-capitalized", we must keep $190
million of capital against our $1.4 billion of CRE loans on the balance sheet
and the approximately $1.0 billion of CRE related commitments (comprised of
unfunded construction loans and outstanding commitment letters). The
well-capitalized designation is very important in numerous respects; among other
things, being below well-capitalized could potentially increase the Bank's FDIC
premiums and adversely affect its ability to issue brokered CDs or pay dividends
to the holding company.

The second component is driven off of the POD and LGD factors. As shown above,
we have calculated total potential charge-offs under a serious recession of $67
million. Assuming certain IRS guidelines are followed, charge-offs are fully
tax-deductible. Therefore, the potential $67 million of charge-offs would
translate into an after-tax decrease in equity of $44 million.

The third, and last, component is a "cushion" we keep to the regulatory
"well-capitalized" minimums - this cushion was approximately $38 million as of
September 30, 2002.

These three components of capital allocated to CRE loans totaled $272 million as
of September 30, 2002. Lastly, we have various non-CRE loans, commitments and
other items that require additional capital of $44 million, thus yielding a
grand total capital goal of $316 million. The Bank had actual regulatory capital
(Bank equity less goodwill plus a portion of the ALLL) of $408 million at
September 30, 2002 or $92 million in excess of our capital goal.

(Dollars in millions)
TOTAL CAPITAL CALCULATION 9/30/02
- ---------------------------------------------------------------------
Actual regulatory capital at September 30, 2002 $ 408
=======

Regulatory capital required to achieve "well-capitalized" $ 190
POD/LGD component 44
Cushion 38
-------
Total Capital on CRE Loans $ 272
Non-CRE related capital 44
-------
Total Capital Goal $ 316
=======

Actual regulatory capital in excess of goal $ 92
=======

26

FORWARD-LOOKING STATEMENTS

This filing contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may be identified by, among other things, the use of
forward-looking terms such as "may," "intends," "expects," "anticipates,"
"estimates," "projects," "targets," "forecasts" or "seeks" or the negative of
such terms or other variations on such terms or comparable terminology. By their
nature, these statements are subject to numerous uncertainties that could cause
actual results to differ materially from those in the statements. Important
factors that might cause Corus' actual results to differ materially include, but
are not limited to, the following:

- the general state of the economy and, together with all aspects of
Corus' business that are affected by changes in the economy, the
impact that changing rates have on Corus' net interest margin;
- Corus' ability to increase the commercial real estate loan portfolio;
- federal and state legislative and regulatory developments;
- changes in management's estimate of the adequacy of the allowance for
loan losses;
- changes in the level and direction of loans and write-offs;
- changes in the overall mix of Corus' loan and deposit products;
- the impact of repricing and competitors' pricing initiatives on loan
and deposit products;
- Corus' ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
- Corus' ability to access cost-effective funding; and
- the purchase of the second mortgage high-loan-to-value portfolio and
the capability of Corus to minimize loan delinquencies and charge-offs
of the acquired loans.

Corus undertakes no obligation to revise or update these forward-looking
statements to reflect events or circumstances after the date of this filing.

27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Corus' operations are subject to risk resulting from interest rate fluctuations
to the extent that there is a difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities that are
prepaid/withdrawn, mature, or reprice in specified periods. The principal
objective of Corus' asset/liability management activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating funding requirements. Corus utilizes an
interest rate sensitivity model as the primary quantitative tool in measuring
the amount of interest rate risk that is present at the end of each quarter. The
model uses income simulation to quantify the effects of various interest rate
scenarios on the projected net interest income over a five-year period. Factored
into the modeling is the use of derivative financial instruments, which may
include interest rate swaps, floors and options. The indices of these
derivatives correlate to on-balance sheet instruments and modify net interest
sensitivity to levels deemed to be appropriate based on the current economic
outlook.

Interest rate sensitivity as of September 30, 2002 is as follows:

(1) These "shocks" represent hypothetical instantaneous and sustained changes
from current rates.

Corus' projected one-year sensitivity to interest rates has increased since
December 31, 2001. This increase in sensitivity is primarily due to the
repricing characteristics of certain deposit products introduced during 2002.
Note that given the extraordinarily low absolute level of market interest rates,
caution should be used in attempting to extrapolate these results beyond the
range shown above.

Corus is also exposed to price risk with its common stock portfolio in financial
industry companies valued at $142 million as of September 30, 2002, including
net unrealized gains of $40 million. This price risk does not have a direct
effect on the net income of Corus, although would reduce any gains which may be
taken on the sale of certain equity securities in the future.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the date of filing this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on and as of the time of such evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiary) required to be included in the
Company's periodic filing with the Securities and Exchange Commission. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the time
of such evaluation.

28

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS.

This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.

This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES.

This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.

ITEM 5: OTHER INFORMATION.

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

3a Amended and Restated Articles of Incorporation is incorporated herein
by reference to Exhibit 4.1 to the Form S-8 filing dated May 22, 1998.

3b By-Laws are incorporated herein by reference to Exhibit 4.2 to the Form
S-8 filing dated May 22, 1998.

11 Computation of Net Income per Common Share.

99.1 Independent Accountants' Review Report.

99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(b) Reports on Form 8-K.

None

29

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CORUS BANKSHARES, INC.
(Registrant)

November 8, 2002 By: /s/ Michael E. Dulberg
----------------------------
Michael E. Dulberg
First Vice President and Chief Accounting Officer

(Principal Accounting Officer and duly authorized
Officer of Registrant)

30

CERTIFICATIONS

I, Robert J. Glickman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Corus
Bankshares, Inc;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 8, 2002 /s/ Robert J. Glickman
--------------------------
Robert J. Glickman
Chief Executive Officer

31

CERTIFICATIONS

I, Timothy H. Taylor, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Corus
Bankshares, Inc;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 8, 2002 /s/ Timothy H. Taylor
------------------------------
Timothy H. Taylor
Chief Financial Officer

32