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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
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, 2003
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)
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X} No [ ]
As of October 31, 2003, the Registrant had 14,031,044 common shares, $0.05 par
value, outstanding.
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CORUS BANKSHARES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
ITEM 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 31
ITEM 4. Controls and Procedures 31
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities and Use of Proceeds 32
ITEM 3. Defaults Upon Senior Securities 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
ITEM 5. Other Information 32
ITEM 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Exhibit 15 - Letter RE Unaudited Financial Information 34
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification 35
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification 36
Exhibit 32 - Section 1350 Certifications 37
Exhibit 99 - Independent Accountants' Review Report 38
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORUS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Unaudited)
SEPTEMBER 30 December 31 September 30
(Dollars in thousands) 2003 2002 2002
-------------- ------------ ------------
Assets
Cash and due from banks - non-interest bearing $ 59,580 $ 61,560 $ 78,206
Federal funds sold 752,200 370,100 490,000
Securities:
Available-for-sale, at fair value
Common stocks at the Bank Holding Company 164,519 147,845 141,645
(amortized cost $95,661, $101,478 and $101,478)
Other securities 144,867 272,799 280,149
(amortized cost $142,110, $267,658 and $274,722)
Held-to-maturity, at amortized cost 6,597 6,687 6,730
(fair value $6,655, $6,767 and $6,817)
----------- ----------- -----------
Total Securities 315,983 427,331 428,524
Loans, net of unearned income 2,185,711 1,741,969 1,587,997
Less: Allowance for loan losses 36,145 36,629 36,740
----------- ----------- -----------
Net Loans 2,149,566 1,705,340 1,551,257
Premises and equipment, net 26,885 28,320 29,325
Accrued interest receivable and other assets 25,830 19,876 22,537
Goodwill, net of accumulated amortization of $30,009 4,523 4,523 4,523
----------- ----------- -----------
Total Assets $ 3,334,567 $ 2,617,050 $ 2,604,372
=========== =========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 229,804 $ 216,551 $ 224,926
Interest-bearing 2,414,977 1,843,222 1,828,305
----------- ----------- -----------
Total Deposits 2,644,781 2,059,773 2,053,231
Long-term debt - trust preferred securities 92,500 -- --
Other borrowings 36,547 48,110 51,698
Accrued interest payable and other liabilities 42,322 27,126 30,834
----------- ----------- -----------
Total Liabilities 2,816,150 2,135,009 2,135,763
Shareholders' Equity
Common stock (par value $0.05 per share,
50,000,000 shares authorized; 14,041,044,
14,119,244 and 14,128,144 shares outstanding,
respectively) 702 706 706
Surplus 19,333 17,374 15,719
Retained earnings 451,833 430,482 422,549
Accumulated other comprehensive income 46,549 33,479 29,635
----------- ----------- -----------
Total Shareholders' Equity 518,417 482,041 468,609
----------- ----------- -----------
Total Liabilities and Shareholders' Equity $ 3,334,567 $ 2,617,050 $ 2,604,372
=========== =========== ===========
See accompanying notes.
1
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
(In thousands, except per share data) 2003 2002 2003 2002
----------- --------- ---------- ---------
Interest, Loan Fees, and Dividend Income
Interest and fees on loans:
Taxable $ 39,587 $ 31,794 $107,413 $ 96,484
Tax-advantaged 38 54 123 172
Federal funds sold 1,180 1,710 3,076 5,832
Securities:
Taxable 1,472 3,118 5,793 9,323
Tax-advantaged 16 16 48 50
Dividends 1,351 1,219 3,908 3,565
Trading account 243 118 703 449
-------- -------- -------- --------
Total Interest, Loan Fees, and Dividend Income 43,887 38,029 121,064 115,875
Interest Expense
Deposits 10,416 13,300 32,008 40,486
Federal funds purchased -- -- -- 3
Long-term debt - trust preferred securities 577 -- 609 --
Other borrowings 267 452 894 1,376
-------- -------- -------- --------
Total Interest Expense 11,260 13,752 33,511 41,865
Net Interest Income 32,627 24,277 87,553 74,010
Provision for Loan Losses -- -- -- --
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses 32,627 24,277 87,553 74,010
Noninterest Income
Service charges on deposit accounts 2,973 3,034 8,895 9,005
Securities gains, net 1,634 3,965 2,299 7,294
Other income 639 1,691 2,031 3,015
-------- -------- -------- --------
Total Noninterest Income 5,246 8,690 13,225 19,314
Noninterest Expense
Salaries and employee benefits 9,106 6,827 25,472 22,102
Net occupancy 1,113 977 3,132 2,913
Data processing 679 620 1,999 1,812
Depreciation - furniture & equipment 404 598 1,174 1,433
Other expenses 2,249 2,139 6,954 6,872
-------- -------- -------- --------
Total Noninterest Expense 13,551 11,161 38,731 35,132
-------- -------- -------- --------
Income Before Income Taxes 24,322 21,806 62,047 58,192
Income Tax Expense 8,168 7,316 20,740 19,411
-------- -------- -------- --------
Net Income $ 16,154 $ 14,490 $ 41,307 $ 38,781
======== ======== ======== ========
Net income per share:
Basic $ 1.15 $ 1.02 $ 2.94 $ 2.74
Diluted $ 1.12 1.01 2.88 2.71
Cash dividends declared per common share $ 0.500 $ 0.160 $ 1.160 $ 0.475
Average common shares outstanding:
Basic 14,039 14,157 14,059 14,159
Diluted 14,385 14,290 14,363 14,306
See accompanying notes.
2
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
(Dollars in thousands, except per share data) Stock Surplus Earnings Income Total
---------- ---------- ---------- ------------- ---------
Balance at December 31, 2002 $ 706 $ 17,374 $ 430,482 $ 33,479 $ 482,041
Net income -- -- 41,307 -- 41,307
Other comprehensive income (net of income taxes):
Net change in unrealized gains on available-
for-sale securities -- -- -- 13,070 13,070
---------
Comprehensive income 54,377
---------
Retirement of 90,000 common shares (5) (65) (3,668) -- (3,738)
Shares issued under stock option plan,
11,800 common shares 1 430 -- -- 431
Deferred compensation -- 1,594 -- -- 1,594
Cash dividends declared on common stock,
$1.160 per common share -- -- (16,288) -- (16,288)
--------- --------- --------- --------- ---------
Balance at September 30, 2003 $ 702 $ 19,333 $ 451,833 $ 46,549 $ 518,417
========= ========= ========= ========= =========
See accompanying notes.
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
(Dollars in thousands, except per share data) Stock Surplus Earnings Income Total
--------- --------- --------- ------------- ---------
Balance at December 31, 2001 $ 708 $ 15,951 $ 391,798 $ 42,429 $ 450,886
Net income -- -- 38,781 -- 38,781
Other comprehensive income (net of income taxes):
Net change in unrealized gains on available-
for-sale securities -- -- -- (12,794) (12,794)
---------
Comprehensive income 25,987
---------
Retirement of 31,500 common shares (2) (35) (1,304) -- (1,341)
Deferred compensation -- (197) -- -- (197)
Cash dividends declared on common stock,
$0.475 per common share -- -- (6,726) -- (6,726)
--------- --------- --------- --------- ---------
Balance at September 30, 2002 $ 706 $ 15,719 $ 422,549 $ 29,635 $ 468,609
========= ========= ========= ========= =========
See accompanying notes.
3
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine months ended September 30 2003 2002
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,307 $ 38,781
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,119 2,373
Amortization of investment and loan premiums, net 580 297
Deferred income tax (benefit) expense (2,808) 1,078
Securities gains, net (2,299) (7,294)
Deferred compensation 4,025 1,676
(Increase) decrease in accrued interest receivable and other assets (4,100) 5,369
Increase in accrued interest payable and other liabilities 3,805 3,461
--------- ---------
Net cash provided by operating activities 42,629 45,741
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held-to-maturity 91 293
Proceeds from maturities of available-for-sale securities 149,651 67,014
Proceeds from sales of available-for-sale securities 10,883 233,589
Purchases of available-for-sale securities (29,171) (360,538)
Net increase in loans (446,748) (120,508)
Bad debt recoveries 2,358 1,766
Purchases of premises and equipment, net (684) (2,324)
--------- ---------
Net cash used in investing activities (313,620) (180,708)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts 585,008 (68,225)
Proceeds from issuance of long-term debt - trust preferred securities 92,500 --
Repayment of debt (8,000) (3,000)
Decrease in other borrowings, net (3,563) (1,118)
Issuance of common shares under the stock option plan 431 --
Retirements of common shares (3,738) (1,341)
Cash dividends paid on common shares (11,527) (6,657)
--------- ---------
Net cash provided by (used in) financing activities 651,111 (80,341)
--------- ---------
Net increase (decrease) in cash and cash equivalents 380,120 (215,308)
Cash and cash equivalents at January 1 431,660 783,514
--------- ---------
Cash and cash equivalents at September 30 $ 811,780 $ 568,206
========= =========
See accompanying notes.
4
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Consolidated Financial Statements
The 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
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, 2002 included in Corus' Annual Report on Form 10-K for
the year ended December 31, 2002. The results of operations for the
interim period should not be considered indicative of results to be
expected for the full year.
2. Recent Accounting Pronouncements
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" was issued, establishing standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement requires
that an issuer classify certain financial instruments, which may
previously have been classified as equity, as liabilities. This generally
includes financial instruments which either 1) require mandatory
redemption at a specified time other than upon liquidation or termination
of the entity, 2) include an obligation to either repurchase the issuer's
equity shares or is indexed to such an obligation and which may require
settlement in cash or 3) require the issuance of a variable number of the
issuer's shares based on a monetary amount which is generally unrelated to
the value of those shares. The Statement was effective for Corus as of May
31, 2003 and is not expected to have a material impact on the Company's
accounting and reporting.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued, amending and clarifying
financial accounting and reporting for certain derivative instruments.
This statement is generally effective for contracts entered into or
modified after June 30, 2003. The Statement is not expected to have a
material impact on the Company's accounting and reporting for derivatives.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" was issued and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, the statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement was effective for Corus beginning with the fiscal period ending
December 31, 2002. Because the Company plans to continue its accounting
for stock-based compensation under APB No. 25, the adoption of SFAS No.
148 is not expected to have a material impact on results of operations or
financial position. See Note 8 of Notes to Consolidated Financial
Statements for required disclosure.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." The objective of this interpretation is to provide guidance on
how to identify a variable interest entity ("VIE") and determine when the
assets, liabilities, noncontrolling interest, and results of operations of
a VIE need to be included in a company's consolidated financial
statements. The adoption of FIN 46 is not expected to have a material
impact on the Company's accounting and reporting.
5
3. Segment Reporting
The following reflects the disclosure requirements set forth by SFAS 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, mezzanine loans, and
loans to customers in the check cashing industry.
Consumer Lending is composed of home equity, residential mortgage, 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 gains/(losses) on 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, 2003
(Dollars in thousands) Commercial Consumer Retail Corporate Inter-segment
Lending Lending Banking Support Eliminations Consolidated
----------- ----------- ----------- ----------- ------------- -----------
Total Revenues (1) $ 21,840 $ 998 $ 11,158 $ 3,877 $ -- $ 37,873
Net Income 10,468 256 3,782 1,648 -- 16,154
Total Average Assets 2,284,516 75,490 2,568,377 191,726 (2,045,073) 3,075,036
End of Period Goodwill -- -- 4,523 -- -- 4,523
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars in thousands) Commercial Consumer Retail Corporate Inter-segment
Lending Lending Banking Support Eliminations Consolidated
----------- ----------- ----------- ----------- ------------- -----------
Total Revenues (1) $ 14,543 $ 2,082 $ 9,172 $ 7,170 $ -- $ 32,967
Net Income 6,289 706 2,584 4,911 -- 14,490
Total Average Assets 1,736,850 85,509 2,158,673 356,913 (1,703,477) 2,634,468
End of Period Goodwill -- -- 4,523 -- -- 4,523
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Dollars in thousands) Commercial Consumer Retail Corporate Inter-segment
Lending Lending Banking Support Eliminations Consolidated
----------- ----------- ----------- ----------- ------------- -----------
Total Revenues (1) $ 57,666 $ 3,572 $ 28,724 $ 10,816 $ -- $ 100,778
Net Income 25,848 1,129 8,396 5,934 -- 41,307
Total Average Assets 2,078,735 84,683 2,337,045 161,469 (1,854,488) 2,807,444
End of Period Goodwill -- -- 4,523 -- -- 4,523
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars in thousands) Commercial Consumer Retail Corporate Inter-segment
Lending Lending Banking Support Eliminations Consolidated
----------- ----------- ----------- ----------- ------------- -----------
Total Revenues (1) $ 43,867 $ 5,929 $ 28,919 $ 14,609 $ -- $ 93,324
Net Income 18,748 1,681 8,547 9,805 -- 38,781
Total Average Assets 1,648,993 126,909 2,172,483 403,923 (1,710,350) 2,641,958
End of Period Goodwill -- -- 4,523 -- -- 4,523
(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. Derivatives
As of January 1, 2001, Corus implemented SFAS No. 133, as amended. This
statement establishes 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 change in fair value of the hedged risk
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.
Corus utilizes interest rate fixed-to-floating swaps (pay fixed/receive
floating and pay floating/receive fixed) 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. All but one of the
fixed-to-floating swaps qualified as fair value hedges and received hedge
accounting treatment. The Company's basis swaps, however, do not meet the
strict criteria required to qualify for hedge accounting.
The income statement impact and notional amounts related to both hedge and
non-hedge derivatives were as follows:
DERIVATIVE INCOME/(LOSS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Income Statement ------------------- --------------------
(dollars in thousands) Classification 2003 2002 2003 2002
- ---------------------- -------------- ------- ------- ------- -------
Fair value hedge (fixed-to-floating swaps):
Loan hedge Interest Income $ (16) $ 16 $ (1) $ (41)
Brokered CD hedge(1) Interest Expense -- N/A -- N/A
------- ------- ------- -------
Total hedge $ (16) $ 16 $ (1) $ (41)
Non-hedge:
Fixed-to-floating swaps Noninterest Income 22 (25) 32 (34)
Basis swaps Noninterest Income (1,091) 386 1,544 3,190
------- ------- ------- -------
Total Non-hedge (1,069) 361 1,576 3,156
------- ------- ------- -------
Total Derivative Gain/(Loss) $(1,085) $ 377 $ 1,575 $ 3,115
======= ======= ======= =======
NOTIONAL AMOUNTS OF DERIVATIVES
(Dollars in thousands) SEPTEMBER 30, 2003 September 30, 2002
- ---------------------- ------------------ ------------------
Fair value hedge (fixed-to-floating swaps):
Loan hedge $ 5,712 $ 8,761
Brokered CD hedge(1) 372,503 N/A
Non-hedge:
Fixed-to-floating swaps 984 1,068
Basis swaps 1,000,000 800,000
(1) These swaps were entered into beginning in April 2003 and qualify for the
"shortcut method," as defined by SFAS No. 133. Corus does not anticipate
any net income statement impact from the associated mark-to-market
adjustments.
8
5. Issuance of Trust Preferred Securities
In 2003, the Company formed Corus Statutory Trust I ("Trust I"), Corus
Statutory Trust II ("Trust II"), and Corus Statutory Trust III ("Trust
III"). All three entities are wholly-owned finance subsidiaries of the
Company, formed for the sole purpose of issuing and selling capital
securities and using the proceeds to purchase subordinated debentures
issued by the Company. The trust preferred securities issued by the Trusts
mature 30 years after issuance, although the securities are callable
quarterly on or after the fifth year subsequent to issuance, or earlier in
the event of certain changes or amendments to regulatory requirements or
federal tax rules.
The following table summarizes the three trust preferred issuances:
Issue Maturity Amount Issued
Date Date Rate (in millions)
---------- ---------- ------------ -------------
Trust I June 2003 June 2033 LIBOR + 3.05% $ 27.5
Trust II June 2003 June 2033 LIBOR + 3.10% 20.0
Trust III Sept. 2033 Sept. 2033 LIBOR + 2.95% 45.0
-------------
Total $ 92.5
=============
Corus owns all of the combined $2.9 million of common securities issued by
the three Trusts. The sole assets of the Trusts are subordinated
debentures issued by Corus totaling $95.4 million, which have terms
similar to that of the trust preferred securities. The subordinated
debentures and the trust preferred securities pay distributions and
dividends, respectively, on a quarterly basis. The interest rates on
payments reset quarterly. Corus has the ability to defer interest payments
on the subordinated debentures and distributions on the trust preferred
securities for a period not to exceed 20 consecutive quarters subject,
however, to certain restrictions with regard to Corus' ability to make,
among other things, distributions to holders of Corus common stock. Corus
has not exercised this option. Issuance fees totaled $344,000, $200,000,
and $558,000, respectively, for the trust preferred securities issued by
Trust I, Trust II, and Trust III and are being amortized over the 30-year
lives of the securities. Finally, Corus has, through various agreements,
essentially guaranteed payment of all amounts due under the trust
preferred securities.
6. 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.
Corus has extended the maturity date on both notes to June 25, 2006, and
either note 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 note is $1.0 million quarterly
beginning September 30, 2001 and the revolving note 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, 2003, management
believes that Corus was in compliance with all loan covenants.
Interest and fees for both notes for the nine months ended September 30,
2003 totaled $890,000. At September 30, 2003, the term note had an
outstanding balance of $36.0 million and the revolving credit line had no
balance outstanding.
9
7. Net Income Per Share
Net income per share was calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
(In thousands, except per share data) 2003 2002 2003 2002
------- ------- ------- -------
Denominator for basic earnings per share:
average common shares outstanding 14,039 14,157 14,059 14,159
Dilutive common stock options 346 133 304 147
------- ------- ------- -------
Denominator for diluted earnings per share 14,385 14,290 14,363 14,306
======= ======= ======= =======
Numerator: Net income attributable to common shares $16,154 $14,490 $41,307 $38,781
Net income per share:
Basic $ 1.15 $ 1.02 $ 2.94 $ 2.74
Diluted 1.12 1.01 2.88 2.71
8. Stock-Based Employee Compensation
Corus utilizes stock options to compensate employees under the,
shareholder approved, 1999 Stock Option Plan ("the Plan"). Under the
Plan, options to purchase Corus' common stock have been granted to
employees at prices equal to the fair market value of the underlying
stock on the dates the options were granted. The options vest 20%
per year, over a five-year period, and expire in 10 years. The
Company accounts for the Plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees, and related
Interpretations" ("APB No. 25"). Since all options granted under the
Plan had an exercise price equal to the market value of the
underlying common stock on the date of grant, the granting of the
options had no impact on net income. The following table illustrates
the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- --------------------------
(In thousands, except per share data) 2003 2002 2003 2002
------------ ----------- ----------- ----------
Net income, as reported $ 16,154 $ 14,490 $ 41,307 $ 38,781
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 28 26 44 99
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (281) (285) (817) (761)
---------- ---------- ---------- ----------
Pro forma net income $ 15,901 $ 14,231 $ 40,534 $ 38,119
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic - as reported $ 1.15 $ 1.02 $ 2.94 $ 2.74
Basic - pro forma 1.13 1.01 2.88 2.69
Diluted - as reported $ 1.12 $ 1.01 $ 2.88 $ 2.71
Diluted - pro forma 1.11 1.00 2.82 2.66
10
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.
SIGNIFICANT ACCOUNTING POLICIES
Management has determined that one particular accounting policy requires a high
level of judgment: the assessment of the allowance for loan losses.
The allowance for loan losses is based upon quarterly reviews. These reviews
include an assessment of the loan portfolio and include reviews of both specific
credits and an overall assessment. Specific reviews are performed in accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and can
result in a specific reserve for certain impaired loans. For those loans not
specifically reviewed, an assessment is performed, by loan type (i.e.,
commercial, commercial real estate, construction, home equity, residential first
mortgage, etc.) to determine an inherent loss rate. The inherent loss rate is
based primarily on a combination of historical loss experience and delinquency
levels (current vs. historical).
Additional factors are also considered including the level of problem and
potential problem loans, trends in volume and terms of loans, changes in risk
selection and underwriting standards, experience, ability and depth of lending
management, and economic and industry conditions.
The assessment as to the adequacy of the allowance for loan losses is grounded
by the assumption that historical experience is a good predictor of future
performance. This assumption, while supported by guidance provided by the
Financial Accounting Standards Board, the Office of the Comptroller of the
Currency, and the Securities & Exchange Commission, may not ultimately be
correct. In that event, estimates of inherent losses may differ from actual
results.
OPERATING RESULTS
For the three months ended September 30, 2003, net income was $16.2 million, or
$1.12 per share on a diluted basis, compared to net income of $14.5 million, or
$1.01 per share on a diluted basis, in 2002. For the nine months ended September
30, 2003, net income was $41.3 million, or $2.88 per share on a diluted basis,
versus $38.8 million, or $2.71 per share on a diluted basis, in 2002.
Earnings for the third quarter of 2003 represented annualized returns of 12.6%
on equity (ROE) and 2.1% on assets (ROA) compared to 12.2% and 2.2% for the same
period in 2002. Earnings year-to-date for both 2003 and 2002 represented
annualized returns of 11.1% on equity (ROE) and 2.0% on assets (ROA).
11
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
(Dollars in thousands) BALANCE AND FEES COST BALANCE AND FEES COST
- ---------------------- ----------- --------- ----- ----------- -------- -----
ASSETS
Earning Assets:
Liquidity management assets (1) $ 717,572 $ 2,920 1.63% $ 758,051 $ 4,970 2.62%
Common stocks at the Bank Holding Company (2) 164,637 1,860 4.52% 161,490 1,678 4.16%
Loans, net of unearned income (3) 2,095,865 39,645 7.57% 1,629,225 31,878 7.83%
----------- --------- ----------- --------
Total earning assets 2,978,074 44,425 5.97% 2,548,766 38,526 6.05%
Noninterest-earning assets:
Cash and due from banks--noninterest bearing 77,292 70,905
Allowance for loan losses (35,990) (40,151)
Premises and equipment, net 27,130 28,843
Other assets, including goodwill 28,530 26,105
----------- -----------
Total assets $ 3,075,036 $2,634,468
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits--interest-bearing:
Money market deposits $ 967,965 $ 3,806 1.57% $ 888,820 $ 4,862 2.19%
Retail certificates of deposit 422,518 2,473 2.34% 413,884 3,614 3.49%
Brokered certificates of deposit 427,321 3,490 3.27% 259,070 4,063 6.27%
Savings deposits 168,727 211 0.50% 159,009 599 1.51%
NOW deposits 198,783 436 0.88% 120,679 162 0.54%
----------- --------- ----------- --------
Total interest-bearing deposits 2,185,314 10,416 1.91% 1,841,462 13,300 2.89%
Long-term debt - trust preferred securities 54,348 577 4.25% -- -- -- %
Borrowings 40,418 267 2.64% 51,586 452 3.50%
----------- --------- ----------- --------
Total interest-bearing liabilities 2,280,080 11,260 1.98% 1,893,048 13,752 2.91%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 240,759 231,161
Other liabilities 42,143 35,092
Shareholders' equity 512,054 475,167
----------- -----------
Total liabilities and shareholders' equity $ 3,075,036 $ 2,634,468
=========== ===========
Interest income and loan fees/average earning assets $ 2,978,074 $ 44,425 5.97% $ 2,548,766 $ 38,526 6.05%
Interest expense/average interest-bearing liabilities $ 2,280,080 11,260 1.98% $ 1,893,048 13,752 2.91%
----------- --------- ---- ----------- -------- ----
Net interest spread $ 33,165 3.99% $ 24,774 3.14%
========= ==== ======== ====
Net interest margin 4.45% 3.89%
==== ====
Tax equivalent adjustments are based on a Federal income tax rate of 35%.
(1) Liquidity management assets include federal funds sold and securities held
at the subsidiary bank. Interest income on securities includes a tax
equivalent adjustment of $9,000 for both 2003 and 2002.
(2) Dividends on the common stock portfolio include a tax equivalent
adjustment of $509,000 and $459,000 for 2003 and 2002, respectively.
(3) Interest income on tax-advantaged loans includes a tax equivalent
adjustment of $20,000 and $29,000 for 2003 and 2002, respectively.
Unremitted interest on nonaccrual loans is not included in the amounts.
Includes net interest income derived from interest rate swap contracts.
12
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
(Dollars in thousands) BALANCE AND FEES COST BALANCE AND FEES COST
- ---------------------- ----------- --------- -------- -------- -------- --------
Assets
Earning Assets:
Liquidity management assets (1) $ 658,545 $ 9,645 1.95% $ 789,762 $ 15,681 2.65%
Common stocks at the Bank Holding Company (2) 153,262 5,380 4.68% 165,854 4,908 3.95%
Loans, net of unearned income (3) 1,902,907 107,603 7.54% 1,596,682 96,749 8.08%
--------- ------ ---------- ------
Total earning assets 2,714,714 122,628 6.02% 2,552,298 117,338 6.13%
Noninterest-earning assets:
Cash and due from banks--noninterest bearing 75,115 75,914
Allowance for loan losses (36,147) (40,310)
Premises and equipment, net 27,661 28,977
Other assets, including goodwill 26,101 25,079
--------- ----------
Total assets $ 2,807,444 $2,641,958
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits--interest-bearing:
Money market deposits $ 932,518 $11,666 1.67% $ 889,804 $ 13,644 2.04%
Retail certificates of deposit 403,391 8,005 2.65% 413,625 11,575 3.73%
Brokered certificates of deposit 320,129 10,601 4.42% 283,587 13,081 6.15%
Savings deposits 166,716 980 0.78% 155,667 1,738 1.49%
NOW deposits 161,518 756 0.62% 118,238 447 0.50%
--------- ------ ---- ---------- ------
Total interest-bearing deposits 1,984,272 32,008 2.15% 1,860,921 40,485 2.90%
Long-term debt - trust preferred securities 19,332 609 4.20% - - - %
Borrowings 41,786 894 2.85% 52,478 1,380 3.51%
--------- ------ ---------- ------ ----
Total interest-bearing liabilities 2,045,390 33,511 2.18% 1,913,399 41,865 2.92%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 229,049 225,430
Other liabilities 36,592 38,042
Shareholders' equity 496,413 465,087
--------- ----------
Total liabilities and shareholders' equity $ 2,807,444 $2,641,958
========= ==========
Interest income and loan fees/average earning assets $ 2,714,714 $122,628 6.02% $2,552,298 $ 117,338 6.13%
Interest expense/average interest-bearing liabilities $ 2,045,390 33,511 2.18% $1,913,399 41,865 2.92%
--------- ------ ---- ---------- ------ ----
Net interest spread $89,117 3.84% $ 75,473 3.21%
====== ==== ====== ====
Net interest margin 4.38% 3.94%
==== ====
Tax equivalent adjustments are based on a Federal income tax rate of 35%.
(1) Liquidity management assets include federal funds sold and securities held
at the subsidiary bank. Interest income on securities includes a tax
equivalent adjustment of $26,000 and $27,000 for 2003 and 2002,
respectively.
(2) Dividends on the common stock portfolio include a tax equivalent
adjustment of $1.5 million and $1.3 million for 2003 and 2002,
respectively.
(3) Interest income on tax-advantaged loans includes a tax equivalent
adjustment of $66,000 and $93,000 for 2003 and 2002, respectively.
Unremitted interest on nonaccrual loans is not included in the amounts.
Includes net interest income derived from interest rate swap contracts.
13
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, 2003, Corus' net interest
margin increased by 56 and 44 basis points to 4.45% and 4.38%, respectively,
compared to the prior year. These increases were achieved in spite of the fact
that the Federal Reserve cut interest rates twice, for a combined 75 basis
points, from the third quarter of 2002 to the third quarter of 2003. Corus was
able to increase its net interest margin, versus comparable 2002 periods, due to
strong loan growth which was initially funded by redeploying assets previously
held in lower yielding investments. Growth in the most recent quarter was funded
primarily through additional brokered CDs (see Funding/Liquidity section). Loans
are, of course, Corus' highest yielding asset.
Another factor affecting yields is the impact of loan fees recognized during the
period. As we have stated in previous quarters, loan fee income is a normal part
of our business. The fees typically relate to points paid at closing where the
recognition of income is deferred and amortized ratably over the term of the
loan. Income recognition associated with these fees is relatively predictable
and tends to increase as the overall level of loans increase. Other types of
fees, on the other hand, such as those associated with the prepayment of loans
or a contingent fee arrangement are less predictable and can result in earnings
spikes since recognition of the income is not deferred, but rather recorded when
received. Importantly, these fees are as much a part of Corus' business as
points, they are simply accounted for differently due to their unpredictable
nature. For the three and nine months ended September 30, 2003, total loan fees
were $7.8 million and $21.4 million, respectively, compared $4.9 million and
$15.6 million, respectively, for the prior year periods. This growth in fees
during 2003, over 2002, is driven by our continued growth in total loans,
especially commercial real estate loans, which generate virtually all of the
loan fees.
Noninterest Income
For the three and nine months ended September 30, 2003, noninterest income
decreased by $3.4 million and $6.1 million, respectively compared to the prior
year. The decreases mainly resulted from lower net securities gains, as
described below. Other income also decreased due to a one-time $1 million
payment in the third quarter of 2002 related to the sale of Corus' Trust and
Investment Management business in October 2000. Service charges on deposit
accounts were essentially flat compared to the prior year.
Securities Gains/(Losses), net
For the three and nine months ended September 30, 2003, Corus recorded net
securities gains of $1.6 million and $2.3 million, respectively, compared to
$4.0 million and $7.3 million of net gains in the same periods of 2002. The
following details the net securities gains/(losses) by source:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
(Dollars in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
Gains on common stocks at Bank Holding Company $ 2,759 $ -- $ 10,074 $ 951
Charge for "other than temporary" impairment -- -- (8,962) --
Sales of securities at subsidiary bank (56) 3,604 (389) 3,187
Mark-to-market adjustments on non-hedge derivatives (1,069) 361 1,576 3,156
-------- -------- -------- --------
Total securities gains/(losses), net $ 1,634 $ 3,965 $ 2,299 $ 7,294
======== ======== ======== ========
14
Gains on common stocks at Bank Holding Company
Gains on common stocks at the Bank Holding Company relate to the common stock
portfolio of various financial industry companies held at the Bank Holding
Company (see Common Stock Portfolio section for additional details). For the
first nine months of 2003, Corus recognized gains totaling $10.1 million
compared to $951,000 for the same period of 2002. The 2003 gains reflect both a
$7.3 million gain from the actual sale of securities in the first quarter as
well as a gain of $2.8 million in the third quarter resulting from two
stock-for-stock acquisition transactions relating to investments held by Corus.
These transactions, while not taxable until the stock is sold, result in a book
gain equal to the difference between the value received in the stock of the
acquirer as compared to Corus' cost basis in the acquired company's stock.
Charge for "other than temporary" impairment
In the first quarter of 2003, Corus recorded a charge of $9.0 million related to
"other than temporary" declines in value of certain common stocks held at the
Bank Holding Company. It is important to point out that this charge was not as a
result of the Company selling the associated stocks, but rather an accounting
entry with no cash flow or tax implications. This charge was recorded in
accordance with Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("FAS 115") and as
further defined by the Securities and Exchange Commission Staff Accounting
Bulletin No. 59 ("SAB 59").
As background, accounting rules require that investments be categorized as
trading, held-to-maturity ("HTM"), or available-for-sale ("AFS"). Trading
securities are those securities that are bought and held principally for the
purpose of selling them in the near term. HTM securities are those investments
which the company has the "positive intent and ability to hold" to maturity.
Finally, AFS securities are those investments not classified as either trading
or HTM. The common stocks held at the Bank Holding Company are classified and
accounted for as AFS securities.
The significance of how an investment is classified is reflected in how
unrealized gains/(losses) are treated in the accounting records and thus in the
company's financial statements. For trading securities, unrealized
gains/(losses) are recorded directly in the income statement each period. This
reflects the assumed short-term nature of these investments and the idea that
these securities are generally purchased with the objective of generating
profits on short-term differences in price. On the other hand, for HTM
securities, unrealized gains/(losses) are generally not recorded at all under
the assumption that any short-term fluctuations in value will ultimately reverse
by maturity. The accounting for AFS securities is somewhat of a middle ground
between trading and HTM. For AFS securities, changes in market value are
recorded each period on the balance sheet, on an after-tax basis directly in
equity as an item referred to as Other Comprehensive Income. These changes in
market value are not reflected in the income statement.
An exception to the above guidelines arises when unrealized losses are
determined to be "other than temporary" ("OTT"). If an investment is determined
to have experienced an OTT decline in value, the loss must then be recognized in
the income statement regardless of how the investment is categorized.
Indications of OTT declines in value include prolonged periods of consistent
unrealized losses or deterioration in the financial condition or near-term
prospects of the issuer. Corus' general practice for marketable equity
securities is to recognize impairment losses on individual securities when the
security has been in a loss position at the close of each trading day during six
(6) consecutive months as of any quarter end. Lastly, Corus evaluates its
investments for OTT declines in value on a lot-by-lot basis, meaning that if
there are multiple purchases of a certain security, each purchase is evaluated
individually.
With all the preceding being said, it is important to note that while the
accounting rules require that we report short-term stock price declines as
"other than temporary" losses in the income statement, the reality is stock
prices - for even the finest and best-managed companies - rise and fall,
sometimes over very extended periods of time (such "extended" periods of times
can easily be multiples of a six month timeframe). The fact that a company's
shares fall in value for a period as short as six months is neither overly
concerning to us nor any reasonable indicator of how the stock may fare in the
future. This is particularly true if the overall stock market has been
declining. Conversely, if a stock has been falling in the face of a generally
rising market, especially if this has been occurring over a protracted period of
time, this poor relative performance may well indicate a genuine problem with
the company and its prospects. Regardless, such a fundamental/economic approach
is not the way the accounting rules work.
Lastly, while we are required to report securities losses from these "other than
temporary" declines in value, we are not allowed to report securities gains when
those same securities recover in value. Case in point, as of September 30, 2003,
$4.9 million of the previously charged-off $9.0 million, has been recovered as
the prices of the associated common stocks
15
have risen. Unfortunately, while Corus was required to record the $9.0 million
charge as a reduction to income, the recovery does not receive the same
accounting treatment, but must instead be recorded as an unrealized gain (as
Other Comprehensive Income in Shareholders' Equity) and not recognized in income
until the security is ultimately sold. Unfortunately, this is another accounting
`disconnect' that companies, and their investors, must learn to live with.
Mark-to-market adjustments on non-hedge derivatives
Finally, for the three and nine months ended September 30, 2003, the Bank
recorded a loss of $1.1 million and a gain of $1.6 million, respectively, from
what we refer to as mark-to-market adjustments on non-hedge derivatives.
Compared to the prior year, this represents declines of approximately $1.4
million for the quarter and $1.6 million year-to-date. Due to their unusual
nature, the basis for these gains/(losses) 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 and brokered CDs to floating rate or vice 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 No. 133). 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 does 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 securities 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 securities gains/(losses) on the
Company's 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 Corus holds basis swaps to maturity, which we
generally do, the value of the instruments will ultimately return to $0. What
this means is that the cumulative gains or losses recognized at any point in
time would be temporary as they would ultimately reverse, such that the
cumulative gains and losses over the life of a basis swap would sum to zero.
However in the event that Corus sells any basis swaps prior to maturity, the
cumulative gains or losses would not reverse.
As of September 30, 2003, Corus has recorded net cumulative gains of $6.6
million related to mark-to-market adjustments on non-hedge derivatives. While
the portfolio of basis swaps vary both in notional amounts and maturities, they
will all have matured by 2008. This means that absent any sales of existing
swaps, the previously recognized $6.6 million of securities gains will "reverse"
in the form of $6.6 million of securities losses between now and 2008. While
management can predict the eventual reversal of these gains, we cannot predict
in what periods or in what periodic amounts those reversals will occur.
Noninterest Expense
For the three and nine months ended September 30, 2003, noninterest expense
increased by $2.4 million, and $3.6 million, respectively, compared to the prior
year, predominantly due to rises in salaries and benefits expense. The increases
resulted from two specific items. First, officer bonus accruals increased by
$1.1 million and $1.8 million for the three and nine months ended September 30,
2003, respectively, compared to 2002. Corus' commercial loan officers are
compensated primarily on a commission basis so strong loan growth naturally
results in increased compensation. Second, the mark-to-market adjustments
associated with the Commercial Loan Officer Commission Program ("the CLO
Commission Program") increased compared to the prior year. The CLO Commission
Program is discussed in greater detail below.
The CLO Commission Program is a compensation plan whereby commissions may be
earned each year with a portion paid currently and the remainder deferred for up
to 10 years (note that both the paid and deferred amounts are expensed
16
in that year). The deferred portion can be invested, at each participant's
option, in among other instruments, Corus common stock. The number of shares
deferred is determined by dividing the commission amount by an average stock
price, as defined in the plan document. To the extent that commissions are
deferred in Corus stock, the Company repurchases an equal number of shares in
the open market. In this way, the Company has effectively "hedged" itself
against changes in the value of the stock between the deferral date and the
ultimate delivery date. Ideally, this should be the end of the story until the
shares are ultimately released at the end of the deferral period.
However, as described more completely in the plan document, the deferred amounts
are subject to loss under certain circumstances. As a result, actual amounts due
to the employees are not known until the end of the deferral period and as such
the CLO Commission Program must be accounted for under what is known as
"variable plan accounting" rules. Under these rules, the Company is required to
record an adjustment to income based on changes in the market value of the
deferred stock. Therefore even though the Company has clearly purchased, and is
essentially holding in "inventory", the shares required to satisfy its
obligation to the employees, changes in the liability to the employees, as
defined by changes in the market value of the deferred stock, must be recorded
as either expense or income. In other words, if the price of Corus stock rises,
the Company must record additional compensation expense and if the price falls,
a reduction to compensation expense is recorded. We refer to this as the CLO
Commission Program mark-to-market adjustment. It is important to note these
adjustments carry no current tax payment or cash flow implications.
During the third quarter of 2003, the market price of Corus stock increased and
as a result, additional compensation expense of $868,000 was recorded. By
comparison, during the third quarter of 2002, Corus' stock price declined
slightly resulting in a reduction to expense of $261,000, a fluctuation of $1.1
million. On a year-to-date basis, the CLO Commission Program mark-to-market
adjustment resulted in additional expense of $1.6 million in 2003, and a
reduction to expense of $197,000 in 2002, resulting in a difference of $1.8
million.
FINANCIAL CONDITION
Earning Assets
The following table details the composition of Corus' earning assets:
(Dollars in thousands) SEPTEMBER 30, 2003 December 31, 2002 September 30, 2002
AMOUNT PERCENT Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
Loans, net of unearned income $2,185,711 67% $1,741,969 69% $1,587,997 63%
Federal funds sold 752,200 23 370,100 14 490,000 20
Securities other than common stocks 151,464 5 279,486 11 286,879 11
Common stocks at the Bank Holding Company 164,519 5 147,845 6 141,645 6
------- - ------- --- ------- ---
Total $3,253,894 100% $2,539,400 100% $2,506,521 100%
========== === ========== === ========== ===
17
Loans
The following table details the composition of Corus' loan portfolio:
(Dollars in thousands) SEPTEMBER 30, 2003 December 31, 2002 September 30, 2002
AMOUNT PERCENT Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ----------
Loans:
Commercial real estate:
Non-construction $1,162,101 53% $ 989,146 57% $ 828,010 52%
Construction 821,547 38 531,612 30 532,131 34
Mezzanine 47,590 2 32,092 2 36,240 2
---------- ---------- ---------- ---------- ---------- ----------
Total commercial real estate 2,031,238 93% 1,552,850 89% 1,396,381 88%
Commercial 79,839 4 87,631 5 79,707 5
Residential real estate and other 74,634 3 101,488 6 111,909 7
---------- ---------- ---------- ---------- ---------- ----------
Total Loans $2,185,711 100% $1,741,969 100% $1,587,997 100%
========== ========== ========== ========== ========== ==========
Commercial Real Estate Lending
Commercial real estate loans are comprised of non-construction, construction,
and mezzanine loans. The non-construction loans are of relatively short
duration, rarely more than five years in length, and usually shorter. Some would
call these "bridge" loans or "mini-perms", but the meaning of these labels is
not standardized in the lending industry. These loans are fully funded, or
nearly so, when the loan closes. Construction loans typically have maturities of
24 to 36 months and are funded throughout the term as construction progresses.
Mezzanine loans are essentially second mortgage loans on commercial real estate
projects, almost always subordinate to a Corus construction or non-construction
loan (as opposed to a third party's). Interest rates charged for mezzanine loans
are considerably higher than those charged for typical commercial real estate
loans, but they also carry additional risk.
The commercial real estate markets have been good for many years and Corus has
had particularly impressive results. We have actually had, in total, net
recoveries on this portfolio over the past 10 years. While our commercial real
estate portfolio continues to show minimal delinquencies and virtually no
losses, we recognize this sort of performance cannot persist indefinitely.
The table above shows commercial real estate loans of $2.0 billion, an increase
of $635 million or 45% compared to September 30, 2002. This table, however, only
reflects actual balances outstanding, which excludes commitments. While not yet
funded, commitments, which consist of unfunded loan amounts and commitment
letters issued, are also a significant part of the loan portfolio. Including
commitments, the commercial loan portfolio, as shown below totals $3.3 billion.
The table below shows a reconciliation of commercial real estate loans
outstanding to the total including commitments.
COMMERCIAL REAL ESTATE LOANS OUTSTANDING INCLUDING COMMITMENTS
SEPTEMBER 30, 2003 December 31, 2002 September 30, 2002
(Dollars in thousands) AMOUNT PERCENT Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ----------
Funded loans, net $2,031,238 61% $1,552,850 56% $1,396,381 58%
Commitments:
Loans 1,072,131 32 1,050,808 38 933,074 38
Commitment Letters 189,375 6 152,164 5 72,725 3
Letters of Credit 20,682 1 20,682 1 20,493 1
---------- ---------- ---------- ---------- ---------- ----------
Total $3,313,426 100% $2,776,504 100% $2,422,673 100%
========== ========== ========== ========== ========== ==========
18
Corus' commitments are primarily comprised of unfunded commitments under
commercial real estate construction loans. 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.
The following tables break out commercial real estate loans by 1) property type,
2) location, 3) size, and 4) a cross-section of location and property type.
COMMERCIAL REAL ESTATE LOANS - BY PROPERTY TYPE
(Dollars in millions) AS OF SEPTEMBER 30, 2003
------------------------------------------------------------
LOANS OUTSTANDING TOTAL COMMITMENT(1)
# OF --------------------- ---------------------
LOANS AMOUNT % AMOUNT %
-------- -------- -------- -------- --------
Condo/loft conversion 44 $ 652 32% $ 1,324 40%
Hotel 39 553 27 662 20
Office 24 354 18 596 18
Rental apartments 15 271 13 473 14
Warehouse / Light industrial 12 64 3 117 4
Nursing homes 9 69 3 69 2
Vacant land 5 36 2 37 1
Retail 4 8 -- 8 --
Other 1 2 -- 2 --
Loans less than $1 million 209 49 3 52 2
Deferred fees/other discounts N/A (27) (1) (27) (1)
-------- -------- -------- -------- --------
Total 362 $ 2,031 100% $ 3,313 100%
======== ======== ======== ======== ========
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
19
COMMERCIAL REAL ESTATE LOANS - BY MAJOR METROPOLITAN AREA
(Dollars in millions) AS OF SEPTEMBER 30, 2003
------------------------------------------------------------
LOANS OUTSTANDING TOTAL COMMITMENT(1)
# OF --------------------- ---------------------
LOANS AMOUNT % AMOUNT %
-------- -------- -------- -------- --------
California:
Los Angeles 23 $ 317 16% $ 508 15%
San Francisco 7 85 4 218 7
San Diego 7 84 4 112 3
Sacramento 2 52 2 76 2
-------- -------- -------- -------- --------
California Total 39 538 26 914 27
Washington, D.C.(2) 18 283 14 547 17
Chicago 40 262 13 419 13
Chicago -- Loans less than $1 million 200 45 2 47 1
New York City 14 261 13 431 13
Miami 199 10 272 8
6
Texas:
Houston 9 166 8 190 6
Dallas 3 32 2 59 2
San Antonio 1 6 -- 6 --
-------- -------- -------- -------- --------
Texas Total 13 204 10 255 8
Other (3) 32 266 13 455 14
Deferred fees/other discounts N/A (27) (1) (27) (1)
-------- -------- -------- -------- --------
Total 362 $ 2,031 100% $ 3,313 100%
======== ======== ======== ======== ========
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
(2) Includes northern Virginia and Maryland loans.
(3) No other metropolitan area exceeds three percent of the total.
COMMERCIAL REAL ESTATE LOANS - BY TOTAL COMMITMENT
(Dollars in millions) AS OF SEPTEMBER 30, 2003
------------------------------------------------------------
LOANS OUTSTANDING TOTAL COMMITMENT(1)
# OF --------------------- ---------------------
LOANS AMOUNT % AMOUNT %
-------- -------- -------- -------- --------
$60 million and above 12 $ 390 19% $ 802 24%
$40 million to $60 million 16 491 24 762 23
$20 million to $40 million 35 561 28 981 30
$1 million to $20 million 90 567 28 743 22
Less than $1 million 209 49 2 52 2
Deferred fees/other discounts N/A (27) (1) (27) (1)
-------- -------- -------- -------- --------
Total 362 $ 2,031 100% $ 3,313 100%
======== ======== ======== ======== ========
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
20
COMMERCIAL REAL ESTATE LOAN COMMITMENTS - BY MAJOR METROPOLITAN AREA AND
PROPERTY TYPE(1)
(Dollars in millions) AS OF SEPTEMBER 30, 2003
----------------------------------------------------------------------
Condo/loft Rental All
conversion Hotel Office apartments others(2) Total
---------- -------- -------- ---------- --------- --------
California:
Los Angeles $ 69 $ 193 $ 61 $ 71 $ 114 $ 508
San Francisco 144 18 56 -- -- 218
San Diego -- 46 49 17 -- 112
Sacramento -- -- 43 33 -- 76
-------- -------- -------- -------- -------- --------
California Total 213 257 209 121 114 914
Washington, D.C.(3) 163 110 222 52 -- 547
New York City 258 37 14 110 12 431
Chicago -- greater than $1 million 188 85 24 27 95 419
Miami 165 57 -- 50 -- 272
Texas:
Houston 70 -- 79 41 -- 190
Dallas 59 -- -- -- -- 59
San Antonio -- -- 6 -- -- 6
-------- -------- -------- -------- -------- --------
Texas Total 129 -- 85 41 -- 255
Other(4) 208 116 42 72 12 450
-------- -------- -------- -------- -------- --------
Subtotal $ 1,324 $ 662 $ 596 $ 473 $ 233 $ 3,288
======== ======== ======== ======== ========
Loans less than $1 million 52
Deferred fees/other discounts (27)
--------
Total $ 3,313
========
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
(2) Includes warehouse/light industrial, nursing homes, vacant land, retail,
and other.
(3) Includes northern Virginia and Maryland loans.
(4) No other metropolitan area exceeds three percent of the total.
21
The following table shows the locations of new loans originated during the first
nine months of 2003 and 2002:
COMMERCIAL REAL ESTATE LOAN ORIGINATIONS - BY LOCATION
(Dollars in millions) NINE MONTHS ENDED SEPTEMBER 30:
2003 2002
-------------------------------- --------------------------------
# OF # OF
LOANS AMOUNT % LOANS AMOUNT %
-------- -------- -------- -------- -------- --------
California 12 $ 280 25% 8 $ 308 29%
Washington D.C.(1) 7 204 18 6 286 27
New York 5 161 15 4 98 9
Illinois 15 138 12 21 186 18
Florida(2) 1 86 8 -- -- --
Other 14 240 22 12 184 17
-------- -------- -------- -------- -------- --------
Total 54 $ 1,109 100% 51 $ 1,062 100%
======== ======== ======== ======== ======== ========
(1) Includes northern Virginia and Maryland loans.
(2) While this loan has a face amount of $86 million, the maximum allowable
outstanding at any given time is $70 million.
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 various loan participations in which Corus has purchased an interest:
AS OF SEPTEMBER 30, 2003
-----------------------------------------------
CURRENT COMMITMENT BALANCE OUTSTANDING
% --------------------- ----------------------
LOAN # PROPERTY TYPE LOCATION PURCH TOTAL CORUS TOTAL CORUS
- ------ ------------- -------- ----- ----- ----- ----- -----
(Dollars in thousands)
1 Office CA 12% $187,883 $ 22,546 $181,792 $ 21,815
2 Hotel CA 15% 94,773 14,216 94,773 14,216
---------- ----------
Total purchased interest $ 36,762 $ 36,031
Corus' total CRE portfolio 3,313,426 2,031,238
Purchased interests as a percentage of Corus' total 1.1% 1.8%
Other Lending
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.
22
Common Stocks
At September 30, 2003, Corus had investments in the common stocks of 29
financial industry companies with a current market value totaling $164.5
million, including net unrealized gains of $68.9 million. These investments are
included in the available-for-sale classification. The following is a list of
Corus' holdings, by market value, as of September 30, 2003:
TICKER MARKET PERCENTAGE OF
CORPORATION SYMBOL SHARES HELD VALUE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Comerica Inc. CMA 339,300 $ 15,811 9.6%
FleetBoston Financial Corp. FBF 423,960 12,782 7.8
JP Morgan Chase & Co. JPM 319,100 10,955 6.7
MAF Bancorp Inc. MAFB 281,550 10,755 6.5
Charter One Financial Inc. CF 338,536 10,359 6.3
Citigroup Inc. C 225,000 10,240 6.2
Amsouth Bancorporation ASO 466,015 9,889 6.0
Wachovia Corp. WB 223,840 9,220 5.6
Bank of America Corp. BAC 99,873 7,794 4.7
Merrill Lynch & Co. Inc. MER 132,000 7,066 4.3
US Bancorp USB 268,870 6,450 3.9
South Trust Corp. SOTR 195,900 5,752 3.5
Bank One Corp. ONE 137,700 5,322 3.2
Union Planters Corp. UPC 143,554 4,542 2.8
Morgan Stanley Dean Witter & Co. MWD 82,000 4,138 2.5
Compass Bancshares Inc. CBSS 108,750 3,774 2.3
Amcore Financial Inc. AMFI 142,500 3,585 2.2
Hibernia Corp. HIB 154,200 3,124 1.9
Associated Banc Corp. ASBC 80,786 3,061 1.9
Mellon Financial Corp. MEL 100,000 3,014 1.8
Bank of New York Co. Inc. BK 100,000 2,911 1.8
Suntrust Banks Inc. STI 48,000 2,898 1.8
Banknorth Group Inc. BNK 90,000 2,540 1.6
Mercantile Bankshares Corp. MRBK 58,500 2,340 1.4
National City Corp. NCC 74,520 2,195 1.3
Provident Bancshares Corp. PBKS 43,757 1,240 0.8
BB&T Corp. BBT 33,737 1,212 0.7
Commerce Bancshares Inc. CBSH 27,135 1,187 0.7
First Source Corp. SRCE 18,992 363 0.2
---------- ------
Total $ 164,519 100.0%
========== ======
During the three and nine months ended September 30, 2003, Corus received
dividends on the stock portfolio of $1.4 million and $3.9 million, respectively,
compared to $1.2 million and $3.6 million during the same periods of 2002. See
noninterest income section for discussion of treatment of realized and
unrealized gains and losses.
23
Nonperforming Assets
Nonperforming loans are nonaccrual loans, troubled debt restructurings, and 90
days or more past due loans still accruing interest. The breakdown by loan
category is shown below:
SEPTEMBER 30 December 31 September 30
(Dollars in thousands) 2003 2002 2002
---------- ---------- ----------
Nonaccrual loans:
CRE Non-construction $ 7,133 $ -- $ --
CRE Construction -- -- --
CRE Mezzanine 741 4,504 8,249
Commercial -- -- --
Residential real estate and other 129 304 304
---------- ---------- ----------
Total nonaccrual 8,003 4,808 8,553
Troubled debt restructurings:
CRE Non-construction -- -- --
CRE Construction 10,560 -- --
CRE Mezzanine -- -- --
Commercial -- -- --
Residential real estate and other 62 62 62
---------- ---------- ----------
Total troubled debt restructurings 10,622 62 62
Loans 90 days or more past due:
CRE Non-construction 665 -- 88
CRE Construction -- -- --
CRE Mezzanine -- -- --
Commercial -- -- --
Residential real estate and other 1,008 1,648 1,760
---------- ---------- ----------
Total 90 days or more past due 1,673 1,648 1,848
Total nonperforming loans:
CRE Non-construction 7,798 -- 88
CRE Construction 10,560 -- --
CRE Mezzanine 741 4,504 8,249
Commercial -- -- --
Residential real estate and other 1,199 2,014 2,126
---------- ---------- ----------
Total nonperforming loans 20,298 6,518 10,463
Other real estate owned 282 800 916
---------- ---------- ----------
Total nonperforming assets $ 20,580 $ 7,318 $ 11,379
========== ========== ==========
Nonperforming loans/Total loans 0.93% 0.37% 0.66%
Nonperforming assets/Total assets 0.62% 0.28% 0.44%
Total nonperforming assets increased compared to December 2002 by $13.3 million
to $20.6 million. The increase is primarily due to an increase in Troubled Debt
Restructurings ("TDR's"). A TDR is a loan that was restructured in such a way as
to provide the borrower with some form of concession relative to market absent a
concession from the borrower that is deemed to be approximately proportionate to
the lender's concession. Typically, the lender's concession is in the form of a
lower interest rate, an extended term or forgiven principal or interest. A
borrower's concession often comes in the form of additional loan paydowns and/or
additional collateral.
A TDR oftentimes results from situations where the borrower is experiencing
financial problems and expects to have difficulty complying with the original
terms of the loan. However, once the loan is restructured in a TDR, the
prospects of
24
collecting all principal and interest on that loan generally improve (as the
borrower's loan rate and, thus, loan payments are reduced), albeit at somewhat
less favorable terms to the lender. However, the point to remember is that once
a loan becomes a TDR, it generally becomes a safer loan.
With that said, Corus is required to report the balance of any TDR's under the
nonperforming asset category which would seem to imply, in some way, that these
loans are not performing. However the two loans - one is an office loan and the
other a residential development loan - that constitute the $10.6 million
construction TDR balance are not only both current in terms of required
payments, but also are considered to be well collateralized. Management will
continue to monitor these loans closely.
In addition to the increase in TDR's, a $7.1 million loan was placed on
nonaccrual in May 2003. Management believes the loan is well secured and no loss
is expected.
Potential Problem Loans
In addition to those loans disclosed under the preceding Nonperforming Assets
section, management identified, through their problem loan identification
system, certain other loans in the portfolio where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in future disclosure of such loans as nonaccrual,
past due, or troubled debt restructurings. As of September 30, 2003, the
principal amount of these loans was $21.9 million, driven primarily by one hotel
loan totaling $17.5 million. This level represents a decrease from the $22.8
million reported at June 30, 2003.
Allowance for Loan Losses
The allowance for loan losses is based on management's analysis of individual
loans, prior and current loss experience, delinquency levels, overall growth in
the portfolio, current economic conditions, and other factors. Management
believes that the level of the allowance for loan losses was adequate at
September 30, 2003. A reconciliation of the activity in the allowance for loan
losses is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30 SEPTEMBER 30
----------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Balance at beginning of period $ 35,811 $ 40,094 $ 36,629 $ 40,457
Provision for loan losses -- -- -- --
Less charge-offs:
Residential real estate and other 474 815 1,210 2,272
Overdraft -- Check Cashing 84 2,651 1,189 2,651
Commercial -- Check Cashing -- 560 443 560
Commercial real estate -- -- -- --
----------- ----------- ----------- -----------
Total charge-offs 558 4,026 2,842 5,483
----------- ----------- ----------- -----------
Add recoveries:
Residential real estate and other 604 671 1,674 1,743
Overdraft -- Check Cashing 288 -- 682 --
Commercial -- 1 2 6
Commercial real estate -- -- -- 17
----------- ----------- ----------- -----------
Total recoveries 892 672 2,358 1,766
----------- ----------- ----------- -----------
Net recoveries/(charge-offs) 334 (3,354) (484) (3,717)
----------- ----------- ----------- -----------
Balance at September 30 $ 36,145 $ 36,740 $ 36,145 $ 36,740
=========== =========== =========== ===========
Loans at September 30 $ 2,185,711 $ 1,587,997 $ 2,185,711 $ 1,587,997
=========== =========== =========== ===========
Allowance as a percentage of loans 1.65% 2.31% 1.65% 2.31%
=========== =========== =========== ===========
25
In the third quarter of 2002 and again in the first quarter of 2003, Corus
charged off amounts related to Corus' business of servicing the check cashing
industry. These losses, which were Corus' first losses related to this business
in nearly twenty years, were associated with a specific incident. Excluding the
aforementioned charge-offs, the Company had net recoveries of $465,000 for the
2003 year-to-date period.
Deposits
The following table details the composition of deposit products by type:
SEPTEMBER 30 December 31 September 30
(Dollars in thousands) 2003 2002 2002
------------------- ------------------- -------------------
Money Market $1,070,930 40% $ 895,038 43% $ 878,093 42%
Brokered certificates of deposit 551,766 21 258,409 13 408,267 20
Retail certificates of deposit 424,358 16 396,821 19 258,225 13
Demand 229,804 9 216,551 11 224,926 11
NOW 201,547 8 131,188 6 122,903 6
Savings 166,376 6 161,766 8 160,817 8
---------- --- ---------- --- ---------- ---
Total $2,644,781 100% $2,059,773 100% $2,053,231 100%
========== === ========== === ========== ===
Funding/Liquidity
Corus' policy is to ensure the availability of sufficient funds to accommodate
the needs of borrowers and depositors at all times. This objective is achieved
primarily through the maintenance of liquid assets. Liquid assets are defined as
federal funds sold and marketable securities that can be sold quickly without a
material loss of principal.
The liquidity to fund loan commitments will first come from a combination of
available liquidity and normal paydowns/payoffs of the existing loan portfolio
and then, to the extent necessary, from additional issuance of brokered
certificates of deposit ("BRCD"). A portion of Corus' current loan funding comes
from BRCD and to the extent that total loans outstanding grow in the future,
management expects to fund much, if not all, of that growth with BRCD. In order
to avoid the liquidity risk of an overly significant portion maturing during any
given year, Corus works to have the BRCD maturities staggered, ranging from 1 to
7 years. To further mitigate liquidity risk, Corus' liquidity policy requires
that the Bank hold more liquid assets as the level of BRCD increases. As of
September 30, 2003, BRCD totaled $552 million. The Bank has established a BRCD
limit such that BRCD will not exceed 41% of total deposits (i.e., retail
deposits and BRCD). Based on current deposit levels, this implies a maximum
amount of BRCD of $1.4 billion.
Issuance of Trust Preferred Securities
In September 2003, Corus formed a wholly owned finance subsidiary of the Company
for the sole purpose of issuing what are commonly referred to as Trust Preferred
securities. This is the third such issuance for Corus and, as mentioned
previously, Trust Preferred securities are a very common form of raising
tax-advantaged capital, especially for bank holding companies. While the legal
structure of Trust Preferred securities is unfortunately quite complicated, both
the essence of these securities, and the basis for Corus' decision to utilize
them, is actually quite straightforward. Trust Preferred securities are
essentially long-term debt (30-year terms) with some unique features.
The trust sold $45.0 million of Trust Preferred securities via a private
placement, the proceeds of which were "lent" to the Company and secured by a
subordinated debenture (subordinate to all other debt of the Company's but
senior to common stock) issued by the Company to the trust. The funds raised by
the issuance of the Trust Preferred securities were, in turn,
26
infused into the Bank as additional capital thus increasing the Bank's legal
lending limit by $6.75 million. The increased legal lending limit, which will
allow Corus to pursue larger loans, drove Corus' decision to pursue this
financing strategy.
Trust Preferred securities have several unique attributes. One of the most
notable, and the key to the widespread issuance of Trust Preferred securities,
is that the Federal Reserve allows bank holding companies to include, up to
certain limits, Trust Preferred securities in the regulatory calculation of
capital (what is known as "Tier 1" capital) while providing the issuer with a
tax deductible funding vehicle. In addition, Trust Preferred securities: a) have
no financial covenants (except in the event that the Company ever opts to defer
payments), b) are not "puttable" back to Corus, and c) include an option for
Corus to call them at par beginning five years after issuance and quarterly
thereafter (or earlier in the event of certain changes or amendments to
regulatory requirements or federal tax rules).
The Trust Preferred securities also grant Corus the right to defer interest
payments on the subordinated debentures, and distributions on the Trust
Preferred securities, for a period not to exceed 20 consecutive quarters without
the subordinated debentures or Trust Preferred securities going into default
(this provision is subject however to certain restrictions with regard to Corus'
ability to make, among other things, dividends, distributions, etc. to holders
of Corus common stock). It should be noted that this provision was not
negotiated by Corus, but rather is a standard and required feature of Trust
Preferred securities in order for the Federal Reserve to allow such instruments
to be counted in capital at the bank holding company. While this deferral option
is present, Corus does not anticipate that it would ever be utilized.
Capital
Regulatory capital and the associated ratios for Corus and its subsidiary bank
as of September 30, 2003 are presented below:
Tier 1 Risk-Based Total Risk-Based
Tier 1 Leverage (1) Capital (2) Capital (3)
----------------------- ----------------------- ----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- -------- --------
Minimum ratios for well-capitalized 5.00% 6.00% 10.00%
Corus Bankshares, Inc. $559,845 18.68% $559,845 17.65% $626,976 19.77%
Subsidiary Bank $492,937 16.94% $492,937 16.16% $529,082 17.34%
(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
The following disclosure is not computed in accordance with Generally Accepted
Accounting Principles ("GAAP") and is considered a non-GAAP disclosure.
Management believes that this presentation, while not in accordance with GAAP,
provides useful insight into how management analyzes and quantifies risk and
determines the appropriate level of capital.
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 takes the form of management and loan officers estimating 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 other things, the extreme
declines in CRE property values witnessed during the late 1980's
27
and early 1990's. 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.
Lastly, it is important to realize that we could well have nonperforming loans
and/or charge-offs in economic conditions other than what might be characterized
as "serious." While Corus has attempted to be conservative in its assessment of
potential defaults and losses, it is conceivable that actual defaults and/or
losses may be greater, perhaps materially, than estimated.
Following is a table that summarizes 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.
(Dollars in millions) 9/30/2003 12/31/2002 9/30/2002
---------- ---------- ----------
CRE LOANS & UNFUNDED COMMITMENTS
CRE loans outstanding $ 2,031 $ 1,553 $ 1,396
Unfunded Commitments 1,282 1,224 1,027
---------- ---------- ----------
CRE Loans + Unfunded Commitments $ 3,313 $ 2,777 $ 2,423
========== ========== ==========
POTENTIAL DEFAULTS & LOSSES
CRE Loans + Unfunded Commitments $ 3,313 $ 2,777 $ 2,423
Weighted average Probability of Default (POD) (1) 14.4% 14.9% 15.4%
---------- ---------- ----------
Potential CRE Loans that could default 477 414 374
Weighted average Loss Given Default (LGD) (1) 16.9% 17.4% 17.8%
---------- ---------- ----------
Potential losses that could occur $ 81 $ 72 $ 67
========== ========== ==========
NONPERFORMING & NONACCRUAL LOANS
Potential CRE loans that could default $ 477 $ 414 $ 374
Potential losses that could occur (81) (72) (67)
---------- ---------- ----------
Potential remaining CRE NPL balances 396 342 307
Percentage that could be nonaccrual 100% 100% 100%
---------- ---------- ----------
Potential nonaccrual CRE NPL balances $ 396 $ 342 $ 307
========== ========== ==========
POTENTIAL "LOST" INTEREST INCOME
Potential losses that could occur $ 81 $ 72 $ 67
Potential remaining CRE NPL balances 396 342 307
---------- ---------- ----------
Total CRE loans no longer accruing interest 477 414 374
Assumed average CRE loan interest rate (2) 5.9% 6.3% 6.2%
---------- ---------- ----------
Potential total "lost" interest income (per annum) $ 28 $ 26 $ 23
========== ========== ==========
(1) 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.
(2) The assumed average CRE loan interest rate was the rate at the time of the
analysis period and does not attempt to project future interest rates.
Management believes that the declines in the POD and LGD factors from September
30, 2002 to September 30, 2003 reflect, in aggregate, a safer portfolio.
The above figures are a critical piece of the output from the Bank's internal
"risk" identification system, however, the system would be incomplete if these
risks did not assist in calculating an appropriate level of risk-adjusted
capital for the
28
Bank to maintain, but they do. Broadly speaking, the capital the Bank allocates
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, $267 million of capital
must be kept against our $2.0 billion of CRE loans on the balance sheet and the
$1.3 billion of CRE related commitments (comprised of unfunded construction
loans and outstanding commitment letters) as of September 30, 2003. 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 certificates of
deposit or pay dividends to the Bank Holding Company.
The second component is driven off of the POD and LGD factors. As shown above,
total potential charge-offs under a serious recession, based on September 30,
2003 balances, are calculated at $81 million. Assuming certain IRS guidelines
are followed, charge-offs are fully tax-deductible. Therefore, the potential $81
million of charge-offs would translate into an after-tax decrease in equity of
$52 million.
The third, and last, component is a "cushion" over and above the regulatory
well-capitalized minimums - this cushion was approximately $52 million (only
coincidentally equal to the second component) as of September 30, 2003.
These three components of capital allocated to CRE loans totaled $371 million as
of September 30, 2003. Lastly, the Bank has various non-CRE loans, commitments,
and other items that require additional capital of $38 million, thus yielding a
grand total capital goal of $409 million. The Bank had actual regulatory capital
(Bank equity less goodwill plus a portion of the allowance for loan losses) of
$529 million at September 30, 2003, or $120 million in excess of our capital
goal.
TOTAL CAPITAL CALCULATION - BANK ONLY 9/30/2003 12/31/2002 9/30/2002
- ------------------------------------- --------- ---------- ---------
(Dollars in millions)
Total Bank Equity $ 499 $ 391 $ 388
- - Goodwill and unrealized securities gains (6) (9) (8)
-------- -------- --------
Total Bank Tier 1 Capital $ 493 $ 382 $ 380
+ Total Bank Tier 2 Capital 36 32 29
-------- -------- --------
Total Bank Regulatory Capital $ 529 $ 414 $ 409
======== ======== ========
Regulatory capital required to achieve
well-capitalized designation $ 267 $ 215 $ 190
POD/LGD component for CRE Loans 52 47 44
Cushion for CRE Loans 52 42 38
-------- -------- --------
Total Capital on CRE Loans $ 371 $ 304 $ 272
Non-CRE related capital 38 37 44
-------- -------- --------
Total Capital Goal $ 409 $ 341 $ 316
======== ======== ========
Actual regulatory capital in excess of goal $ 120 $ 73 $ 93
======== ======== ========
29
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" "seeks," or "attempts" 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 low rates have on Corus' net interest margin;
- Corus' ability to continue its strong loan originations and, in
turn, its ability to increase the commercial real estate loan
portfolio;
- Corus' ability to access cost-effective funding to fund marginal
loan growth;
- changes in management's estimate of the adequacy of the allowance
for loan losses;
- changes in the overall mix of Corus' loan and deposit products;
- the impact of competitors' pricing initiatives on loan and deposit
products; and
- the extent of defaults and losses given default, and the resulting
lost interest income from such defaults.
Corus undertakes no obligation to revise or update these forward-looking
statements to reflect events or circumstances after the date of this filing.
30
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. These simulations include
assumptions regarding, among other things, growth and or runoff in certain
assets and liabilities and shareholder equity. The model also factors in the use
of derivative financial instruments, which may include basis swaps, 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.
Corus' projected sensitivity to changes in interest rates has fallen, under all
scenarios, since December 31, 2002. The primary cause of this reduction is the
increasing impact of "in-the-money" interest rate floors (i.e., floors which are
generating interest income at current interest rates) embedded within some of
our floating-rate commercial real estate loans. The growth in "in-the-money"
loan floors limits the amount these loans will reprice downward when interest
rates decline, thus reducing the Bank's exposure to falling rates. Conversely
though, when interest rates increase, these "floating-rate" loans behave as
fixed-rate loans until short-term interest rates increase to such a level that
the floor is no longer acting to "fix" the loan's interest rate. The result is a
higher level of current interest income across all scenarios. As a consequence
though, the projected change in net interest income (as a percent of net
interest income under constant rates) under the rising rate scenarios shown
below is not as great as would have been the case if no loans had "in-the-money"
floors. Importantly, the Bank's interest rate risk models project continued
growth in commercial real estate loans and assume that a growing percentage of
the Bank's future commercial real estate loans will have "in-the-money" floors
(assuming short-term rates stay at such historically low levels).
Interest rate sensitivity was as follows:
Rate Shock Amount (1) -75 bp -50 bp 0 bp +50 bp +100 bp +200 bp
------ ------ ---- ------ ------- -------
Percent change in the next 12 month's
net interest income vs. constant rates
September 30, 2003 (1.6)% (0.8)% - (0.1)% (0.2)% 2.5%
December 31, 2002 (6.0)% (4.2)% - 2.8% 5.8% 11.8%
(1) These "shocks" represent hypothetical instantaneous and sustained changes
from current rates.
Corus is also exposed to price risk with its common stock portfolio in financial
industry companies valued at $164.5 million as of September 30, 2003, including
net unrealized gains of $68.9 million. This price risk would impact the net
income of Corus, in the form of securities losses, should unrealized losses on
individual securities be determined to be "other than temporary." This price
risk would also affect any gains or losses that may be realized on the sale of
certain equity securities in the future.
ITEM 4. CONTROLS AND PROCEDURES
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 as of September 30, 2003. 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.
31
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.
None.
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3(i) Amended and Restated Articles of Incorporation are incorporated
herein by reference to Exhibit 3(i) to the Form 10-Q filing dated
May 8, 2003.
3(ii) Amended and Restated By-Laws are incorporated herein by reference to
Exhibit 3(ii) to the Form 10-Q filing dated August 8, 2003
15 Letter re unaudited interim financial information
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certifications
99 Independent Accountants' Review Report
(b) Reports on Form 8-K.
A Form 8-K was filed on July 16, 2003 regarding publicly released
information on the Company's financial condition and results of
operations for the quarter ended June 30, 2003.
32
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 12, 2003 By: /s/ Michael E. Dulberg
------------------------------
Michael E. Dulberg
First Vice President and Chief Accounting
Officer
(Principal Accounting Officer and duly
authorized Officer of Registrant)
33