ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SUMMARY
Corus Bankshares, Inc. ("Corus" or the "Company"), incorporated in Minnesota in
1958, is a bank holding company registered under the Bank Holding Company Act of
1956. Corus, through its wholly-owned banking subsidiary, Corus Bank, N.A. (the
"Bank"), is primarily focused on commercial real estate lending and deposit
gathering. The third, and smaller, business of the Bank is servicing the check
cashing industry.
As a result of the deepening problems related to our loan portfolio and our
current financial condition, Corus Bankshares, Inc. ("Corus" or the "Company")
announced in February 2009 that, at the request of the Federal Reserve Bank of
Chicago (the "FRB") and the Office of the Comptroller of the Currency (the
"OCC"), the Company and its wholly-owned subsidiary, Corus Bank, N.A. (the
"Bank"), respectively, have entered into a Written Agreement (the "Agreement")
with the FRB and a Consent Order (the "Order") with the OCC. The Agreement and
the Order (collectively, the "Regulatory Agreements") contain a list of strict
requirements ranging from a capital directive, which requires Corus and the Bank
to achieve and maintain minimum regulatory capital levels (in the Bank's case,
in excess of the statutory minimums to be classified as well-capitalized), to
developing a liquidity risk management and contingency funding plan. In
addition, as of May 1, the Bank was notified by the OCC that it is
undercapitalized under the OCC's Prompt Corrective Action rules and, therefore,
subject to a number of additional statutory and regulatory requirements,
including submission of an acceptable capital restoration plan to the OCC.
Also as a result of our current financial condition, the Bank is subject to
restrictions on the interest rates it may offer to its depositors. Under the
applicable restrictions, the Bank cannot pay interest rates higher than 75 basis
points above the national average rates for each deposit type. In light of the
Bank's historical practice of paying above average rates both locally and
nationally, the Bank's liquidity may be negatively impacted, possibly
materially, due to deposit run-off to the extent that it is unable to continue
offering above average rates.
While the Company intends to take such actions as may be necessary to enable
Corus and the Bank to comply with the requirements of the Regulatory Agreements
and withstand the potential impact of the interest rate restrictions, there can
be no assurance that Corus or the Bank will be able to comply fully with the
provisions of the Regulatory Agreements, or that compliance with the interest
rate restrictions and the Regulatory Agreements, in particular the regulatory
capital requirements, will not have material and adverse effects on the
operations and financial condition of the Company and the Bank. Any material
failure to comply with the provisions of the Regulatory Agreements could result
in further enforcement actions by both the FRB and the OCC, or the placing of
the Bank into conservatorship or receivership.
REGULATORY ACTIONS
Written Agreement
The Agreement with the FRB restricts the payment of dividends by the Company, as
well as the taking of dividends or any other payment representing a reduction in
capital from the Bank, without the prior approval of the FRB. The Agreement
further requires that the Company shall not incur, increase, or guarantee any
debt, repurchase or redeem any shares of its stock, or pay any interest or
principal on subordinated debt or trust preferred securities, without the prior
approval of the FRB. The Agreement also requires the Company to develop a
capital plan by May 19, 2009, which shall address, among other things, the
Company's and the Bank's current and future capital requirements, compliance
with minimum capital ratios, the source and timing of additional funds necessary
to meet future capital requirements, and procedures to notify the FRB within
30 days of each quarter-end if capital ratios fall below the required minimums.
The Company is also required to submit cash flow projections for 2009, which
were provided to the FRB on April 17, 2009. The Agreement also requires the
Company to provide advance notice to the FRB in order to appoint any new
director or senior executive officer, which the FRB may approve or disapprove.
Finally, the Board of Directors of the Company (the "Board") is required to
submit written progress reports to the FRB within 30 days after the end of each
calendar quarter.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
Consent Order
The Order with the OCC requires the Bank, among other things,
• to establish a compliance committee to monitor and coordinate compliance with
the Order;
• to achieve and maintain Tier 1 capital at least equal to 9% of adjusted total
assets and at least equal to 12% of risk-weighted assets by June 18, 2009;
• to develop a three-year capital plan for the Bank by April 19, 2009, which
includes, among other things, specific plans to for maintaining adequate
capital, a discussion of the sources and timing of additional capital, as well
as contingency plans for alternative sources of capital;
• to develop, prior to involvement in any new products or services, or the
resumption of commercial real estate lending, a strategic plan covering at least
a three-year period, which shall, among other things, include a specific
description of the goals and objectives to be achieved, the targeted markets,
the specific Bank personnel who are responsible and accountable for the plan,
and the appointment of a Chief Credit Officer;
• to revise and maintain by March 20, 2009, a liquidity risk management program,
which assesses, on an ongoing basis, the Bank's current and projected funding
needs, and ensures that sufficient funds exist to meet those needs. The program
must include specific plans for how the Bank is complying with regulatory
restrictions which limit the interest rates the Bank can offer to depositors;
• to revise by May 19, 2009, the Bank's loan policy and commercial real estate
concentration management program. The Bank also must establish a new loan review
program to ensure the timely and independent identification of problem loans and
modify its existing program for the maintenance of an adequate allowance for
loan and lease losses;
• to take immediate and continuing action to protect the Bank's interest in
certain assets identified by the OCC or any other bank examiner by developing a
criticized assets report covering the entire credit relationship with respect to
such assets;
• to develop by May 19, 2009, an independent appraisal review and analysis
process to ensure that appraisals conform to appraisal standards and
regulations, and to order, within 30 days following any event that triggers an
appraisal analysis, a current independent appraisal or updated appraisal on
loans secured by certain properties; and
• to develop by March 20, 2009, a revised Other Real Estate Owned ("OREO")
program to ensure that the OREO properties are managed in accordance with
applicable banking regulations.
To date, the Bank has taken several steps to comply with the terms of the Order,
including:
• The Board established a Compliance Committee to monitor and coordinate the
Bank's compliance with the provisions of the Order. The Committee consists of
two independent directors and one employee director.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
• The Bank delivered to the OCC a three-year capital plan on April 24, 2009,
after requesting and receiving a one week extension on the original deadline.
The Bank is in the process of working with the OCC and responding to feedback on
its initial capital plan submission.
• The Board has submitted a Contingency Funding Plan to the OCC and is
monitoring the Bank's liquidity on a daily, weekly and monthly basis in
accordance with the requirements of the Order.
• The initial set of Criticized Asset Reports ("CARs") for both criticized loans
and OREO have been completed as of March 31, 2009, and have been submitted to
the Board and OCC for their review. Future CARs will be submitted to both the
Bank Board and the OCC on a monthly basis.
• The Board has adopted an OREO Policy. In addition, reports on the status of
OREO properties will be provided to the Board on at least a quarterly basis. The
Bank is complying with this requirement through its monthly submission of the
Criticized Asset and other OREO reports to the Board.
Prompt Corrective Action Notification
On May 1, 2009, based on its March 31, 2009, regulatory Report of Condition and
Income ("Call Report"), the Bank received formal notification under the OCC's
Prompt Corrective Action ("PCA") regime of its "undercapitalized" status.
Accordingly, the Bank is subject to numerous mandatory statutory and regulatory
requirements, including restrictions on capital distributions; a prohibition on
the payment of "management fees" by the Bank to the Company or any other person
having control of the Bank; restrictions on asset growth; and a prohibition
against any new acquisitions, the establishment of new branch offices, or
engaging in any new lines of business without prior approval from the OCC.
Moreover, the OCC has discretionary authority to take additional actions with
respect to the Bank as if the Bank were significantly undercapitalized, should
the OCC make a determination that such additional actions are necessary to carry
out the purposes of the PCA statute.
In addition, the Bank is required to submit a capital restoration plan deemed
acceptable by the OCC no later than May 22, 2009, or such later time as the OCC
may agree. The capital restoration plan must address, among other things, the
steps the Bank will take to become adequately capitalized; the levels of capital
to be attained during each year in which the plan will be in effect; how the
Bank will comply with applicable restrictions and requirements associated with
its undercapitalized status; and the types and levels of activities in which the
Bank will engage. By statute, the OCC is not permitted to approve the Bank's
capital restoration plan unless the Company submits a written guarantee that the
Bank will comply with the terms of the plan until the Bank has been adequately
capitalized on average during each of four consecutive calendar quarters. As
part of the guarantee, the Company is required to provide appropriate assurances
of the Bank's performance and must also provide assurances that the Company will
fulfill any commitments to raise capital made in the capital restoration plan.
Such a guarantee would have a priority over most of the other creditors of the
holding company in bankruptcy, including the holders of the Company's trust
preferred securities and equity securities. The Company currently has
approximately $3.1 billion in liquid assets and its principal obligations
consist of approximately $414 million in trust preferred securities.
The Bank is developing a capital restoration plan but no assurances can be
provided that it will be able to submit an acceptable plan, including the
required Company guarantee. Failure of the Bank to submit an acceptable capital
restoration plan would, among other things, result in the Bank becoming
"significantly undercapitalized" under the OCC's PCA rules, and therefore would
become subject to additional regulatory restrictions. These restrictions
include: requiring a recapitalization of the Bank through the sale of shares and
obligations of the Bank, requiring that shares sold must be voting shares, or
requiring the Bank to be acquired by another holding company or combined with
another institution; imposing additional affiliate transaction restrictions;
restricting interest rates the Bank may pay to "the prevailing rates" paid on
like deposits in the region where the Bank is located; placing further
restrictions on asset growth; placing further restrictions on the Bank's
activities, including the forced reduction or termination of any activity the
OCC determines imposes excessive risk; requiring one or more of the following
management changes: new election of directors, dismissal of directors or senior
management officials, or hiring of senior executive officers; prohibiting the
Bank from accepting deposits from correspondent institutions, including renewals
and rollovers; prohibiting the Company from making any capital distribution
without FRB approval; requiring divestiture of the Bank; or requiring the Bank
to take "any other action" the OCC deems appropriate to further the purposes of
PCA. In addition, as a significantly undercapitalized institution, the Bank
would be prohibited from paying any bonus to a senior executive officer, or
paying base compensation in excess of an officer's prior 12-month average
compensation without prior written approval from OCC. In addition to these
remedial measures, the Bank and the Company also would be subject to other
supervisory action including, among other things, the risk of additional
supervisory or enforcement actions against the Company and/or the Board, or the
placing of the Bank into conservatorship or receivership.
LIQUIDITY
The Bank must comply with federal restrictions on the interest rates the Bank
may offer to its depositors. Under these restrictions, the Bank cannot pay
interest rates higher than 75 basis points above the national average rates for
each deposit type. This restriction is potentially significant to the Bank due
to its historical practice of paying above average rates both locally and
nationally.
As background, the Chicago banking market is extremely fragmented (over 140
banks and thrifts) and competitive. As Corus' needs for additional funding grew
over the years, the Bank explored several different deposit gathering
strategies, including building new branches and acquiring brokered certificates
of deposit. Corus concluded that building new branches was expensive and the
success of this strategy uncertain. It was also a strategy that was already
being pursued by numerous Chicago-area banks. Brokered deposits were not
attractive since they were less likely to be available in a time of crisis. As
an alternative, Corus decided that offering above average rates nationally,
promoted via the internet, was the most efficient and cost effective strategy
for the Bank. The strategy was scalable so deposits could be added or reduced
based on the loan funding needs of the Bank and it was cost effective since the
Bank wouldn't be saddled with the overhead of a large branch network when loan
volume declined.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
This strategy makes Corus particularly vulnerable to a restriction on the level
of interest rates it offers. Management believes Corus' ability to attract
deposits is a function of its ability to continue to offer rates above the
national average. To the extent that Corus is restricted from offering high
deposit interest rates, liquidity may be negatively impacted, possibly
materially.
The current FDIC rules on interest rate restrictions establish that the Bank may
not offer interest rates higher than 75 basis points above the rates of interest
on deposits offered in the Bank's normal market area. Corus submitted a plan to
the FDIC that presented the Bank's normal market area as the national market.
The FDIC approved our national market designation and our use of the
Bankrate.com average national rate table to determine the base rate. Corus began
to offer deposit products using these rate limitations on January 24, 2009. From
January 24, 2009, through March 31, 2009, Corus experienced deposit run-off of
$323 million. However, it should be noted that part of the Bank's strategy, as
noted above, involved shrinking deposits as loan demand declined. For example,
our unfunded loan commitments shrank by $322 million during the same period.
On January 27, 2009, a new rule was proposed by the FDIC that would amend its
existing rules which impose interest rate restrictions on deposits that can be
paid by depository institutions that are not "well-capitalized." Under this new
rule, affected depository institutions would be allowed to pay a "national rate"
plus 75 basis points, and the FDIC would set and publish the national rate. To
compute the national rate, the FDIC would use all the data that was available
from approximately 8,300 banks and thrifts (and their branches) to determine a
national average rate for each deposit product. Banks that are not
well-capitalized would then be limited to paying 75 basis points over the
national average rates set by the FDIC for each deposit product.
We do not know whether there will be changes to the proposed rule or whether it
will be adopted at all, or what impact the final rule will have on Corus.
However, the Bank has historically paid above average rates locally and
nationally, and as a result, the restrictions on interest rates could cause a
decrease in both new and existing deposits, which would adversely impact our
business, financial condition, and results of operations.
GOING CONCERN
Corus is suffering from the extraordinary effects of what may ultimately be the
worst economic downturn since the Great Depression. The effects of the current
environment are being felt across many industries, with financial services and
residential real estate being particularly hard hit. The effects of the downturn
have been particularly severe during the last 180 days of 2008, and have
continued into 2009. Corus, with a portfolio consisting primarily of condominium
construction loans, many in the hard hit areas of Arizona, Nevada, south Florida
and southern California, has seen a rapid and precipitous decline in the value
of the collateral securing our loan portfolio. Thus, we are experiencing
significant loan quality issues. The net loss of $285.0 million recorded by the
Company in the first quarter of 2009 was primarily the result of significant
increases in the provision for credit losses. The impact of the current
financial crisis in the U.S. and abroad is having far-reaching consequences and
it is difficult to say at this point when the economy will begin to recover. As
a result, we cannot assure you that we will be able to resume profitable
operations in the near future, or at all.
We have determined that significant additional sources of capital will be
required for us to continue operations through 2009 and beyond. The Company's
Board of Directors has formed a Strategic Planning Committee. The Committee has
hired an investment banking firm to seek all strategic alternatives to enhance
the stability of the Company including a capital investment, sale, strategic
merger or some form of restructuring. There can be no assurance that the Company
will succeed in this endeavor and be able to comply with the new regulatory
requirements. In addition, a transaction, which would likely involve equity
financing, would result in substantial dilution to our current stockholders and
could adversely affect the price of our common stock. If the Company does not
comply with the new capital requirements contained in the Order, the regulators
may take additional enforcement action against the holding company and the Bank.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
It remains to be seen if those efforts will be successful, either on a
short-term or long-term basis. In addition, it is unclear at this point what
impact, if any, the interest rate restrictions included in the Order will have
on Corus' continued ability to maintain adequate liquidity. As a result of our
financial condition, our regulators are continually monitoring our liquidity and
capital adequacy. Based on their assessment of our ability to continue to
operate in a safe and sound manner, our regulators at any time may take other
and further actions, including placing the Bank into conservatorship or
receivership, to protect the interests of depositors insured by the Federal
Deposit Insurance Corporation.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future, and do
not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets, and the amounts or classification of
liabilities that may result from the outcome of any regulatory action, which
would affect our ability to continue as a going concern.
PERSONNEL
On April 24, 2009, Robert J. Glickman resigned as President and Chief Executive
Officer and Director of the Company and of the Bank, for personal reasons
effective April 24, 2009. Joseph C. Glickman also resigned as Director and
Chairman of the Board of the Company for personal reasons effective April 24,
2009. Neither resignation was the result of a disagreement with the Company, the
Bank or other members of the Board of Directors of either the Company or the
Bank. Robert J. Glickman is a vested participant in the Company's pension plan
and will be eligible to begin receiving payments. Joseph C. Glickman is a party
to a deferred compensation agreement with the Company that provides him with
deferred compensation for the remainder of his life with an annual benefit of
$59,000, paid on a semi-monthly basis via the Company's regular payroll. Other
than as discussed above, neither will receive any severance payments or
benefits.
Randy P. Curtis, currently Executive Vice President of the Company and Executive
Vice President - Retail Banking of the Bank, will serve as interim President and
Chief Executive Officer, subject to approval of the appropriate regulatory
authorities, while the Board of Directors seeks a permanent successor.
Mr. Curtis, age 50, was Senior Vice President-Retail Banking of the Bank from
1997 through 2005 and has been in his current position since 2005.
As a result, of the resignations, the number of directors of the Company was
reduced from seven to five.
On May 11, 2009, Richard J. Koretz gave notice of his resignation as Executive
Vice President and Chief Operating Officer of the Company, effective June 5,
2009, to pursue other opportunities. The Company does not currently intend to
appoint a new Chief Operating Officer. On May 12, 2009, the Company announced
the promotion of John Barkidjija to Executive Vice President Commercial Real
Estate and Chief Credit Risk Officer.
RESULTS OF OPERATIONS
Corus reported a net loss of $285.0 million in the first quarter of 2009,
compared with net income of $4.5 million in the same period of 2008. This
translates to a diluted loss per share of $5.31 for the three months ended
March 31, 2009, compared to diluted earnings per share of $0.08 for the three
months ended March 31, 2008.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
Problem loans continue to grow as a result of the continuing nationwide downturn
in the residential real estate market. Due to continued concerns about loan
quality, Corus recorded a provision for credit losses of $193.3 million for the
first three months of 2009, compared with $36.8 million during the same period
of 2008. Further contributing to the Company's net loss was the increase in the
Company's nonperforming assets to $2.5 billion (including $0.5 billion of other
real estate owned), which led to a steep decline in the Company's interest
income. The Company's interest income was not enough to offset its interest
expense during the first quarter of 2009.
The Company has also experienced increases in noninterest expense. Noninterest
expense increased primarily due to costs associated with the Company's
foreclosed real estate, including impairment charges of nearly $45 million.
Additionally, the Company has experienced significant increases in its expenses
associated with regulatory compliance and audits, FDIC insurance, as well as
legal and consulting fees. These expenses will continue as a direct result of
the Company's ongoing troubled condition.
NET INTEREST LOSS / INCOME AND NET INTEREST MARGIN
Net interest loss/income, which is the difference between income on earning
assets (interest, points and fees, and dividends) and interest expense on
deposits and borrowings, has historically been the major source of earnings for
Corus. The related net interest margin (the "NIM") represents net interest
loss/income as a percentage of the average earning assets during the period.
For the three months ended March 31, 2009, Corus reported net interest loss of
$6.4 million and a NIM of (0.34)%. These results represent significant declines
from the same period in 2008 when Corus reported net interest income of
$46.9 million and a NIM of 2.14%.
The primary driver behind the net interest loss and decline in Corus' NIM
continues to be the significant growth in nonperforming assets, as a result of
the continued deteriorating conditions in the housing market. Nonperforming
assets consist of nonperforming loans (i.e. nonaccrual, past due 90 days or
more, and troubled debt restructurings) and other real estate owned. While,
under certain limited circumstances, Corus recognizes income on nonaccrual
loans, in general this pool of assets earns essentially no income, which has a
dramatic downward impact on the NIM. During the first quarter of 2009,
nonperforming assets averaged $2.5 billion compared to $426 million for the
first quarter of 2008.
The Company saw a decrease on rates paid on interest-bearing deposits,
consistent with the FDIC rate restrictions discussed in detail in Note 1 to the
consolidated financial statements. However, the cost of deposits did not decline
at nearly the rate that the yield on loans and investments did.
Finally, a decrease in loan points and fee income also contributed to the net
interest loss. Loan points and fee income for the three months ended March 31,
2009 and 2008 totaled $5.2 million and $14.9 million, respectively.
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CORUS BANKSHARES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations - continued
Nonaccrual Loans
The accrual of interest income is discontinued on any loan for which payment in
full of principal or interest is not expected. In addition, a loan will be
placed in nonaccrual status if the loan is past due for a period of 90 days or
more unless the loan is both well-secured and in the process of collection. For
a loan to be "in process of collection," the timing and amount of repayment must
be reasonably certain. While interest is not being accrued for accounting
purposes, the interest is still owed by the borrower.
When a loan is placed on nonaccrual status, previously accrued but uncollected
interest is generally reversed against interest income. One exception relates to
interest which has been capitalized into the loan principal balance through an
interest reserve. Interest capitalized into the loan balance via interest
. . .
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