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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 MARCH 31, 2004
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 April 30, 2004, the Registrant had 27,901,948 common shares, $0.05 par
value, outstanding.
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Corus Bankshares, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2004
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 25
ITEM 4. Controls and Procedures 26
PART II. -- OTHER INFORMATION
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 26
ITEM 6. Exhibits and Reports on Form 8-K 27
Signature 28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORUS BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Unaudited)
MARCH 31 December 31 March 31
(dollars in thousands) 2004 2003 2003
----------- ------------ -----------
Assets
Cash and due from banks - non-interest bearing $ 66,144 $ 63,524 $ 68,032
Federal funds sold 802,400 682,000 333,870
Securities:
Available-for-sale, at fair value
Common stocks at the Bank Holding Company
(amortized cost $100,623, $95,661 and $92,902) 197,802 188,844 134,886
Other securities 212,074 244,062 239,350
(amortized cost $210,863, $242,308 and $235,089)
Held-to-maturity, at amortized cost
(fair value $11,772, $11,802 and $6,735) 11,725 11,744 6,659
----------- ------------ -----------
Total Securities 421,601 444,650 380,895
Loans, net of unearned income 2,372,800 2,433,771 1,794,481
Less: Allowance for loan losses 36,767 36,448 35,517
----------- ------------ -----------
Net Loans 2,336,033 2,397,323 1,758,964
Premises and equipment, net 26,244 26,313 27,902
Accrued interest receivable and other assets 34,961 25,497 27,142
Goodwill, net of accumulated amortization of $30,009 4,523 4,523 4,523
----------- ------------ -----------
Total Assets $ 3,691,906 $ 3,643,830 $ 2,601,328
=========== ============ ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 243,594 $ 227,960 $ 218,989
Interest-bearing 2,625,727 2,618,442 1,822,686
----------- ------------ -----------
Total Deposits 2,869,321 2,846,402 2,041,675
Other borrowings 34,105 36,403 43,477
Long-term debt - subordinated debentures 177,837 172,500 -
Accrued interest payable and other liabilities 57,941 42,345 30,249
----------- ------------ -----------
Total Liabilities 3,139,204 3,097,650 2,115,401
Shareholders' Equity
Common stock (par value $0.05 per share,
50,000,000 shares authorized: 27,900,028, 28,036,888
and 28,058,488 shares outstanding, respectively) 1,395 1,402 1,403
Surplus 17,117 16,942 13,495
Equity - options outstanding 5,916 5,670 4,609
Retained earnings 464,321 460,458 436,361
Accumulated other comprehensive income 63,953 61,708 30,059
----------- ------------ -----------
Total Shareholders' Equity 552,702 546,180 485,927
----------- ------------ -----------
Total Liabilities and Shareholders' Equity $ 3,691,906 $ 3,643,830 $ 2,601,328
=========== ============ ===========
March 31, 2003 data reflects a 100% stock dividend on 12/15/03 and has been
restated due to the impact of the adoption of Statement of Financial Accounting
Standards No. 123.
See accompanying notes.
1
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31
-----------------------
(in thousands, except per share data) 2004 2003
--------- ---------
Interest, Loan Fees, and Dividend Income
Interest and fees on loans:
Taxable $ 45,850 $ 33,386
Tax-advantaged 30 44
Federal funds sold 1,486 966
Securities:
Taxable 1,776 2,385
Tax-advantaged 16 16
Dividends 1,574 1,250
Trading account - 200
--------- ---------
Total Interest, Loan Fees, and Dividend Income 50,732 38,247
Interest Expense
Deposits 11,844 11,133
Other borrowings 251 342
Long-term debt - subordinated debentures 1,856 -
--------- ---------
Total Interest Expense 13,951 11,475
Net Interest Income 36,781 26,772
Provision for Loan Losses - -
--------- ---------
Net Interest Income After Provision for Loan Losses 36,781 26,772
Noninterest Income
Service charges on deposit accounts 2,932 2,995
Securities gains/(losses), net 1,254 (101)
Other income 551 727
--------- ---------
Total Noninterest Income 4,737 3,621
Noninterest Expense
Salaries and employee benefits 9,627 8,249
Net occupancy 993 963
Data processing 729 639
Depreciation - furniture & equipment 318 377
Other expenses 2,568 2,474
--------- ---------
Total Noninterest Expense 14,235 12,702
--------- ---------
Income Before Income Taxes 27,283 17,691
Income Tax Expense 9,348 5,898
--------- ---------
Net Income $ 17,935 $ 11,793
========= =========
Net income per share:
Basic $ 0.64 $ 0.42
Diluted $ 0.62 $ 0.41
Cash dividends declared per common share $ 0.313 $ 0.080
Average common shares outstanding:
Basic 28,010 28,216
Diluted 28,888 28,731
2003 data reflects a 100% stock dividend on 12/15/03 and has been restated due
to the impact of the adoption of Statement of Financial Accounting Standards No.
123.
See accompanying notes.
2
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
Accumulated
Equity - Other
Common Options Retained Comprehensive
(in thousands, except common share data) Stock Surplus Outstanding Earnings Income Total
------ -------- ----------- -------- ------------- --------
Balance at December 31, 2003 $1,402 $ 16,942 $ 5,670 $460,458 $61,708 $546,180
Net income - - - 17,935 - 17,935
Other comprehensive income (net of income taxes):
Net change in unrealized gains on available-
for-sale securities - - - - 2,245 2,245
--------
Comprehensive income 20,180
--------
Stock options vested - - 356 - - 356
Retirement of 139,600 common shares (7) (40) - (5,353) - (5,400)
Shares issued under stock option plan,
2,740 common shares - 86 (21) - - 65
Stock option settlements - (8) (9) - - (17)
Stock option expirations - 35 (54) - - (19)
Cash dividends declared on common stock,
$0.313 per common share - - - (8,719) - (8,719)
Other - 102 (26) - - 76
------ -------- ------- -------- ------- --------
Balance at March 31, 2004 $1,395 $ 17,117 $ 5,916 $464,321 $63,953 $552,702
====== ======== ======= ======== ======= ========
See accompanying notes.
THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
Accumulated
Equity - Other
Common Options Retained Comprehensive
(in thousands, except common share data) Stock Surplus Outstanding Earnings Income Total
------ -------- ----------- -------- ------------- --------
Balance at December 31, 2002 $1,412 $ 16,668 $ - $430,482 $33,479 $482,041
Adoption of SFAS No. 123 - (3,115) 4,256 - - 1,141
Net income - - - 11,793 - 11,793
Other comprehensive income (net of income taxes):
Net change in unrealized gains on available-
for-sale securities - - - - (3,420) (3,420)
--------
Comprehensive income 8,373
--------
Stock options vested - - 427 - - 427
Retirement of 180,000 common shares (9) (61) (3,668) - (3,738)
Stock option exercises - 28 (42) - - (14)
Stock option settlements - (25) (32) - - (57)
Cash dividends declared on common stock,
$0.080 per common share - - - (2,246) - (2,246)
------ -------- ------ -------- ------- --------
Balance at March 31, 2003 $1,403 $ 13,495 $4,609 $436,361 $30,059 $485,927
====== ======== ====== ======== ======= ========
2003 data reflects a 100% stock dividend on 12/15/03 and has been restated due
to the impact of the adoption of Statement of Financial Accounting Standards No.
123.
See accompanying notes.
3
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
----------------------
(in thousands) 2004 2003
-------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,935 $ 11,793
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 509 694
Amortization of investment and loan premiums, net 724 235
Deferred income tax benefit (279) (2,521)
Securities (gains) losses, net (1,254) 101
Deferred compensation 1,293 733
Stock option expense 356 427
Increase in accrued interest receivable and other assets (2,567) (675)
Increase in accrued interest payable and other liabilities 11,412 7,910
-------- ----------
Net cash provided by operating activities 28,129 18,697
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 19 -
Proceeds from maturities of available-for-sale securities 30,740 32,419
Proceeds from sales of available-for-sale securities 124 6,053
Purchases of available-for-sale securities (5,070) (4,129)
Net decrease (increase) in loans 60,647 (54,548)
Bad debt recoveries 554 825
Purchases of premises and equipment, net (440) (276)
-------- ----------
Net cash provided by (used in) investing activities 86,574 (19,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts 22,919 (18,098)
Repayment of debt (1,000) (1,000)
Decrease in other borrowings, net (1,298) (3,633)
Stock option exercises/settlements 105 (71)
Retirements of common shares (5,400) (3,738)
Cash dividends paid on common shares (7,009) (2,259)
-------- ----------
Net cash provided by (used in) financing activities 8,317 (28,799)
-------- ----------
Net increase (decrease) in cash and cash equivalents 123,020 (29,758)
Cash and cash equivalents at January 1 745,524 431,660
-------- ----------
Cash and cash equivalents at March 31 $868,544 $ 401,902
======== ==========
2003 data restated due to the impact of the adoption of Statement of Financial
Accounting Standards No. 123.
See accompanying notes.
4
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, 2003 included in Corus' Annual Report on Form 10-K for
the year ended December 31, 2003. The results of operations for the
interim period may not be indicative of results to be expected for the
full year.
In 2003, Corus adopted the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Corus elected to adopt
SFAS No. 123 using the modified prospective method. Under this method, the
recognition of compensation cost in 2003 and 2004 is the same as what
would have been recognized had the provisions of SFAS No. 123 been applied
since the date of grant for all outstanding options. Corus' consolidated
financial statements as of March 31, 2003 and for the three months then
ended have been restated to reflect the adoption of the SFAS No. 123
effective January 1, 2003.
2. 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.
5
Following is a summary of significant segment information, as required by SFAS
No. 131:
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Commercial Consumer Retail Corporate Inter-segment
(in thousands) Lending Lending Banking Support Eliminations Consolidated
---------- -------- ---------- --------- -------------- ------------
Total Revenues (1) $ 27,658 $ 828 $ 11,118 $ 1,914 $ - $ 41,518
Net Income 13,457 263 3,604 611 - 17,935
Total Average Assets 2,597,112 62,826 2,833,556 406,428 (2,241,468) 3,658,454
End of Period Goodwill - - 4,523 - - 4,523
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Commercial Consumer Retail Corporate Inter-segment
(in thousands) Lending Lending Banking Support Eliminations Consolidated
---------- -------- ---------- --------- -------------- ------------
Total Revenues (1) $ 17,610 $ 1,389 $ 8,507 $ 2,887 $ - $ 30,393
Net Income 6,984 434 2,188 2,187 - 11,793
Total Average Assets 1,907,044 93,829 2,181,313 175,890 (1,725,345) 2,632,731
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.
6
3. 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 on 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 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) and interest rate
basis swaps (to effectively convert LIBOR-based floating rate loans to
Treasury-based floating-rate loans). 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. Nearly all
of the interest rate swaps qualified as fair value hedges and received
hedge accounting treatment. The Company's interest rate 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 GAIN/(LOSS)
THREE MONTHS ENDED
Income Statement MARCH 31
(in thousands) Classification 2004 2003
- ------------- ------------------ ------- -------
Fair value hedge (fixed-to-floating swaps):
Loan hedge Interest Income $ 4 $ 24
Brokered CD hedge(1) Interest Expense - N/A
------- ------
Total fair value hedge 4 24
Non-hedge:
Fixed-to-floating swaps Noninterest Income (250) 5
Basis swaps Noninterest Income 1,423 1,611
------- ------
Total Non-hedge 1,173 1,616
------- ------
Total Derivative Gain/(Loss) $ 1,177 $1,640
======= ======
NOTIONAL AMOUNTS OF DERIVATIVES
(in thousands) MARCH 31, 2004 March 31, 2003
- -------------- -------------- --------------
Fair value hedge (fixed-to-floating swaps):
Loan hedge $ 5,616 $ 5,809
Brokered CD hedge(1) 427,503 N/A
Non-hedge:
Fixed-to-floating swaps 200,942 1,026
Basis swaps 950,000 1,000,000
(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
income statement impact from the associated mark-to-market adjustments.
7
4. Long-Term Debt - Subordinated Debentures
During 2003, Corus formed five wholly owned finance subsidiaries for the
sole purpose of issuing Trust Preferred securities. The subsidiaries
issued $172.5 million in Trust Preferred securities and Corus, in turn,
issued subordinated debentures to the trusts in the amount of $177.8
million - the difference being Corus' investment in the subsidiaries. The
terms for both the Trust Preferred securities and the subordinated
debentures are essentially identical. The instruments all mature 30 years
from the issuance date and include interest rates ranging from LIBOR plus
2.85% to LIBOR plus 3.10%, resetting quarterly. Combined issuance fees
totaled $1.6 million and are being amortized over 30 years.
5. Other Borrowings
On June 26, 2001, Corus entered into an agreement with a third party to
borrow $70 million, consisting of a term note in the amount of $50 million
and a revolving note in the amount of $20 million, both at an effective
interest rate equal to LIBOR plus 150 basis points, adjusted quarterly.
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 three 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 March 31, 2004, management believes
that Corus was in compliance with all loan covenants.
Interest and fees for both notes for the three months ended March 31, 2004
totaled $250,000. At March 31, 2004, the term note had an outstanding
balance of $34.0 million and the revolving credit line had no balance
outstanding.
6. Net Income Per Share
Net income per share was calculated as follows:
THREE MONTHS ENDED
MARCH 31
--------------------
(In thousands, except per share data) 2004 2003
-------- ---------
Denominator for basic earnings per share:
average common shares outstanding 28,010 28,216
Dilutive common stock options 878 515
-------- ---------
Denominator for diluted earnings per share 28,888 28,731
======== =========
Numerator: Net income attributable to common shares $ 17,935 $ 11,793
Net income per share:
Basic $ 0.64 $ 0.42
Diluted 0.62 0.41
All 2003 amounts have been restated to reflect a 100% stock dividend on
12/15/03.
8
7. Employee Benefit Plans
The following reflects the disclosure requirements set forth by SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."
Corus maintains a noncontributory defined benefit pension plan. No
contributions were made for the three months ended March 31, 2004 and
2003, and Corus expects to make no contributions to the plan in 2004.
Net periodic benefit cost was comprised of the following:
THREE MONTHS ENDED
MARCH 31
-------------------
(in thousands) 2004 2003
-------- --------
Service cost $ 207 $ 188
Interest cost 347 318
Expected return on plan assets (399) (313)
Net amortization and deferral 9 71
------ ------
Net Periodic Benefit Cost $ 164 $ 264
====== ======
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SUMMARY
Corus Bankshares, Inc. is a one-bank holding company headquartered in Chicago,
Illinois. In addition to deposit gathering and servicing the check cashing
industry, Corus specializes in making commercial real estate and construction
loans with a concentration, by property type, in residential condominiums,
hotels, apartments, and office buildings. 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 March 31, 2004, net income was $17.9 million, or
$0.62 per share on a diluted basis, compared to net income of $11.8 million, or
$0.41 per share on a diluted basis, in 2003.
Earnings for the first quarter of 2004 represented annualized returns of 13.1%
on equity (ROE) and 2.0% on assets (ROA) compared to 9.8% and 1.8% for the same
period in 2003.
10
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------------
2004 2003
===============================================================
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
(in thousands) BALANCE AND FEES COST BALANCE AND FEES COST
==========================================================================================================================
ASSETS
Earning Assets:
Liquidity management assets (1) $ 855,225 $ 3,286 1.54% $ 651,907 $ 3,576 2.19%
Common stocks at the Bank Holding Company (2) 195,364 2,167 4.44% 146,642 1,722 4.70%
Loans, net of unearned income (3) 2,487,833 45,897 7.38% 1,738,076 33,453 7.70%
- ------------------------------------------------------------------------------- ----------------------
Total earning assets 3,538,422 51,350 5.80% 2,536,625 38,751 6.11%
Noninterest-earning assets:
Cash and due from banks--noninterest bearing 95,985 78,946
Allowance for loan losses (36,625) (36,709)
Premises and equipment, net 26,291 28,180
Other assets, including goodwill 34,381 25,689
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,658,454 $2,632,731
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits--interest-bearing:
Money market deposits $ 1,193,281 $ 5,063 1.70% $ 921,760 $ 4,014 1.74%
Brokered certificates of deposit 591,434 3,753 2.54% 244,498 3,714 6.08%
Retail certificates of deposit 419,707 2,230 2.13% 392,041 2,890 2.95%
NOW deposits 233,095 591 1.01% 130,656 114 0.35%
Savings deposits 167,175 207 0.49% 163,250 401 0.98%
- ------------------------------------------------------------------------------- ----------------------
Total interest-bearing deposits 2,604,692 11,844 1.82% 1,852,205 11,133 2.40%
Other borrowings 35,879 251 2.80% 45,762 342 2.99%
Long-term debt - subordinated debentures 177,837 1,856 4.17% - - -%
- ------------------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 2,818,408 13,951 1.98% 1,897,967 11,475 2.42%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 239,081 220,724
Other liabilities 52,257 30,854
Shareholders' equity 548,708 483,186
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,658,454 $2,632,731
==========================================================================================================================
Interest income and loan fees/average earning assets $ 3,538,422 $51,350 5.80% $2,536,625 $ 38,751 6.11%
Interest expense/average interest-bearing liabilities $ 2,818,408 13,951 1.98% $1,897,967 11,475 2.42%
- --------------------------------------------------------------------------------------------------------------------------
Net interest spread $37,399 3.82% $ 27,276 3.69%
==========================================================================================================================
Net interest margin 4.23% 4.30%
==========================================================================================================================
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 2004 and 2003.
(2) Dividends on the common stock portfolio include a tax equivalent
adjustment of $593,000 and $471,000 for 2004 and 2003, respectively.
(3) Interest income on tax-advantaged loans includes a tax equivalent
adjustment of $16,000 and $23,000 for 2004 and 2003, respectively.
Unremitted interest on nonaccrual loans is not included in the amounts.
Includes net interest income derived from interest rate swap contracts.
11
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 months ended March 31, 2004, Corus' net interest income grew by
$10.1 million, or 37% driven by significant loan growth. Included in interest
income were loan fees of $8.9 million for the three months ended March 31, 2004
and $7.1 million for the three months ended March 31, 2003.
Noninterest Income
For the three months ended March 31, 2004, noninterest income increased by $1.1
million compared to the prior year. The increase mainly resulted from higher net
securities gains, as described below.
Securities Gains/(Losses), net
For the three months ended March 31, 2004, Corus recorded net securities gains
of $1.3 million compared to a loss of $101,000 in 2003. The following details
the net securities gains/(losses) by source:
THREE MONTHS ENDED
MARCH 31
--------------------
(in thousands) 2004 2003
--------------------
Gains on common stocks at Bank Holding Company $ 81 $ 7,315
Charge for "other than temporary" impairment - (8,962)
Sales of securities at subsidiary bank - (70)
Mark-to-market adjustments on non-hedge derivatives 1,173 1,616
--------------------
Total securities gains/(losses), net $ 1,254 $ (101)
====================
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). During the
first quarters of 2004 and 2003, Corus recognized gains of $81,000 and $7.3
million, respectively, on security sales from the portfolio.
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" ("SFAS 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
12
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 March 31, 2004,
$8.5 million of the previously charged-off $9.0 million, has been recovered as
the prices of the associated common stocks have risen. Thus, 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 either sold or in
some instances the underlying corporation is acquired.
Mark-to-market adjustments on non-hedge derivatives
For the three months ended March 31, 2004 and 2003, the Bank recorded gains of
$1.2 million and $1.6 million, respectively, from what we refer to as
mark-to-market adjustments on non-hedge derivatives. 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) 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 derivatives are "paired-off" against
specific assets and/or liabilities ("the hedged items") and also pass an
additional succession of tests, then the income statement impact of any periodic
changes in the value of the derivatives are effectively offset by changes in the
value of the hedged items. Such derivatives are afforded what is termed "hedge
accounting" treatment. For those swaps that do not qualify for hedge accounting
treatment, the periodic changes in their market value is reflected 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 swaps to
maturity, 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 swap would sum to zero. However in the event
that Corus sells any swaps prior to maturity, the cumulative gains or losses
would not reverse. As of March 31, 2004, Corus has recorded net cumulative gains
of $6.8 million related to mark-to-market adjustments on non-hedge derivatives.
13
Noninterest Expense
For the three months ended March 31, 2004, noninterest expense increased by $1.5
million compared to the prior year, predominantly due to an increase of $1.4
million in salaries and benefits expense. The increase in salaries and benefits
is primarily for commercial loan officers, who are compensated on a commission
basis. Commercial loan officer compensation expense is expected to increase by
$2.2 million for the full year of 2004 as compared to 2003, due to anticipated
loan growth.
FINANCIAL CONDITION
Earning Assets
The following table details the composition of Corus' earning assets:
MARCH 31, 2004 December 31, 2003 March 31, 2003
(in thousands) AMOUNT PERCENT Amount Percent Amount Percent
------------------------- -------------------------- -------------------
Loans, net of unearned income $ 2,372,800 66% $2,433,771 68% $1,794,481 72%
Federal funds sold 802,400 22 682,000 19 333,870 13
Securities other than common stocks 223,799 6 255,806 7 246,009 10
Common stocks at the Bank Holding Company 197,802 6 188,844 6 134,886 5
------------------------- -------------------------- -------------------
Total $ 3,596,801 100% $3,560,421 100% $2,509,246 100%
========================= ========================== ===================
Loans
The following table details the composition of Corus' loan portfolio:
MARCH 31, 2004 December 31, 2003 March 31, 2003
(in thousands) AMOUNT PERCENT Amount Percent Amount Percent
------------------------- -------------------------- -------------------
Loans:
Commercial real estate:
Non-construction $ 1,112,487 47% $1,207,015 50% $ 995,925 56%
Construction 1,072,004 45 1,005,206 41 597,375 33
Mezzanine 45,294 2 53,790 2 32,585 2
------------------------- -------------------------- -------------------
Total commercial real estate 2,229,785 94% 2,266,011 93% 1,625,885 91%
Commercial 79,004 3 98,621 4 75,619 4
Residential real estate and other 64,011 3 69,139 3 92,977 5
------------------------- -------------------------- -------------------
Total Loans $ 2,372,800 100% $2,433,771 100% $1,794,481 100%
========================= ========================== ===================
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.
14
The following table is a summary of commercial real estate loans and unfunded
commitments. Including commitments, the commercial real estate loan portfolio
totals $3.7 billion.
(in thousands) MARCH 31, 2004 December 31, 2003 March 31, 2003
----------------------- ----------------------- -----------------------
Funded commercial
real estate loans, net $2,229,785 60% $2,266,011 59% $1,625,885 56%
Commitments:
Loans - unfunded portion 1,195,063 33 1,168,115 31 1,104,848 38
Commitment Letters 266,974 7 375,865 10 166,610 5
Letters of Credit 10,454 -- 10,502 -- 20,682 1
----------------------- ----------------------- -----------------------
Total $3,702,276 100% $3,820,493 100% $2,918,025 100%
======================= ======================= =======================
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 size, property
type, and location:
COMMERCIAL REAL ESTATE LOANS - BY SIZE
AS OF MARCH 31, 2004
-------------------------------------------------
TOTAL COMMITMENT(1) FUNDED BALANCE
# OF ------------------ ------------------
(dollars in millions) LOANS AMOUNT % AMOUNT %
----- ------------------ ------------------
$60 million and above 15 $ 1,069 29% $ 548 25%
$40 million to $60 million 17 797 21 501 21
$20 million to $40 million 39 1,096 30 639 29
$1 million to $20 million 85 724 20 528 24
Less than $1 million 166 40 1 38 2
Deferred fees/other discounts N/A (24) (1) (24) (1)
--- ------------------ ------------------
Total 322 $ 3,702 100% $ 2,230 100%
=== ================== ==================
COMMERCIAL REAL ESTATE LOANS - BY PROPERTY TYPE
AS OF MARCH 31, 2004
-------------------------------------------------
TOTAL COMMITMENT(1) FUNDED BALANCE
# OF ------------------ ------------------
(dollars in millions) LOANS AMOUNT % MOUNT %
----- ------------------ ------------------
Condo/loft conversion 57 $ 1,943 52% $ 962 43%
Hotel 39 628 17 445 20
Rental apartments 15 465 13 337 15
Office 17 459 12 322 14
Warehouse / Light industrial 12 99 3 59 3
Nursing homes 7 60 2 60 3
Vacant land 4 22 1 21 1
Retail 4 8 -- 8 --
Other 1 2 -- 2 --
Loans less than $1 million 166 40 1 38 2
Deferred fees/other discounts N/A (24) (1) (24) (1)
--- ------------------ ------------------
Total 322 $ 3,702 100% $ 2,230 100%
=== ================== ==================
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
15
COMMERCIAL REAL ESTATE LOANS - BY MAJOR METROPOLITAN AREA
AS OF MARCH 31, 2004
-------------------------------------------------
TOTAL COMMITMENT(1) FUNDED BALANCE
# OF ------------------ ------------------
(dollars in millions) LOANS AMOUNT % AMOUNT %
----- ------------------ ------------------
California:
Los Angeles 24 $ 490 13% $ 286 13%
San Francisco 9 277 7 128 6
San Diego 8 142 4 107 5
Sacramento 1 33 1 31 1
--- ------- --- ------- ---
California Total 42 942 25 552 25
Washington, D.C.(2) 25 853 23 470 21
New York City 17 480 13 240 11
Chicago 29 430 12 259 12
Chicago-Loans less than $1 million 159 36 1 35 1
Miami 8 392 11 251 11
Texas:
Houston 5 105 3 101 5
Dallas 2 31 1 21 1
--- ------- --- ------- ---
Texas Total 7 136 4 122 6
Other (3) 35 457 12 325 14
Deferred fees/other discounts N/A (24) (1) (24) (1)
--- ------- --- ------- ---
Total 322 $ 3,702 100% $ 2,230 100%
=== ======= === ======= ===
(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 - Originations
Corus originated 19 loans with commitments aggregating $529 million in the first
quarter of 2004. This compares to 15 loans aggregating $352 million in the first
quarter of 2003. This represents a 50% increase in loan originations for the
period.
Commercial Real Estate Loans - Pay-offs
Total pay-offs in the first quarter of 2004 were $484 million, more than double
the quarterly average for all of 2003. The timing of loan pay-offs is inherently
difficult to predict. Furthermore, given that Corus makes large individual
loans, just a few payoffs can have a significant impact.
16
Commercial Real Estate Loans - Loans Pending
Finally, the following table presents a comparison of Corus' loans pending
listed in descending order with respect to stage of completion. In other words,
a prospective loan categorized as Commitment Accepted is essentially one step
away from closing while a prospective loan classified as Discussion Pending is
in its earliest stages.
COMMERCIAL REAL ESTATE LOANS PENDING
(dollars in millions)
MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
---------------- ------------------ ---------------
# OF COMMITMENT # OF COMMITMENT # OF COMMITMENT
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------ ----- ------
Commitment Accepted 2 $ 40 3 $ 94 3 $ 69
Commitment Offered 7 227 6 313 4 103
Application Received 8 477 9 305 6 111
Application Sent Out 12 622 8 451 7 275
Term Sheet Issued 42 2,371 36 1,715 19 724
Discussion Pending 2 104 5 115 2 105
---- ------ ---- ------ ---- ------
Total 73 $3,841 67 $2,993 41 $1,387
==== ====== ==== ====== ==== ======
In total, loans pending have increased significantly from both the most recent
year-end and from a year ago. For perspective, for the loans pending at March
31, 2003, over 90% of the loans that had reached the Application Received stage
ultimately closed.
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. As of March 31, 2004,
Corus had purchased participations in two loans. Corus' total commitment on
these loans is $57 million or 1.5% of Corus' total commercial real estate
portfolio.
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.
17
Common Stocks
At March 31, 2004, Corus had investments in the common stocks of 30 financial
industry companies with a current market value totaling $197.8 million,
including net unrealized gains of $97.2 million. These investments are included
in the available-for-sale classification. The following is a list of Corus'
holdings, by market value, as of March 31, 2004:
TICKER MARKET PERCENTAGE OF
CORPORATION SYMBOL SHARES HELD VALUE PORTFOLIO
- ----------------------------------------------------------------------------------------
(dollars in thousands)
FleetBoston Financial Corp. FBF 423,960 $ 19,036 9.6%
Comerica Inc. CMA 339,300 18,431 9.3
JP Morgan Chase & Co. JPM 319,100 13,386 6.8
MAF Bancorp Inc. MAFB 281,550 12,236 6.2
Charter One Financial Inc. CF 338,536 11,971 6.1
Citigroup Inc. C 225,000 11,633 5.9
Amsouth Bancorporation ASO 466,015 10,956 5.5
Wachovia Corp. WB 223,840 10,520 5.3
Bank of America Corp. BAC 99,873 8,088 4.1
Merrill Lynch & Co. Inc. MER 132,000 7,862 4.0
Bank One Corp. ONE 137,700 7,507 3.8
US Bancorp USB 268,870 7,434 3.8
South Trust Corp. SOTR 195,900 6,498 3.3
City National Corp. CYN 84,000 5,032 2.5
Morgan Stanley Dean Witter & Co. MWD 82,000 4,699 2.4
Compass Bancshares Inc. CBSS 108,750 4,510 2.3
Union Planters Corp. UPC 143,554 4,285 2.2
Amcore Financial Inc. AMFI 142,500 4,234 2.1
Hibernia Corp. HIB 154,200 3,622 1.8
Associated Banc Corp. ASBC 80,786 3,618 1.8
Suntrust Banks Inc. STI 48,000 3,346 1.7
Bank of New York Co. Inc. BK 100,000 3,150 1.6
Mellon Financial Corp. MEL 100,000 3,129 1.6
Banknorth Group Inc. BNK 90,000 3,064 1.5
National City Corp. NCC 74,520 2,651 1.3
Mercantile Bankshares Corp. MRBK 58,500 2,511 1.3
Provident Bancshares Corp. PBKS 43,757 1,373 0.7
Commerce Bancshares Inc. CBSH 28,491 1,359 0.7
BB&T Corp. BBT 33,736 1,191 0.6
First Source Corp. SRCE 18,992 470 0.2
------------------
Total $197,802 100.0%
==================
During the first quarter ended March 31, 2004, Corus received dividends on the
stock portfolio of $1.6 million compared to $1.3 million during the same period
of 2003. See noninterest income section for discussion of treatment of realized
and unrealized gains and losses.
On April 1, 2004, Bank of America Corp. (BAC) acquired FleetBoston Financial
Corp. (FBF) in a stock-for-stock transaction. Corus received 235,424 additional
shares of BAC, bringing its total position in BAC to 335,297 shares. Corus' book
basis in the FBF shares before the acquisition was $9.0 million whereas the
market value of the 235,424 BAC shares on April 1, 2004 was $19.1 million.
Therefore, the acquisition will give rise to a book gain of $10.1 million as
securities gains in the second quarter of 2004. It should be noted that this
gain has neither a cash flow nor net tax impact; this is GAAP treatment for
accounting for stock-for-stock acquisitions.
Additionally, two other companies of which Corus owns stock have announced
stock-for-stock transactions. JP Morgan Chase & Co. (JPM) plans to acquire Bank
One Corp. (ONE). Under the announced terms and at JPM's price as of March 31,
2004, the acquisition would result in a book gain of $3.6 million. Regions
Financial Corp. (RF) plans to "merge" with Union Planters Corp. (UPC). Under the
announced terms of this transaction and at RF's price as of March 31, 2004, the
18
acquisition would result in a book gain of $2.3 million. It is anticipated that
both of these transactions will close in the second quarter of 2004.
Nonperforming Assets
Nonperforming assets were as follows:
MARCH 31 December 31 March 31
(in thousands) 2004 2003 2003
-------- -------- --------
Total nonperforming loans:
Nonaccrual $ 7,349 $ 7,896 $ 1,980
Troubled debt restructurings 4,781 6,436 12,170
Loans 90 days or more past due 957 1,236 1,694
-------- -------- --------
Total nonperforming loans 13,087 15,568 15,844
Other real estate owned 130 66 228
-------- -------- --------
Total nonperforming assets $ 13,217 $ 15,634 $ 16,072
======== ======== ========
Nonperforming loans/Total loans 0.55% 0.64% 0.88%
Nonperforming assets/Total assets 0.36% 0.43% 0.62%
Total nonperforming assets decreased compared to December 2003 by $2.4 million
to $13.2 million. The decrease is primarily due to payments associated with the
two construction loans, which are classified as Troubled Debt Restructurings
("TDR's"). The only other item of significance is a $7.0 million
non-construction commercial real estate loan that was placed on nonaccrual in
May 2003. Management believes the loan is well secured and no loss is expected.
19
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 March
31, 2004. A reconciliation of the activity in the allowance for loan losses is
as follows:
THREE MONTHS ENDED
MARCH 31
------------------------
(in thousands) 2004 2003
------------------------
Balance at beginning of period $ 36,448 $ 36,629
Provision for loan losses - -
Less charge-offs:
Residential real estate and other 235 396
Overdraft-Check Cashing - 1,105
Commercial-Check Cashing - 436
Commercial real estate - -
------------------------
Total charge-offs 235 1,937
------------------------
Add recoveries:
Residential real estate and other 554 485
Overdraft-Check Cashing - 338
Commercial - 2
Commercial real estate - -
------------------------
Total recoveries 554 825
------------------------
Net recoveries/(charge-offs) 319 (1,112)
------------------------
Balance at March 31 $ 36,767 $ 35,517
========================
Loans at March 31 $2,372,800 $ 1,794,481
========================
Allowance as a percentage of loans 1.55% 1.98%
========================
Net (Charge-off) / Recovery - 10 Year History
CHECK CONSUMER
COMMERCIAL CASHING RESIDENTIAL
REAL ESTATE INDUSTRY COMMERCIAL REAL ESTATE STUDENT
(in thousands) LOANS LOANS (1) LOANS LOANS LOANS TOTAL
- --------------------------------------------------------------------------------------------
2004 (1st Qtr) $ - $ - $ - $ 319 $ - $ 319
2003 - (950) 191 488 90 (181)
2002 17 (3,227) 8 (674) 48 (3,828)
2001 10 - (1) (1,865) 2,712 856
2000 42 - (104) (2,473) 10,046 7,511
1999 62 - (19) (2,536) (1,190) (3,683)
1998 148 - 7 (3,945) (1,097) (4,887)
1997 (155) - (3) (8,167) (9,683) (18,008)
1996 820 - 678 (5,945) (4,525) (8,972)
1995 (240) - (200) 120 24 (296)
------------------------------------------------------------------------
Total $ 704 $ (4,177) $ 557 $ (24 678) $ (3 575) $ (31 169)
========================================================================
(1) Represents loans to Corus' customers in the check cashing industry
20
Corus has had particularly impressive results with commercial real estate
lending. In fact, while we have actually had, in total, net recoveries on this
portfolio over the past 10 years, management anticipates that there may be
charge-offs in the future (See Commercial Real Estate Risk Disclosure section).
The check cashing industry loan charge-offs relate to a specific control
weakness, which has since been corrected. Management does not expect charge-offs
of this magnitude to recur. Finally, Corus made the decision in 2000 to exit the
consumer residential real estate and student lending businesses and the
portfolios have since either been sold or are running off.
Deposits
The following table details the composition of deposit products by type:
MARCH 31 December 31 March 31
(in thousands) 2004 2003 2003
-------------------- -------------------- ---------------------
Money Market $1,205,552 42% $1,208,784 42% $ 901,357 44%
Brokered certificates of deposit 586,516 20 596,831 21 228,555 11
Retail certificates of deposit 429,488 15 422,091 15 384,630 19
Demand 243,594 9 227,960 8 218,989 11
NOW 236,228 8 223,590 8 142,854 7
Savings 167,943 6 167,146 6 165,290 8
---------- --- ---------- --- ---------- ---
Total $2,869,321 100% $2,846,402 100% $2,041,675 100%
========== === ========== === ========== ===
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. To the extent that total loans outstanding grow in the future,
management will fund this growth with a combination of core deposit growth and,
to the extent necessary, BRCD growth. 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 March 31, 2004, BRCD totaled $587
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 $1.6 billion.
21
Capital
Regulatory capital and the associated ratios for Corus and its subsidiary bank
as of March 31, 2004 are presented below:
Tier 1 Risk-Based Total Risk-Based
Tier 1 Leverage(1) Capital (2) Capital (3)
------------------ --------------------- ---------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------ --------------------- ---------------------
Minimum ratios for well-capitalized 5.00% 6.00% 10.00%
Corus Bankshares, Inc. $ 645,626 17.49% $ 645,626 18.42% $ 737,223 21.04%
Subsidiary Bank $ 574,607 16.60% $ 574,607 17.07% $ 611,374 18.16%
(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 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 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.
22
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.
(in millions) 3/31/04 12/31/03 3/31/03
------- -------- -------
CRE LOANS & UNFUNDED COMMITMENTS
CRE loans outstanding $ 2,230 $ 2,266 $ 1,626
Unfunded Commitments 1,472 1,554 1,292
------- ------- -------
CRE Loans + Unfunded Commitments $ 3,702 $ 3,820 $ 2,918
======= ======= =======
POTENTIAL DEFAULTS & LOSSES
CRE Loans + Unfunded Commitments $ 3,702 $ 3,820 $ 2,918
Weighted average Probability of Default (POD)(1) 15.0% 14.4% 14.1%
------- ------- -------
Potential CRE Loans that could default 555 550 411
Weighted average Loss Given Default (LGD)(1) 16.0% 16.4% 16.9%
------- ------- -------
Potential losses that could occur $ 89 $ 90 $ 69
======= ======= =======
NONPERFORMING & NONACCRUAL LOANS
Potential CRE loans that could default $ 555 $ 550 $ 411
Potential losses that could occur (89) (90) (69)
------- ------- -------
Potential remaining CRE NPL balances 466 460 342
Percentage that could be nonaccrual (2) 100% 100% 100%
------- ------- -------
Potential nonaccrual CRE NPL balances $ 466 $ 460 $ 342
======= ======= =======
(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) Not necessarily all nonperforming loans would be nonaccrual, however in
order to be conservative we will assume 100% of the above nonperforming
loans are nonaccrual.
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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 changes in 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, especially with
brokered certificates of deposit, to fund marginal loan growth;
- the amount of charge-offs related to Corus' business of servicing
the check cashing industry;
- changes in management's estimate of the adequacy of the allowance
for loan losses;
- the impact of competitors' pricing initiatives on loan and deposit
products;
- the extent of defaults and losses given default, and the resulting
lost interest income from such defaults; and
- changes in the laws, regulations and policies governing financial
services companies.
Corus undertakes no obligation to revise or update these forward-looking
statements to reflect events or circumstances after the date of this filing.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
Corus' operations are subject to risk resulting from interest rate fluctuations
to the extent that there is a difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities that are
prepaid/withdrawn, mature, or reprice in specified periods. The principal
objective of Corus' asset/liability management activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating funding requirements. Corus utilizes an
interest rate sensitivity model as the primary quantitative tool in measuring
the amount of interest rate risk that is present at the end of each quarter. The
model uses income simulation to quantify the effects of various interest rate
scenarios on the projected net interest income over a five-year period. Factored
into the modeling is the use of derivative financial instruments, which may
include basis swaps, interest rate swaps, floors and options.
The Bank's interest rate sensitivity model projects continued growth in
commercial real estate loans and assumes 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). The decrease in
sensitivity as compared to December 31, 2003, relates primarily to the impact of
changes in loan growth assumptions.
Interest rate sensitivity was as follows:
Rate Shock Amount (1) -75 bp -50 bp 0 bp +50 bp +100 bp +200 bp +300 bp
------ ------ ---- ------ ------- ------- -------
Percent change in the next 12 month's
net interest income vs. constant rates
March 31, 2004 0.1% 0.4% - (2.6)% (3.9)% (0.7)% 3.8%
December 31, 2003 1.5% 1.3% - (2.8)% (4.3)% (1.5)% 2.7%
(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 $197.8 million as of March 31, 2004, including net
unrealized gains of $97.2 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.
25
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
the Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of March 31, 2004. Based on and as of the time of such
evaluation, 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 reports that
it files with or submits to the Securities and Exchange Commission under the
Securities Exchange Act of 1934. There have been no changes in the Company's
internal control over financial reporting that occurred during the Company's
quarter ended March 31, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(a) (b) (c) (d)
Total Number of Shares Maximum Number of
Total Number Average Purchased as Part of Shares that May Yet Be
of Shares Price Paid Publicly Announced Plans Purchased Under the
Period Purchased per Share or Programs Plans or Programs
------ --------- --------- ----------- -----------------
January 1-31, 2004 - $ - - 597,450
February 1-29, 2004 27,600 $37.86 27,600 569,850
March 1-31, 2004 112,000 $38.89 112,000 457,850
Total 139,600 $38.68 139,600 457,850
The repurchases were pursuant to a 1,000,000 common share repurchase program
that was approved by the Board of Directors in November 1999. The program was
scheduled to expire in November 2004. On April 21, 2004, Corus' Board of
Directors approved a new program to repurchase up to 1,000,000 common shares of
Corus stock. The new program expires in April 2009. Coincident with the approval
of the new plan, the November 1999 plan was terminated.
26
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-K/A filing dated March 19, 2004
10.1 Commission Program for the Commercial Loan Officers is incorporated
herein by reference from Form S-8 filing dated May 22, 1998**
10.2 The 1999 Stock Option Plan is incorporated herein by reference from
Form S-8 filing dated April 30, 1999**
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
*Filed herewith
**Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
A Form 8-K was filed under items 7 and 12 on January 20, 2004 regarding
publicly released information on the Company's financial condition and
results of operations for the quarter ended December 31, 2003.
A Form 8-K was filed under items 5 and 7 on February 2, 2004 regarding
publicly released information on anticipated security gains.
A Form 8-K was filed under items 5 and 7 on February 9, 2004 regarding
publicly released information on an increase in dividend.
A Form 8-K was filed under items 7 and 12 on March 4, 2004 regarding Corus
Bankshares 2003 Annual Report to Shareholders.
27
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)
May 6, 2004 By: /s/ Michael E. Dulberg
-------------------------------
Michael E. Dulberg
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer and duly
authorized Officer of Registrant)
28