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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, 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 October 31, 2004, the Registrant had 27,856,748 common shares, $0.05 par
value, outstanding.
CORUS BANKSHARES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 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 27
Signature 28
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) 2004 2003 2003
---------- ---------- ----------
Assets
Cash and due from banks - non-interest bearing $ 91,405 $ 63,524 $ 59,580
Federal funds sold 1,230,500 682,000 752,200
Securities:
Available-for-sale, at fair value
Common stocks at the Bank Holding Company 204,162 188,844 164,519
(cost $123,119, $95,661 and $95,661)
Other securities 56,565 244,062 144,867
(amortized cost $56,193, $242,308 and $142,110)
Held-to-maturity, at amortized cost 11,111 11,744 6,597
(fair value $11,126, $11,802 and $6,655)
---------- ---------- ----------
Total Securities 271,838 444,650 315,983
Loans, net of unearned income 2,587,885 2,433,771 2,185,711
Less: Allowance for loan losses 37,677 36,448 36,145
---------- ---------- ----------
Net Loans 2,550,208 2,397,323 2,149,566
Premises and equipment, net 25,868 26,313 26,885
Accrued interest receivable and other assets 17,568 25,497 25,830
Goodwill, net of accumulated amortization of $30,009 4,523 4,523 4,523
---------- ---------- ----------
Total Assets $4,191,910 $3,643,830 $3,334,567
========== ========== ==========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 247,962 $ 227,960 $ 229,804
Interest-bearing 3,055,474 2,618,442 2,414,977
---------- ---------- ----------
Total Deposits 3,303,436 2,846,402 2,644,781
Other borrowings 1,092 36,403 36,547
Long-term debt - subordinated debentures 255,158 172,500 92,500
Accrued interest payable and other liabilities 56,344 42,345 41,463
---------- ---------- ----------
Total Liabilities 3,616,030 3,097,650 2,815,291
Shareholders' Equity
Common stock (par value $0.05 per share,
50,000,000 shares authorized: 27,866,448, 28,036,888
and 28,082,088 shares outstanding, respectively) 1,393 1,402 1,404
Surplus 17,540 16,942 13,928
Equity - options outstanding 6,404 5,670 5,316
Retained earnings 497,624 460,458 452,079
Accumulated other comprehensive income 52,919 61,708 46,549
---------- ---------- ----------
Total Shareholders' Equity 575,880 546,180 519,276
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $4,191,910 $3,643,830 $3,334,567
========== ========== ==========
September 30, 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 Nine Months Ended
September 30 September 30
------------------- ---------------------
(in thousands, except per share data) 2004 2003 2004 2003
------- ------- -------- --------
Interest, Loan Fees, and Dividend Income
Interest and fees on loans:
Taxable $46,678 $39,587 $136,875 $107,413
Tax-advantaged 29 38 88 123
Federal funds sold 4,628 1,180 8,719 3,076
Securities:
Taxable 739 1,472 3,795 5,793
Tax-advantaged 25 16 51 48
Dividends 1,515 1,351 4,650 3,908
Trading account - 243 496 703
------- ------- -------- --------
Total Interest, Loan Fees, and Dividend Income 53,614 43,887 154,674 121,064
Interest Expense
Deposits 14,968 10,416 39,223 32,008
Federal funds purchased 2 - 3 -
Other borrowings 265 577 809 609
Long-term debt - subordinated debentures 2,415 267 6,250 894
------- ------- -------- --------
Total Interest Expense 17,650 11,260 46,285 33,511
Net Interest Income 35,964 32,627 108,389 87,553
Provision for Loan Losses - - - -
------- ------- -------- --------
Net Interest Income After Provision for Loan Losses 35,964 32,627 108,389 87,553
Noninterest Income
Service charges on deposit accounts 2,711 2,973 8,563 8,895
Securities gains/(losses), net 16,527 1,634 30,416 2,299
Other income 639 639 1,769 2,031
------- ------- -------- --------
Total Noninterest Income 19,877 5,246 40,748 13,225
Noninterest Expense
Salaries and employee benefits 8,978 8,622 28,271 25,094
Net occupancy 852 1,113 2,775 3,132
Data processing 382 679 2,082 1,999
Depreciation - furniture & equipment 438 404 1,149 1,174
Other expenses 2,201 2,249 7,124 6,954
------- ------- -------- --------
Total Noninterest Expense 12,851 13,067 41,401 38,353
------- ------- -------- --------
Income Before Income Taxes 42,990 24,806 107,736 62,425
Income Tax Expense 14,833 8,338 37,068 20,872
------- ------- -------- --------
Net Income $28,157 $16,468 $ 70,668 $ 41,553
======= ======= ======== ========
Net income per share:
Basic $ 1.01 $ 0.59 $ 2.53 $ 1.48
Diluted $ 0.98 $ 0.57 $ 2.45 $ 1.45
Cash dividends declared per common share $ 0.313 $ 0.250 $ 0.938 $ 0.580
Average common shares outstanding:
Basic 27,859 28,078 27,915 28,118
Diluted 28,780 28,845 28,812 28,658
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
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Accumulated
Equity - Other
Common Options Retained Comprehensive
(in thousands, except common share data) Stock Surplus Outstanding Earnings Income/(loss) Total
-------- -------- ----------- --------- ------------- ---------
Balance at December 31, 2003 $ 1,402 $ 16,942 $ 5,670 $ 460,458 $ 61,708 $ 546,180
Net income - - - 70,668 - 70,668
Other comprehensive income/(loss) (net of income taxes):
Net change in unrealized gains on available-
for-sale securities - - - - (8,789) (8,789)
---------
Comprehensive income 61,879
---------
Stock options vested - - 1,052 - - 1,052
Retirement of 193,500 common shares (10) (55) - (7,371) - (7,436)
Shares issued under stock option plan,
23,060 common shares 1 702 (152) - - 551
Stock option settlements - (189) (81) - - (270)
Stock option expirations - 38 (59) - - (21)
Cash dividends declared on common stock,
$0.938 per common share - - - (26,131) - (26,131)
Other - 102 (26) - - 76
-------- -------- ------- --------- -------- ---------
Balance at September 30, 2004 $ 1,393 $ 17,540 $ 6,404 $ 497,624 $ 52,919 $ 575,880
======== ======== ======= ========= ======== =========
See accompanying notes.
NINE MONTHS ENDED SEPTEMBER 30, 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 - - - 41,553 - 41,553
Other comprehensive income (net of income taxes):
Net change in unrealized gains on available-
for-sale securities - - - - 13,070 13,070
---------
Comprehensive income 54,623
---------
Stock options vested - - 1,283 - - 1,283
Retirement of 180,000 common shares (9) (61) (3,668) - (3,738)
Stock option exercises 1 512 (126) - - 387
Stock option settlements - (76) (97) - - (173)
Cash dividends declared on common stock,
$0.580 per common share - - - (16,288) - (16,288)
-------- -------- ------- --------- -------- ---------
Balance at September 30, 2003 $ 1,404 $ 13,928 $ 5,316 $ 452,079 $ 46,549 $ 519,276
======== ======== ======= ========= ======== =========
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)
Nine Months Ended
September 30
--------------------------
(in thousands) 2004 2003
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70,668 $ 41,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,723 2,119
Amortization of investment and loan premiums, net 963 580
Deferred income tax expense (benefit) 1,736 (2,699)
Securities gains, net (30,416) (2,299)
Proceeds (outlay) from trading activity, net 2,254 (389)
Deferred compensation expense 3,652 2,431
Stock option expense 1,052 1,283
Decrease (Increase) in accrued interest receivable and other assets 3,013 (4,100)
Increase in accrued interest payable and other liabilities 10,966 3,978
----------- ---------
Net cash provided by operating activities 65,611 42,457
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 646 91
Proceeds from maturities of available-for-sale securities 196,352 149,651
Proceeds from sales of available-for-sale securities 15,079 10,883
Purchases of available-for-sale securities (20,140) (28,782)
Proceeds from sales of non-hedge derivatives 7,800 -
Net increase in loans (154,643) (446,748)
Bad debt recoveries 1,763 2,358
Purchases of premises and equipment, net (1,278) (684)
----------- ---------
Net cash provided by (used in) investing activities 45,579 (313,231)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposit accounts 457,034 585,008
Proceeds from issuance of long-term debt - subordinated debentures 75,000 92,500
Repayment of debt (35,000) (8,000)
Decrease in other borrowings, net (311) (3,563)
Stock option exercises/settlements 336 213
Retirements of common shares (7,436) (3,737)
Cash dividends paid on common shares (24,432) (11,527)
----------- ---------
Net cash provided by financing activities 465,191 650,894
----------- ---------
Net increase in cash and cash equivalents 576,381 380,120
Cash and cash equivalents at January 1 745,524 431,660
----------- ---------
Cash and cash equivalents at September 30 $ 1,321,905 $ 811,780
=========== =========
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 financial statements include the accounts of Corus
Bankshares, Inc. ("Corus") and its wholly owned subsidiary, Corus Bank,
N.A. (the "Bank"). The interim Consolidated Balance Sheets, 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' 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 the
amounts that 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 September 30, 2003 and for the
three and nine 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.
The loan products include 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 and other
financial instruments. 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 SEPTEMBER 30, 2004
Commercial Consumer Retail Corporate Inter-segment
(in thousands) Lending Lending Banking Support Eliminations Consolidated
---------- ------- ---------- -------- ------------- ------------
Total Revenues (1) $ 28,368 $ 698 $ 12,717 $ 14,058 $ - $ 55,841
Net Income 14,387 521 4,837 8,412 - 28,157
Total Average Assets 2,574,658 54,995 3,171,262 755,115 (2,527,809) 4,028,221
End of Period Goodwill - - 4,523 - - 4,523
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
Commercial Consumer Retail Corporate Inter-segment
(in thousands) 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 1,962 - 16,468
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 NINE MONTHS ENDED SEPTEMBER 30, 2004
Commercial Consumer Retail Corporate Inter-segment
(in thousands) Lending Lending Banking Support Eliminations Consolidated
---------- ------- ---------- -------- ------------- ------------
Total Revenues (1) $ 83,579 $ 2,251 $ 36,639 $ 26,668 $ - $ 149,137
Net Income 41,451 917 12,795 15,505 - 70,668
Total Average Assets 2,523,014 58,940 2,988,769 644,125 (2,363,001) 3,851,847
End of Period Goodwill - - 4,523 - - 4,523
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Commercial Consumer Retail Corporate Inter-segment
(in thousands) 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 6,180 - 41,553
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
(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 primarily to hedge its interest rate risk. This
is accomplished 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). Nearly all of the interest rate swaps qualified as
fair value hedges and received hedge accounting treatment. While the
interest rate basis swaps provide the desired economic hedge to interest
rate fluctuations, they do not meet the strict criteria required to
qualify for hedge accounting. The interest rate basis swaps were sold in
April 2004.
Corus also purchases and sells interest rate derivatives in anticipation
of trading gains. The impact of market adjustments, as well as any gains
or losses upon the sale of these swaps held for trading is recorded
directly into income.
The income statement impact and notional amounts related to both hedge and
non-hedge derivatives were as follows:
DERIVATIVE GAIN/(LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Income Statement -------------------- --------------------
(in thousands) Classification 2004 2003 2004 2003
------------------ ------- ------- ------- -------
Fair value hedge (fixed-to-floating swaps):
Loan hedge Interest Income $ - $ (16) $ 22 $ (1)
Brokered CD hedge(1) Interest Expense - - - -
------- ------- ------- -------
Total fair value hedge - (16) 22 (1)
Non-hedge:
Fixed-to-floating swaps - trading Noninterest Income 569 - 2,173 -
Fixed-to-floating swaps - loans Noninterest Income 28 22 54 32
Basis swaps Noninterest Income - (1,091) 1,446 1,544
------- ------- ------- -------
Total Non-hedge 597 (1,069) 3,673 1,576
------- ------- ------- -------
Total Derivative Gain/(Loss) $ 597 $(1,085) $ 3,695 $ 1,575
======= ======= ======= =======
NOTIONAL AMOUNTS OF DERIVATIVES
(in thousands) SEPTEMBER 30, 2004 September 30, 2003
------------------ ------------------
Fair value hedge (fixed-to-floating swaps):
Loan hedge $ 3,580 $ 5,712
Brokered CD hedge(1) 418,503 372,503
Non-hedge:
Fixed-to-floating swaps - trading 200,000 -
Fixed-to-floating swaps - loans 2,075 984
Basis swaps - 1,000,000
(1) These swaps 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
The debentures all mature 30 years from the issuance date and include
interest rates ranging from LIBOR plus 2.22% to LIBOR plus 3.10%,
resetting quarterly. Combined issuance fees totaled $1.6 million and are
being amortized over the 30-year periods. The debentures were issued to
seven non-consolidated subsidiary trusts, which had been formed for the
sole purpose of issuing Trust Preferred securities.
Interest is payable quarterly, although Corus has the option to defer the
interest payments for a period not to exceed 20 consecutive quarters.
Absent the exercise of this option, Corus has no financial covenants
related to this debt.
5. Other Borrowings
On June 26, 2001, Corus entered into an agreement to borrow $70 million,
consisting of a term note in the amount of $50 million and a revolving
note line of credit in the amount of $20 million, both at an effective
interest rate equal to LIBOR plus 150 basis points, adjusted quarterly. In
the second quarter of 2004 Corus increased the revolving note line of
credit to $50 million.
Corus had previously extended the maturity date on both notes to June 25,
2006. However, during the third quarter of 2004, Corus made a payment of
$33 million to pay off and cancel the term note. With regard to the line
of credit, as of September 30, 2004, there was no balance outstanding.
In the fourth quarter Corus increased the revolving line of credit to $80
million. Terms remain essentially the same, however the interest rate
declined to LIBOR plus 140 basis points.
6. 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) 2004 2003 2004 2003
------- ------- ------- -------
Denominator for basic earnings per share:
average common shares outstanding 27,859 28,078 27,915 28,118
Dilutive common stock options 921 767 897 540
------- ------- ------- -------
Denominator for diluted earnings per share 28,780 28,845 28,812 28,658
======= ======= ======= =======
Numerator: Net income attributable to common shares $28,157 $16,468 $70,668 $41,553
Net income per share:
Basic $ 1.01 $ 0.59 $ 2.53 $ 1.48
Diluted 0.98 0.57 2.45 1.45
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.
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 September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ --------------------
(in thousands) 2004 2003 2004 2003
----- ----- ------- -----
Service cost $ 197 $ 188 $ 591 $ 563
Interest cost 347 317 1,041 952
Expected return on plan assets (399) (313) (1,197) (938)
Net amortization and deferral 8 71 26 212
----- ----- ------- -----
Net Periodic Benefit Cost $ 153 $ 263 $ 461 $ 789
===== ===== ======= =====
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SUMMARY
Corus 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). In some cases, Corus' loss and delinquency
experience may not accurately reflect the inherent losses in a segment of the
portfolio. In those instances, Corus will utilize the most recently available
historical rates as published by the Federal Deposit Insurance Corporation
("FDIC") in its FDIC Quarterly Banking Profile publication.
Corus' commercial real estate portfolio is comprised of construction loans and
non-construction loans. Construction loans are primarily loans to construct new
buildings for residential or commercial use. Non-construction loans, while they
may include limited upgrades/changes to the property, include no major
structural work to the building. Non-construction loans include condo
conversion/inventory loans. These loans, while the collateral property will
ultimately be used for residential purposes, are considered more commercial in
nature.
Our policy for several years, with respect to commercial real estate portfolio
historical loss rates, has been to utilize the publicly available charge-off
history of a similar portfolio. We determined that the best source for this
information was the FDIC Quarterly Banking Profile, which is a summation of all
reporting banks' Call Report data. The FDIC Quarterly Banking Profile presents
loan data for construction loans and non-construction commercial real estate
loans. Management's review of the definitions for Call Report disclosure
provided the basis for determining that the composition of construction loans
and non-construction commercial real estate loans, as reported in the FDIC
Quarterly Banking Profile, were consistent with our portfolio.
The overall assessment of the allowance for loan losses also includes a
consideration of 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.
10
OPERATING RESULTS
For the three months ended September 30, 2004, net income was $28.2 million, or
$0.98 per share on a diluted basis, compared to net income of $16.5 million, or
$0.57 per share on a diluted basis, in 2003. For the nine months ended September
30, 2004, net income was $70.7 million, or $2.45 per share on a diluted basis,
versus $41.6 million, or $1.45 per share on a diluted basis, in 2003.
Earnings for the third quarter of 2004 represented annualized returns of 19.9%
on equity and 2.8% on assets compared to 12.9% and 2.1% for the same period in
2003. Earnings for the first nine months of 2004 represented annualized returns
of 16.9% on equity and 2.4% on assets compared to 11.2% and 2.0% for the same
period in 2003.
Net Interest Income and Net Interest Margin
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, 2004, Corus' net interest
income grew to $36.0 million and $108.4 million, respectively, compared to $32.6
million and $87.6 million for the same periods in 2003. These increases are
attributable primarily to increases in average loans outstanding. Another factor
contributing to the growth in net interest income was the increase in loan fee
income to $10.4 million and $29.7 million, respectively, for the three and nine
months ended September 30, 2004, compared to $7.8 million and $21.4 million in
2003.
For the three and nine months ended September 30, 2004, Corus' net interest
margin decreased by 74 and 46 basis points, respectively, compared to the prior
year. The decrease is primarily the result of Corus' increase in deposits in
advance of anticipated loan growth. These deposits were invested in highly
liquid short-term investments. While providing Corus with additional liquidity,
this had a negative impact on the net interest margin.
Changes in market interest rates will also have an impact on Corus net interest
margin. See the Market Risk Management section under Item 3 of this filing for
discussion of Corus' projected sensitivity to changes in interest rates.
11
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------------
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) $ 1,344,136 $ 5,402 1.61% $ 717,572 $ 2,920 1.63%
Common stocks at the Bank Holding Company (2) 203,768 2,086 4.10% 164,637 1,860 4.52%
Loans, net of unearned income (3) 2,391,198 46,723 7.82% 2,095,865 39,645 7.57%
----------- ----------- ----------- --------
Total earning assets 3,939,102 54,211 5.50% 2,978,074 44,425 5.97%
Noninterest-earning assets:
Cash and due from banks -- noninterest bearing 81,886 77,292
Allowance for loan losses (37,252) (35,990)
Premises and equipment, net 25,997 27,130
Other assets, including goodwill 18,488 28,530
----------- -----------
Total assets $ 4,028,221 $ 3,075,036
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits -- interest-bearing:
Money market deposits $ 1,288,655 $ 6,651 2.06% $ 967,965 $ 3,806 1.57%
Brokered certificates of deposit 531,971 3,514 2.64% 427,321 3,490 3.27%
Retail certificates of deposit 667,523 3,875 2.32% 422,518 2,473 2.34%
NOW deposits 247,298 719 1.16% 198,783 436 0.88%
Savings deposits 167,389 208 0.50% 168,727 211 0.50%
----------- ----------- ----------- --------
Total interest-bearing deposits 2,902,836 14,967 2.06% 2,185,314 10,416 1.91%
Other borrowings 30,480 268 3.51% 40,418 267 2.64%
Long-term debt - subordinated debentures 209,774 2,415 4.60% 54,348 577 4.25%
----------- ----------- ----------- --------
Total interest-bearing liabilities 3,143,090 17,650 2.25% 2,280,080 11,260 1.98%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 259,597 240,759
Other liabilities 58,416 42,143
Shareholders' equity 567,118 512,054
----------- -----------
Total liabilities and shareholders' equity $ 4,028,221 $ 3,075,036
=========== ===========
Interest income and loan fees/average earning assets $ 3,939,102 $ 54,211 5.50% $ 2,978,074 $ 44,425 5.97%
Interest expense/average interest-bearing liabilities $ 3,143,090 17,650 2.25% $ 2,280,080 11,260 1.98%
----------- ----------- ---- ----------- -------- ----
Net interest spread $ 36,561 3.25% $ 33,165 3.99%
=========== ==== ======== ====
Net interest margin 3.71% 4.45%
==== ====
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 $11,000 and $9,000 for 2004 and 2003,
respectively.
(2) Dividends on the common stock portfolio include a tax equivalent
adjustment of $571,000 and $509,000 for 2004 and 2003, respectively.
(3) Interest income on tax-advantaged loans includes a tax equivalent
adjustment of $16,000 and $20,000 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.
12
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------------------
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) $ 1,162,441 $ 13,085 1.50% $ 658,545 $ 9,645 1.95%
Common stocks at the Bank Holding Company (2) 199,223 6,403 4.29% 153,262 5,380 4.68%
Loans, net of unearned income (3) 2,387,216 137,010 7.65% 1,902,907 107,603 7.54%
----------- -------- ---------- --------
Total earning assets 3,748,880 156,498 5.57% 2,714,714 122,628 6.02%
Noninterest-earning assets:
Cash and due from banks -- noninterest bearing 84,194 75,115
Allowance for loan losses (36,910) (36,147)
Premises and equipment, net 26,182 27,661
Other assets, including goodwill 29,501 26,101
----------- ----------
Total assets $ 3,851,847 $2,807,444
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits -- interest-bearing:
Money market deposits $ 1,241,287 $ 17,274 1.86% $ 932,518 $ 11,666 1.67%
Brokered certificates of deposit 561,182 10,633 2.53% 320,129 10,601 4.42%
Retail certificates of deposit 527,143 8,707 2.20% 403,391 8,005 2.65%
NOW deposits 242,923 1,984 1.09% 161,518 756 0.62%
Savings deposits 168,179 625 0.50% 166,716 980 0.78%
----------- -------- ---------- --------
Total interest-bearing deposits 2,740,714 39,223 1.91% 1,984,272 32,008 2.15%
Other borrowings 48,181 812 2.25% 41,786 894 2.85%
Long-term debt - subordinated debentures 192,605 6,250 4.33% 19,332 609 4.20%
----------- -------- ---------- --------
Total interest-bearing liabilities 2,981,500 46,285 2.07% 2,045,390 33,511 2.18%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 252,222 229,049
Other liabilities 61,811 36,592
Shareholders' equity 556,314 496,413
----------- ----------
Total liabilities and shareholders' equity $ 3,851,847 $2,807,444
=========== =========
Interest income and loan fees/average earning assets $ 3,748,880 $156,498 5.57% $2,714,714 $122,628 6.02%
Interest expense/average interest-bearing liabilities $ 2,981,500 46,285 2.07% $2,045,390 33,511 2.18%
----------- -------- ---- --------- -------- ----
Net interest spread $110,213 3.50% $ 89,117 3.84%
======== ==== ======== ====
Net interest margin 3.92% 4.38%
==== ====
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
$25,000 and $26,000 for 2004 and 2003, respectively.
(2) Dividends on the common stock portfolio include a tax equivalent
adjustment of $1.8 million and $1.5 million for 2004 and 2003,
respectively.
(3) Interest income on tax-advantaged loans includes a tax equivalent
adjustment of $47,000 and $66,000 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.
13
Noninterest Income
For the three and nine months ended September 30, 2004, noninterest income
increased by $14.6 million and $27.5 million, respectively, compared to the
prior year. The increase mainly resulted from higher net securities gains, as
described below.
Securities Gains/(Losses), net
For the three and nine months ended September 30, 2004, Corus recorded net
securities gains of $16.5 million and $30.4 million, respectively, compared to
gains of $1.6 million and $2.3 million in the same periods of 2003. The
following details the net securities gains/(losses) by source:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -------------------
(in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Gains on common stocks at Bank Holding Company $15,930 $ 2,759 $26,081 $ 10,074
Trading account gains/(losses), net 569 (56) 2,822 (389)
Mark-to-market adjustments on non-hedge derivatives 28 (1,069) 1,500 1,576
Sales of securities at subsidiary bank - - 13 -
Charge for "other than temporary" impairment - - - (8,962)
------- ------- ------- --------
Total securities gains/(losses), net $16,527 $ 1,634 $30,416 $ 2,299
======= ======= ======= ========
Gains on common stocks at Bank Holding Company
Gains on common stocks at the Bank Holding Company relate to Corus' common stock
portfolio of various financial industry companies. Gains or losses are
recognized when either the investment is sold or when the company is acquired by
another company. Several of the companies in which Corus holds investments have
been, or will be, acquired in 2004. See the Common Stock Portfolio section for
additional details.
Trading account gains/(losses), net
From time to time, the Company may enter into security transactions in
anticipation of taking gains on short-term price movements. Such securities are
classified on our books as trading securities. Eligible trading securities
include Treasury securities, agency securities and interest rate derivatives.
All open trading positions are monitored closely by senior management and `loss
limits' are in place to reduce potential losses.
Securities purchased for trading purposes are, at the time of purchase, clearly
indicated as Trading Account securities on the Company's books. Taking any
action, which would require the reclassification of any security to another
classification after it has been initially designated as trading,
available-for-sale, or held-to-maturity, is against the Bank's policy and
requires Board approval.
For the three and nine months ended September 30, 2004, the Company realized net
gains of $569,000 and $2.8 million, respectively, relating to this trading.
Mark-to-market adjustments on non-hedge derivatives
For the three and nine months ended September 30, 2004, the Bank recorded gains
of $28,000 and $1.5 million, respectively, from mark-to-market adjustments on
non-hedge derivatives. These adjustments resulted primarily from basis swaps
held by Corus, which were sold in April 2004. Mark-to-market adjustments
associated with the remaining non-hedge derivatives have been, and are expected
to remain, immaterial.
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. While we are required to report in
net income securities losses from these "other than temporary" declines in
value, we are not allowed to include securities gains in net income when those
same securities recover in value unless the security is either sold or if the
underlying corporation is acquired.
14
Noninterest Expense
For the three months ended September 30, 2004, noninterest expense declined
slightly. A slight increase in salaries and benefits was more than offset by
decreases in data processing and net occupancy. The decrease in data processing
is attributable to the implementation of a new core data processing system in
the second quarter of 2004. As previously disclosed, for all of 2004, total data
processing expense is estimated to be approximately $2.5 million, a savings of
$200,000 compared to 2003. Further savings are anticipated in the future with
2005 costs estimated to be $1.5 to $1.8 million.
For the nine months ended September 30, 2004, noninterest expense increased by
$3.0 million compared to the prior year, primarily due to the increase in
salaries and benefits expense of $3.2 million. The increase in salaries and
benefits expense is largely attributable to increases in commission-based
commercial loan officer compensation of $2.2 million. Due to the impact of a
large accrual adjustment in the fourth quarter of 2003, the full year comparison
of commercial loan officer compensation is expected to reflect an increase of
$1.4 million compared to 2003. Salaries, other than those attributable to
commercial loan officers, increased by $617,000 for the nine months ended
September 30, 2004.
FINANCIAL CONDITION
Earning Assets
The following table details the composition of Corus' earning assets:
SEPTEMBER 30, 2004 December 31, 2003 SEPTEMBER 30, 2003
(in thousands) AMOUNT PERCENT Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Federal funds sold $1,230,500 30% $ 682,000 19% $ 752,200 23%
Common stocks at the Bank Holding Company 204,162 5 188,844 6 164,519 5
Securities other than common stocks 67,676 2 255,806 7 151,464 5
Loans, net of unearned income 2,587,885 63 2,433,771 68 2,185,711 67
---------- --- ---------- --- ---------- ---
Total $4,090,223 100% $3,560,421 100% $3,253,894 100%
========== === ========== === ========== ===
15
Common Stocks
At September 30, 2004, Corus had investments in the common stocks of 28
financial industry companies with a current market value totaling $204.2
million, including net unrealized gains of $81.0 million. These investments are
included in the available-for-sale classification. The following is a list of
Corus' holdings as of September 30, 2004:
TICKER MARKET PERCENTAGE OF
CORPORATION SYMBOL SHARES HELD VALUE PORTFOLIO
- ----------- ------ ----------- ----- ---------
(dollars in thousands)
Amcore Financial Inc. AMFI 142,500 $ 4,044 2.0%
Amsouth Bancorporation ASO 466,015 11,371 5.6
Associated Banc Corp. ASBC 121,179 3,886 1.9
Bank of America Corp. BAC 670,594 29,057 14.2
Bank of New York Co. Inc. BK 100,000 2,917 1.4
Banknorth Group Inc. BNK 90,000 3,150 1.5
BB&T Corp. BBT 33,736 1,339 0.7
Citigroup Inc. C 225,000 9,927 4.9
City National Corp. CYN 84,000 5,456 2.7
Comerica Inc. CMA 339,300 20,138 9.9
Commerce Bancshares Inc. CBSH 28,491 1,370 0.7
Compass Bancshares Inc. CBSS 108,750 4,765 2.3
First Source Corp. SRCE 18,992 487 0.2
Fremont General Corp FMT 650,000 15,048 7.4
Hibernia Corp. HIB 154,200 4,072 2.0
JP Morgan Chase & Co. JPM 500,864 19,899 9.7
MAF Bancorp Inc. MAFB 281,550 12,143 5.9
Mellon Financial Corp. MEL 100,000 2,769 1.4
Mercantile Bankshares Corp. MRBK 58,500 2,806 1.4
Merrill Lynch & Co. Inc. MER 132,000 6,563 3.2
Morgan Stanley Dean Witter & Co. MWD 82,000 4,043 2.0
National City Corp. NCC 74,520 2,878 1.4
Provident Bancshares Corp. PBKS 43,757 1,468 0.7
Regions Financial Corp. RF 143,554 4,746 2.3
South Trust Corp. SOTR 195,900 8,161 4.0
SunTrust Banks Inc. STI 48,000 3,380 1.7
US Bancorp USB 268,870 7,770 3.8
Wachovia Corp. WB 223,840 10,509 5.1
-------- -----
Total $204,162 100.0%
======== =====
During the three and nine months ended September 30, 2004, Corus received
dividends on the stock portfolio of $1.5 million and $4.6 million, respectively,
compared to $1.4 million and $3.9 million, respectively, during the same periods
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. Under the terms of the acquisition
Corus received additional shares of BAC for its holdings of FBF shares. Corus'
book basis in the FBF shares before the acquisition was $9.0 million whereas the
market value of the newly received BAC shares on April 1, 2004 was $19.1
million. In accordance with Emerging Issues Task Force ("EITF") 91-5,
"Nonmonetary Exchange of Cost-Method Investments," Corus recorded the difference
of $10.1 million as securities gains in the second quarter of 2004 and adjusted
the book basis of the newly received BAC shares.
In the third quarter of 2004, two additional stock-for-stock transactions
involving companies of which Corus owns stock were completed and accounted for
as described above in accordance with EITF 91-5. JP Morgan Chase & Co. (JPM)
acquired Bank One Corp. (ONE), which gave rise to a book gain of $3.0 million.
Regions Financial Corp. (RF) acquired Union Planters Corp. (UPC), which caused a
book gain of $1.3 million. It should be noted that gains from stock-for-stock
transactions have neither a cash flow nor net tax impact until the underlying
shares are ultimately sold.
16
The remaining third quarter gain of $11.6 million was primarily due to the sale
of Corus' investment in Charter One Financial Inc. (CF).
In the fourth quarter of 2004, Corus expects to report a gain from Wachovia
Corp.'s (WB) announced plans to acquire South Trust Corp. (SOTR). Under the
announced terms and at WB's price as of September 30, 2004, the acquisition
would cause a book gain of $5.1 million.
Loans
The following table details the composition of Corus' loan portfolio:
SEPTEMBER 30, 2004 December 31, 2003 September 30, 2003
(in thousands) AMOUNT PERCENT Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Loans:
Commercial real estate:
Non-construction $1,124,251 44% $1,207,015 50% $1,162,101 53%
Construction 1,264,106 49 1,005,206 41 821,547 38
Mezzanine 59,697 2 53,790 2 47,590 2
---------- --- ---------- --- ---------- ---
Total commercial real estate 2,448,054 95 2,266,011 93 2,031,238 93
Commercial 85,240 3 98,621 4 79,839 4
Residential real estate and other 54,591 2 69,139 3 74,634 3
---------- --- ---------- --- ---------- ---
Total loans $2,587,885 100% $2,433,771 100% $2,185,711 100%
========== === ========== === ========== ===
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 following table is a summary of commercial real estate loans and unfunded
commitments. Including commitments, the commercial real estate loan portfolio
totals $4.9 billion.
September 30, 2004 December 31, 2003 September 30, 2003
(in thousands) AMOUNT PERCENT Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Funded commercial
real estate loans, net $2,448,054 50% $2,266,011 59% $2,031,238 61%
Commitments:
Loans - unfunded portion 1,724,968 35 1,168,115 31 1,072,131 32
Commitment Letters 712,249 14 375,865 10 189,375 6
Letters of Credit 24,998 1 10,502 - 20,682 1
---------- --- ---------- --- ---------- ---
Total $4,910,269 100% $3,820,493 100% $3,313,426 100%
========== === ========== === ========== ===
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.
17
Commercial Real Estate Loans - Originations
Corus originated 66 loans with commitments aggregating $2.3 billion in the first
nine months of 2004, which doubles originations for the same period in 2003 of
54 loans aggregating $1.1 billion. To clarify, an origination occurs when a loan
closes. The origination amount equals Corus' full commitment under that loan.
Since many of Corus' loans are for construction projects, the funds are often
not drawn by the borrower at the closing but rather over an extended period of
time. As a result, originations do not necessarily correspond to immediate
increases in loans outstanding.
Commercial Real Estate Loans - Pay-offs
Total pay-offs in the nine months ended September 30, 2004 were $1.4 billion.
This compares to total payoffs of $556 million in the same period of 2003. The
timing of loan pay-offs is inherently difficult to predict.
The following tables break out commercial real estate loans by size, property
type, and location:
COMMERCIAL REAL ESTATE LOANS - BY SIZE
AS OF SEPTEMBER 30, 2004
----------------------------------------------------------------------
TOTAL COMMITMENT(1) FUNDED BALANCE
# OF ------------------- ------------------
(dollars in millions) LOANS AMOUNT % AMOUNT %
----- ------ --- ------- ---
$80 million and above 9 $ 861 18% $ 143 6%
$60 million to $80 million 14 941 19 535 22
$40 million to $60 million 24 1,128 23 523 21
$20 million to $40 million 40 1,154 23 700 29
$1 million to $20 million 89 822 17 544 22
Less than $1 million 138 30 1 29 1
Deferred fees/other discounts N/A (26) (1) (26) (1)
--- ------- --- ------- ---
Total 314 $ 4,910 100% $ 2,448 100%
=== ======= === ======= ===
COMMERCIAL REAL ESTATE LOANS - BY PROPERTY TYPE
AS OF SEPTEMBER 30, 2004
--------------------------------------------------
TOTAL COMMITMENT(1) FUNDED BALANCE
# OF ------------------- --------------
(dollars in millions) LOANS AMOUNT % AMOUNT %
----- ------ --- ------ ---
Condominium 88 $ 3,225 66% $1,347 55%
Hotel 37 745 15 437 18
Rental apartment 13 416 8 353 14
Office 14 391 8 204 9
Other 24 129 3 104 4
Loans less than $1 million 138 30 1 29 1
Deferred fees/other discounts N/A (26) (1) (26) (1)
--- ------- --- ------ ---
Total 314 $ 4,910 100% $2,448 100%
=== ======= === ====== ===
(1) Includes both funded and unfunded commitments, letters of credit, and
outstanding commitment letters.
18
COMMERCIAL REAL ESTATE LOANS - BY MAJOR METROPOLITAN AREA
AS OF SEPTEMBER 30, 2004
-------------------------------------------------
# OF TOTAL COMMITMENT(1) FUNDED BALANCE
(dollars in millions) LOANS AMOUNT % AMOUNT %
--- ----- --- ----- ---
California:
Los Angeles 23 $ 630 13% $ 306 13%
San Francisco 8 277 6 116 5
San Diego 8 177 3 90 4
Sacramento 1 33 1 33 1
--- ----- --- ----- ---
California Total 40 1,117 23 545 23
Washington, D.C.(2) 28 822 17 345 14
Miami 19 763 15 358 15
New York City 20 724
15 281 11
Chicago 30 487 10 370 15
Chicago-Loans less than $1 million 130 27 1 26 1
Las Vegas 6 263 5 36 1
Atlanta 5 165 3 39 2
Texas:
Houston 6 129 3 123 5
Dallas 2 19 - 12 -
--- ----- --- ----- ---
Texas Total 8 148 3 135 5
Other (3) 28 420 9 339 14
Deferred fees/other discounts N/A (26) (1) (26) (1)
--- ----- --- ----- ---
Total 314 $4,910 100% $2,448 100%
=== ===== === ===== ===
(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 - 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
SEPTEMBER 30, 2004 December 31, 2003 SEPTEMBER 30, 2003
------------------ ----------------- ------------------
# OF COMMITMENT # of Commitment # of Commitment
(dollars in millions) LOANS AMOUNT Loans Amount Loans Amount
----- ------ ----- ------ ----- ------
Commitment Accepted 7 $ 360 3 $ 94 5 $ 120
Commitment Offered 9 352 6 282 4 69
Application Received 14 725 9 305 15 552
Application Sent Out 8 583 8 451 7 218
Term Sheet Issued 48 2,810 36 1,715 27 1,348
Discussion Pending 1 14 5 115 4 154
-- ------ -- ------ -- ------
Total 87 $4,844 67 $2,962 62 $2,461
== ====== == ====== == ======
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
September 30, 2003, 90% of the loans that had reached the Application Received
stage ultimately closed.
19
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 September 30,
2004, Corus had purchased participations in two loans. Corus' total commitment
on these loans is $98.6 million or 2.0% 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.
Nonperforming Assets
Nonperforming assets were as follows:
SEPTEMBER 30 December 31 September 30
(in thousands) 2004 2003 2003
---- ---- ----
Total nonperforming loans:
Nonaccrual $ 6,998 $ 7,896 $ 8,003
Troubled debt restructurings 8,614 6,436 10,622
Loans 90 days or more past due 11,109 1,236 1,673
------- ------- -------
Total nonperforming loans 26,721 15,568 20,298
Other real estate owned 130 66 282
------- ------- -------
Total nonperforming assets $26,851 $15,634 $20,580
======= ======= =======
Nonperforming loans/Total loans 1.03% 0.64% 0.93%
Nonperforming assets/Total assets 0.64% 0.43% 0.62%
Total nonperforming assets increased compared to December 2003 by $11.2 million
to $26.9 million. The increase is primarily attributable to three loans that
were over 90 days past due. Management believes these loans are well secured and
no loss is expected.
20
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, 2004. A reconciliation of the activity in the allowance for loan
losses is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
(in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period $ 36,996 $ 35,811 $ 36,448 $ 36,629
Provision for loan losses - - - -
Less charge-offs:
Residential real estate and other 101 474 529 1,210
Overdraft -- Check Cashing - 84 - 1,189
Commercial -- Check Cashing 5 - 5 443
Commercial real estate - - - -
---------- ---------- ---------- -----------
Total charge-offs 106 558 534 2,842
---------- ---------- ---------- -----------
Add recoveries:
Residential real estate and other 787 604 1,763 1,674
Overdraft -- Check Cashing - 288 - 682
Commercial - - - 2
Commercial real estate - - - -
---------- ---------- ---------- -----------
Total recoveries 787 892 1,763 2,358
---------- ---------- ---------- -----------
Net recoveries/(charge-offs) 681 334 1,229 (484)
---------- ---------- ---------- -----------
Balance at September 30 $ 37,677 $ 36,145 $ 37,677 $ 36,145
========== ========== ========== ===========
Loans at September 30 $2,587,885 $2,185,711 $2,587,885 $ 2,185,711
========== ========== ========== ===========
Allowance as a percentage of loans 1.46% 1.65% 1.46% 1.65%
========== ========== ========== ===========
Commercial Real Estate Loan Net (Charge-off) / Recovery - 10 Year History
(in thousands) NET (CHARGE-OFF)/RECOVERY
-------------------------
2004 (YTD) $ -
2003 -
2002 17
2001 10
2000 42
1999 62
1998 148
1997 (155)
1996 820
1995 (240)
------
Total $ 704
======
Corus has had particularly impressive results with commercial real estate
lending. In fact, we have actually had zero charge-offs in the past nineteen
quarters, and de minimus charge-offs over the past 10 years.
21
Deposits
The following table details the composition of deposit products by type:
SEPTEMBER 30 December 31 September 30
(in thousands) 2004 2003 2003
---------------- ---------------- ----------------
Money Market $1,306,904 40% $1,208,784 42% $1,070,930 40%
Retail certificates of deposit 812,294 25 422,091 15 424,358 16
Brokered certificates of deposit 522,942 16 596,831 21 551,766 21
NOW 248,072 7 223,590 8 201,547 8
Demand 247,962 7 227,960 8 229,804 9
Savings 165,262 5 167,146 6 166,376 6
---------- --- ---------- --- ---------- ---
Total $3,303,436 100% $2,846,402 100% $2,644,781 100%
========== === ========== === ========== ===
Liquidity
Corus' liquidity policy is to ensure the availability of sufficient funds to
accommodate the needs of borrowers and depositors at all times as well as
meeting Corus' financial obligations. This objective is achieved primarily
through the maintenance of liquid assets. Liquid assets include cash and cash
equivalents, federal funds sold, and marketable securities that can be sold
quickly without a material loss of principal.
Bank Holding Company
Cash needs of the parent company consist primarily of the payment of dividends
to shareholders, interest and principal payments on short-term and long-term
debt, and the payment of operating expenses. Also, from time-to-time the parent
company may repurchase shares, infuse capital into the Bank, or be required to
advance funds pursuant to any of several loan participation agreements
previously entered into with the Bank.
The parent company's primary source of cash to meet these needs is dividends
from the Bank. The Bank's ability to pay these dividends is dependent on its
ability to generate earnings and to meet regulatory restrictions. At September
30, 2004, the Bank had $87.2 million available to pay in dividends to the parent
company without prior regulatory approval while maintaining well-capitalized
status. The Bank's capital category is determined solely for the purpose of
applying prompt corrective action and that capital category may not constitute
an accurate representation of the Bank's overall financial condition or
prospects.
Additional sources of liquidity available to the parent company include
dividends from its equity securities portfolio, a revolving line of credit (an
$80MM line which currently has a $0 balance and a variable interest rate of
3-month LIBOR + 1.40% - see Note 5 "Other Borrowings"), cash that could be
generated from sales of equity securities, and access to the capital markets.
Although Corus currently has no debt ratings or ratings outlook from any of the
major ratings agencies, it has been able to access the capital markets via
"Pooled" Trust Preferred Securities issuances. Using these vehicles, Corus has
issued a total of $247.5 million of Trust Preferred Securities since June 2003
(See Note 4 "Long-Term Debt - Subordinated Debentures"). The instruments all
mature 30 years from the issuance date and include interest rates ranging from
3-month LIBOR plus 2.22% to 3-month LIBOR plus 3.10%. The majority of the
proceeds from these issuances were infused into the Bank in order to increase
its capital and thus its legal lending limit, allowing the Bank to make larger
commercial real estate loans.
It should be noted that all of the parent company's debt is variable-rate and,
as such, management cannot say with certainty what interest payments on this
debt will be in the future. (See Note 4 "Long-Term Debt - Subordinated
Debentures" and Note 5 "Other Borrowings").
22
Subsidiary Bank
The Bank's principal use of cash is the funding of commitments associated with
the commercial real estate loan portfolio. At September 30, 2004, the Bank had
outstanding commitments of $2.4 billion representing unfunded commercial real
estate loans and commitment letters. While there is no certainty as to the
timing of draw-downs of these construction loans, management anticipates the
majority of those commitments will fund over the next 36 months. The liquidity
to fund those commitments will first come from normal paydowns/payoffs on the
existing loan portfolio, existing liquid assets, net retail deposit growth, Bank
earnings not paid to the parent company as a dividend, and then, to the extent
necessary, from issuance of additional brokered certificates of deposit
("BRCD"). In addition, the Bank must retain sufficient funds to satisfy
depositors withdrawal needs as well as cover operating expenses.
In order to avoid the liquidity risk of an overly significant portion of BRCD
maturing during any given year, the Bank works to have the 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, 2004, BRCD totaled $523 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 deposit levels at September 30, 2004,
this implies a maximum amount of BRCD of $1.9 billion. It should be noted
however that, should the Bank fail to maintain its well-capitalized status, its
ability to access credit through BRCD would be limited.
Capital
Regulatory capital and the associated ratios for Corus and its subsidiary bank
as of September 30, 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. $ 691,238 17.54% $ 691,238 16.18% $ 840,084 19.66%
Subsidiary Bank $ 637,451 16.69% $ 637,451 15.54% $ 675,128 16.46%
(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.
23
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;
- Corus' ability to limit losses associated with nonperforming loans;
- 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;
- 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.
Corus' projected sensitivity to interest rates is dependent on both the degree
and direction of the projected rate movement as well as the absolute level of
rates. Under downward rates shocks the Bank is slightly net liability-sensitive.
This means that, compared to stable rates, we project our net interest margin
will expand when rates fall. This liability-sensitivity is caused primarily by
"in-the-money" interest rate floors embedded within many of our floating-rate
commercial real estate loans which effectively "fix" the rate on the loans when
short-term interest rates are low. These quasi-fixed loans limit the downside
when rates are falling, but also limit the upside when rates rise.
For upward rate shocks, we project the Bank will return to its historic net
asset-sensitive position. Once short-term interest rates rise sufficiently to
cause the interest floors discussed above to be "out-of-the-money", the Bank
will have more variable-rate assets than variable-rate liabilities. While the
vast majority of the Bank's assets reprice off of short-term rates, a meaningful
portion of the liability/shareholder equity side is either permanently fixed
(shareholder equity is effectively fixed, for accounting purposes, at 0%) or
does not price in lock-step with changes in short-term rates (administered-rate
deposits).
The change in the Bank's interest rate risk profile from December 31, 2003 is
largely a function of two factors. First, the rise in interest rates since
year-end has reduced the projected impact of interest rate floors - the primary
cause of the Bank's liability-sensitivity. Second, the Bank's deposit base has
grown primarily from an increase in certificates of deposit with terms of six
and twelve months. The model assumes that these deposits are generally invested
in variable-rate assets.
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
September 30, 2004 1.7% 1.1% - 0.8% 3.1% 8.3% 14.2%
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 $204.2 million as of September 30, 2004, including
net unrealized gains of $81.0 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 September 30, 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 September 30, 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 Purchased Under the
Period Purchased per Share Plans or Programs Plans or Programs
------ --------- --------- ----------------- -----------------
July 1-31, 2004 - $ - - 946,100
August 1-31, 2004 - $ - - 946,100
September 1-30, 2004 - $ - - 946,100
Total - $ - - 946,100
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 program expires in
April 2009. Coincident with the approval of the new plan, the repurchase program
that was approved by the Board of Directors in November 1999 was terminated.
26
ITEM 6: EXHIBITS
(a) Exhibits
3(i) Amended and Restated Articles of Incorporation are incorporated
herein by reference from 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
from 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 Exhibit 10.1 to the Form 10-Q filing dated
August 9, 2004 (2)(3)
10.2 The 1999 Stock Option Plan is incorporated herein by reference from
the Form S-8 filing dated April 30, 1999 (2)
15 Letter re unaudited interim financial information (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification (1)
31.2 Rule 13a-14(a)/15d-14(a) Certification (1)
32 Section 1350 Certifications (1)
99 Report of Independent Registered Public Accounting Firm (1)
(1) Filed herewith
(2) Management contract or compensatory plan or arrangement
(3) Confidential treatment requested for portions of this document.
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)
November 5, 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